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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re: ] Case No. 590-03823-ASW
]
GENERAL TEAMSTERS, ] Chapter 11
WAREHOUSEMEN AND HELPERS ]
UNION LOCAL 890, ]
]
Debtor. ]
MEMORANDUM DECISION
OVERRULING OBJECTION TO CONFIRMATION
AND CONFIRMING DEBTOR'S PLAN
Before the Court is the Third Amended Plan of Reorganization ("Plan"), proposed for
confirmation by the Debtor
above-named ("Debtor") in this Chapter 11 case. Debtor is a local labor union, affiliated with the
International Brotherhood
of Teamsters ("IBT") and the Teamsters Joint Council No. 7 ("JC7").
An objection to confirmation has been filed by a group consisting of: Security Farms; El
Dorado Farms; H.Y. Minami and
Sons; Manriquez & Acuna, Inc.; Higashi Farms, Inc.; Pisoni Farms; Joe Freitas &
Sons; Freitas Farms; San Ysidro Farms;
and J.J.C., Inc. (collectively, "Creditor").(1)
Debtor is represented by John T. Hansen, Esq. and Elaine M. O'Neil, Esq. of Nossaman,
Guthner, Knox & Elliott. Creditor
is represented by David G. Finkle, Esq. of Finkle & Stoll. The matter has been submitted for
decision after trial and
post-trial briefing.
At trial, Debtor called the following witnesses:
Franklin L. Gallegos ("Gallegos"), President of Debtor since 1985.
Michael A. Johnston ("Johnston"), a business representative of Debtor since 1988 and an
administrative assistant to
Gallegos.
Ken S. Mee ("Mee"), an International Vice President of IBT since February 1, 1992.
Chuck Mack ("Mack"), President of JC7 for twelve years and Secretary/Treasurer of
Teamsters Local 70 for twenty-three
years.
Edward P. Clark ("Clark"), a Certified Public Accountant with the firm of Hilderbrand and
Clark.
Frank O. May ("May"), a real estate appraiser.
Donald H. Wollett ("Wollett"), an attorney and professor familiar with the history and
background of labor matters in
America. Creditor called no witnesses at trial.
This Memorandum Decision constitutes the Court's findings of fact and conclusions of law,
pursuant to Rule 7052 of the
Federal Rules of Bankruptcy Procedure.
I.
BACKGROUND
Debtor filed a Chapter 11 petition on August 13, 1990.
HREF="#N_2_">(2)
Creditor asserts an unsecured claim based on a judgment for $526,692 by the United States
District Court for the Northern
District of California. Such judgment finds Debtor liable for damage suffered by Creditor as a
result of violence by Debtors'
members during a 1989 strike that occurred prior to commencement of this Chapter 11 case.
HREF="#N_3_">(3)
Debtor's Plan proposes that Debtor will distribute to creditors holding allowed claims against
the bankruptcy estate, in
accordance with the priorities established by the Bankruptcy Code, an amount equal to the equity
in the estate's real
property and tangible personal property. Debtor proposes to borrow and contribute to the Plan a
sum of money equal to the
equity, at fair market value, in its real property at time of confirmation plus the fair market value
of its unencumbered office
equipment and vehicles; any gain realized by Debtor through sale or refinance of assets during
the five years
post-confirmation is also to be distributed to unsecured creditors. In its post-trial brief, Debtor
estimates that the Plan would
permit a dividend of some 31% to be paid on unsecured claims such as that held by Creditor. The
Plan has been accepted
by all classes except Class 2.3B, which includes Creditor's claim and that class voted to reject the
Plan.
Debtor's income consists of monthly dues and initiation fees received from Debtor's
members. Debtor remits a percentage
of dues each month to IBT and JC7 in the form of "per capita tax" payments. Debtor contends
that, after making such
payments to IBT and JC7, Debtor's remaining income is sufficient only to cover monthly
operating expenses on a "break
even" basis.
Creditor urges that Debtor's Plan should provide for an increase in membership dues and/or
temporary reduction or
cessation of per capita tax payments for a period of time (or elimination of such obligations
altogether, by termination of
Debtor's affiliation with IBT and JC7), so as to leave Debtor with sufficient income after
payment of monthly operating
expenses to produce a larger dividend to unsecured creditors. Creditor argues that the failure of
the Plan to include such
provisions renders it unconfirmable -- while Creditor's pleadings do not clearly set forth the
statutory grounds upon which
Creditor relies, the Court construes the objection as follows:
1/ The Plan has not been proposed in good faith, which is a prerequisite to confirmation
pursuant to 11 U.S.C. §1129(a)(3).
2/ The Plan does not propose to pay Creditor at least as much as Creditor would receive if
Debtor were liquidated under
Chapter 7, which is a prerequisite to confirmation pursuant to 11 U.S.C. §1129(a)(7)(A)(ii).
3/ The Plan is not "fair and equitable" to Creditor within the meaning of 11 U.S.C.
§1129(b)(1), inasmuch as it violates the
Absolute Priority Rule of 11 U.S.C. §1129(b)(2)(B)(ii).
II.
FACTS
A. Debtor's Representation Of Its Members
Wollett testified concerning the development, purpose, and function of labor law in America,
which is governed by the
National Labor Relations Act, 29 U.S.C. Under federal labor law, employees of a company or
within an industry have the
right to organize, and to create a bargaining unit to influence their working conditions. The
members of such a unit may
vote to choose a representative to negotiate with the employer on behalf of the employees, which
representative is often a
local labor union such as Debtor. A local union that is elected to represent a bargaining unit is
responsible to its members
for negotiation and formation of a collective bargaining agreement ("CBA") between the
employees and the employer, and
the maintenance of such CBA throughout its term by monitoring and policing it, including the
establishment and
enforcement of grievance procedures to prevent or halt breaches of the CBA by the
employer.
Johnston testified credibly that, in performing its duties to its members, Debtor has
historically been able to operate only on
a "break even" basis; in 1995, income and expenses both totalled approximately $2.3 million. He
prepared projections for
the next five years based on Debtor's audited financial statements for the period from 1985
through 1993, showing that the
same conditions can be expected in future.(4)
Johnston said that, by "breaking even", he meant that Debtor might have a
small surplus (e.g., $50,000 or less) one year that would be absorbed by shortages of
similar amounts in other years;
Debtor's usual approach to temporary shortages has been to defer payment of bills. Johnston
testified that, since the 1989
strike, Debtor had incurred an average of $80,000 to $90,000 per year in legal expenses, of which
approximately $200,000
had been devoted to bankruptcy matters. Johnston's projections assume a 1% to 2% growth rate
for membership and
modest membership wage increases, based on historical experience; they also contemplate
borrowing $50,000 as part of the
loan proposed by the Plan, to provide a reserve for timely payment of expenses and avoid
temporary shortages -- Johnston
described the proposed $50,000 loan as a "slim reserve" (approximately one week's expenses),
but said that Debtor was
"used to working on a slim reserve". Johnston also compared Debtor's staff levels with those of
other local unions and
found that Debtor maintains lower levels; for example, Teamsters Local 70, of which Mack is
Secretary/Treasurer, has one
employee for every 200 members, whereas Debtor has one employee for every 450 members.
Johnston pointed out that,
since most of Debtor's membership consists of farmworkers who are employed seasonally, and
since dues are based on
wages received, Debtor is in the position of having to provide services to members all year even
though they only pay dues
during the months in which they are employed.
B. Members' Dues
A local union is statutorily entitled to collect dues and initiation fees from its members in
certain minimum amounts, but
increases in such amounts must be approved by majority vote of the members themselves in a
secret ballot, 29 U.S.C.
§411(a)(3). Wollett testified that it is common for a CBA to include a "union security clause"
requiring each employee to
become a union member and pay the dues. Mee testified that the IBT constitution fixes the
minimum amount of dues to be
charged by local unions at twice an employee's hourly rate of pay per month (e.g., an
employee earning $10 per hour would
pay $20 per month in dues). Johnston testified that Debtor has approximately 7,160 members, of
whom over 80% are
farmworkers and food processing workers; between 50% and 60% of the members are
farmworkers with an average wage
of approximately $7 per hour, with an average wage for the other members of between $10.50
and $11 per hour -- Gallegos
testified that "some" of Debtor's members are employed by United Parcel Service and "some" are
subject to a master freight
agreement of IBT, but most are employed as farmworkers earning an average of $7 per hour.
Johnston explained that the
formula by which Debtor calculates its members' dues is the lesser of two and a half times the
average hourly wage under a
CBA or twice such wage plus five. Wollett characterized the role of a local union with respect to
its members' dues as that
of a fiduciary, citing 29 U.S.C. §501.
C. Per Capita Tax
Local unions may be affiliated with national or international "parent" unions, as Debtor is
affiliated with IBT and JC7. A
condition of affiliation may be that the local union remit to the parent union a portion of the dues
that the local union
collects from its members, i.e., a per capita tax. Johnston testified that the IBT
constitution and the JC7 by-laws,
respectively, call for Debtor to pay monthly per capita tax of $4.90 and $1.60, respectively, per
member. Mee testified that
the $4.90 payable to IBT includes a $1 assessment that "kicks in" whenever the net value of IBT's
assets falls below
$20,000,000 (exclusive of certain real property), and that the current assessment commenced in
1994; Johnston testified
that the assessment persisted at time of trial and would continue indefinitely. Mee explained that
IBT entered into a consent
decree with the United States government in 1989 to settle pending litigation, and that
performance under that decree had
cost IBT over $48,000,000. In 1991, "the strike fund became a political issue" and convention
delegates voted to increase
benefits paid by the fund from $55 per week to $200 per week. By 1994, the strike fund was
depleted and IBT had to
borrow $15,000,000 to conclude a pending general freight strike that involved 80,000 workers.
Mee said that "[t]he bottom
line was that we broke the strike fund", the general fund "continued to dwindle" due to the
expense of complying with the
consent decree, and IBT's assets "dropped well below" the level that called for the extra $1
assessment. IBT attempted to
restructure the per capita taxes and charge a percentage of earnings rather than a flat rate (which
would have favored local
unions, such as Debtor, that were composed primarily of workers earning low wages), but the
proposal was voted down by
local unions that would experience per capita tax increases under it. IBT then began "belt
tightening" and has now "stripped
down anything" that is financially burdensome, though it is still unable to provide $200 per week
strike benefits and has
had to return to the $55 per week level.
D. Affiliation
Wollett described what he sees as the general advantages of a local union's affiliation with a
parent union: the availability
of funds from a parent union with which to pay strike benefits is "a critical factor" in the ability
to mount "credible" strikes
that will influence employers and be perceived as more than "idle threats" by local unions whose
members cannot afford to
strike; research facilities are required when a local union is negotiating a CBA, to provide data
concerning conditions
throughout the industry; lobbying is important to protect and advance the members' interests
before state and federal
legislatures; an affiliated local union is not permitted by IBT or JC7 to strike unless the strike is
"sanctioned" by the
affiliate, and a sanctioned strike is more effective with employers and the public than one that is
not supported by a
powerful parent union. In addition, Mack and Gallegos testified that IBT and JC7 provide legal
services to their affiliated
local unions; Mee, Gallegos, and Johnston testified that IBT and JC7 provide training and
education services to their
affiliated local unions; and Mee and Johnston testified that IBT provides a computerized
accounting system to its affiliated
local unions. Mack and Mee testified that Debtor receives more than its proportionate share of
the benefits that are
provided by IBT and JC7 to all affiliates; this is the case because most of Debtors' members earn
low wages and therefore
pay low dues, so that Debtor must depend upon IBT and JC7 for some services that other local
unions can afford to
maintain and provide to their members themselves. Johnston estimated that the value of tangible
services and benefits
received by Debtor from IBT and JC7 during the period from 1985 through 1994 totalled at least
$4,967,500: legal services
worth $720,000, strike benefits of $1,750,000, lobbying services worth $500,000, administrative
and consultant services
worth $500,000, research and assistance worth $100,000, organizing assistance worth $377,500,
and computer services that
would cost $120,000 to replace and maintain; Johnston did not attempt to place a value upon
intangible benefits of
affiliation such as the use of the name "Teamsters", the enhanced impact of a strike sanctioned by
the parent union, etc.
Debtor's financial statements from 1985 through 1994 reflect total per capita tax payments of
$5,255,784 during the ten
year period that was the subject of Johnston's testimony.
E. Termination of Affiliation
Wollett testified that, if an affiliated local union were to terminate its affiliation, it would risk
being sued for breach of its
contracts with the affiliates, and such a step could also impair existing CBAs if employers were
to take the position that
CBAs with an affiliated local union need not be honored if the affiliation ceased. Gallegos
testified that, in formulating
Debtor's Plan, he did not consider providing for Debtor to "disaffiliate" with IBT because he did
not believe that Debtor's
members would accept such a step, inasmuch as "our members are Teamsters" and Debtor's
affiliation with IBT had been
presented to potential members as a benefit in the ten or twelve campaigns that Gallegos had
handled since 1985 to
organize workers and induce them to join Debtor. Johnston testified that, in deciding what kind
of reorganization plan to
propose, he considered that "the members of the union were paying their dues to belong to a
specific organization with
specific benefits and services which were provided by the organization to the members and that it
was not clear to me, in
my mind, if proposing a plan that had the very real potential to change so dramatically the
benefits and services available to
our members, the kind of changes that would occur in the event of a disaffiliation, it wasn't clear
to me that we had any
right to do that. And that was certainly a factor that I took into account in formulating the
plan".
F. Increase In Members' Dues
Gallegos testified that, in formulating Debtor's Plan, he considered the possibility of
providing for an increase in members'
dues but did not include such a provision because he "felt that [the members] will not accept
another increase". He said that
dues were already at a level exceeding the minimum established by IBT and, when the members
were asked in late 1988 to
increase their dues, they voted to reject the increase "by a big margin". After that vote, Gallegos
closed satellite offices and
eliminated Debtor's toll-free telephone number, laid off one clerical worker and two business
agents, and "started to rein in
where we could cut". In the spring of 1989, Debtor again asked the members to increase their
dues, which proposal was
voted upon and passed "by a small margin". Gallegos said that, at some unspecified time before
or after those votes, the
members became "so dissatisfied" with a two cent dues increase devoted to organizing
campaigns that 75% of the members
successfully petitioned Debtor to discontinue it, and "that alone told me I couldn't do that".
G. Non-Payment Of Per Capita Tax
Gallegos testified that, when he was first elected President in 1985, Debtor was some
$1,000,000 in debt, consisting
primarily of delinquent per capita tax payments owed to IBT, JC7, and the Western Conference
of Teamsters (which entity
has since been eliminated). After Gallegos became President, Debtor suffered several judgments
arising out of events that
occurred prior to Gallegos' election and incurred a liability of approximately $150,000 to
Western Growers Pension Fund
by withdrawing from that program. Johnston testified that, by April 1988, Debtor owed IBT
approximately $400,000 in
delinquent per capita tax and needed $500,000 to post a bond in connection with an appeal; IBT
agreed to lend the money
for the bond on condition that both the $500,000 and the $400,000 be secured by a first deed of
trust on Debtor's real
property. Gallegos realized that it was necessary to "restructure" Debtor, "to get our local into a
shape where it can
financially run itself and be current with our bills", and he took measures toward that end
between 1985 and 1989,
including: audits of Debtor's books, reduction of staff from seventeen business agents to thirteen
and from seven clerical
workers to four or five, reduction of his own salary by $20,000 and of each business agent's
salary by $15,000 to $20,000,
and reduction of automobile allowances and other benefits. In late 1985 or early 1986, Gallegos
asked Arnie Weinmeister,
Vice President of IBT and a Chairman of the Western Conference, whether the delinquent per
capita taxes could be waived
or forgiven, which request was denied; Mr. Weinmeister told Gallegos that Debtor's job was to
be "solvent" and that, if
Debtor could not pay its debts, "somebody else was going to take over what we were doing". In
May 1986, Gallegos met
with Jackie Presser, who was at that time the General President of IBT, concerning Debtor's
indebtedness to IBT; in 1988,
Gallegos met with a Mr. Mathis, who was at that time the General Secretary/Treasurer of IBT,
about Debtor's financial
condition -- Gallegos said that neither of those representatives indicated that IBT would consider
waiving or forgiving the
debt owed by Debtor to IBT. Mee testified that, to his knowledge, from 1992 to the time of trial,
IBT had never waived per
capita tax debt for any affiliate. Gallegos testified that, in formulating Debtor's Plan, he did not
consider relief from per
capita taxes to be an option that was available to Debtor. As for past per capita tax defaults, the
Plan provides for those
claims on a par with other secured and unsecured claims and Gallegos said that, to his
knowledge, no one connected with
Debtor had entered into any agreement with IBT or JC7 to make any arrangement for repayment
of those entities' existing
claims other than as they are treated by the Plan.
Johnston, who described himself as the employee of Debtor who was primarily responsible
for negotiating and drafting the
Plan, testified about the possibility of reducing or temporarily eliminating future per capita tax
payments. He said that, in
early 1993, while attempting to formulate a plan of reorganization for Debtor, he spoke by
telephone with Tom Shay, an
International Vice President of IBT and an International Director of the Western Conference of
Teamsters, and told Mr.
Shay that two of the alternatives being considered in connection with Debtor's reorganization
efforts were asking IBT for a
secured loan with which to fund a plan, and/or asking IBT to permit Debtor to pay future per
capita taxes in a reduced
amount, "something that the growers had brought up repeatedly". Johnston said that Mr. Shay's
initial reaction to the latter
alternative was to laugh, as if he thought that Johnston was making a joke; Johnston explained
that "it had been actually
raised seriously" and Mr. Shay replied that "he didn't even need to check with anybody on the
question of [IBT] agreeing to
or allowing to move forward or in any way accepting or allowing a plan that contemplated not --
[Debtor] not paying [IBT]
their per capita in the future." Johnston said that Mr. Shay explained that "We have 600 locals
out there, and all of them, at
one time or another, have financial reasons that they think that there's something better to do with
their money than pay the
per capita. And this just opens up Pandora's box". At about the same time, Johnston made the
same proposal regarding
future per capita tax payments to Richard Bell, an officer of IBT, who "didn't find it as amusing
as Tom Shay had and
basically said, 'Well, I'm not a decision maker on these things, but I've been handling the finances
at this place for the last
fifteen years, and I can tell you that will never go anywhere". During the same period of time,
Johnston also raised the
subject in a conversation with Ralph Torissi of JC7, who "was very angry in response to that, or
appeared so to me, and
said that that was ridiculous and out of the question"; Johnston spoke to Mack about Mr. Torissi's
reaction later that same
day, and Mack "essentially confirmed to me what Ralph Torissi had said that, in terms of a
waiver of -- long-term waiver of
prospective per capita, that that was something that it was frivolous to even bring up at [JC7]
because they would do
everything in their power to block that". Johnston testified that, at some unspecified time during
the District Court litigation
between Creditor and Debtor, JC7 did loan Debtor some $35,000, half of the per capita tax
payable to JC7 for six months,
which Johnston characterized as a "deferral" by JC7 of Debtor's obligation to pay half of the per
capita tax for six months,
which deferral was to extend indefinitely until the District Court litigation was resolved, with no
repayment date set; he
said that no similar loans have been received by Debtor from IBT. Johnston testified that IBT's
executive board consists of
either fifteen or eighteen members and that, of the four people with whom Johnston spoke, only
Shay was on that board at
the time of Johnston's inquiries.
Johnston also testified that, at the time he prepared Debtor's Plan and its prior versions and
approached IBT about a
possible waiver of some future per capita tax, claims were being asserted against Debtor by
Creditor and another grower
totalling $18,000,000 to $20,000,000 but, by the time the District Court litigation between
Debtor and Creditor
commenced, the other grower had settled and Creditor was asserting a claim of only $3,000,000
or $4,000,000; Johnston
acknowledged that the District Court's judgment is for approximately $500,000, an amount
equivalent to one or two years'
worth of per capita tax payments. Johnston stated that he would not consider a plan to be
proposed in good faith that
provided for suspension of per capita tax payments in order to pay Creditor's judgment, for
several reasons: Creditor's
judgment is not against IBT and JC7 and the expense of satisfying it should not be shifted to
them; Creditor's judgment
might not remain at $500,000 after numerous appeals have concluded; and "I have no reason
whatsoever to believe" that
unsecured creditors on a par with Creditor would vote for a plan that paid Creditor "ahead of
them and in different amounts
than them". Johnston also said that he did not believe that a plan that deferred per capita tax for
just one year would be
feasible even if IBT and JC7 were to agree, because Debtor is going to have to incur "a
substantial amount of debt" by
borrowing the value of its tangible assets and deferral of per capita taxes would represent
additional debt and "there's only a
certain amount of debt load that this entity can handle".
H. Consequences Of Non-Payment Of Per Capita Tax
When a local union does not comply with the requirements of its affiliation such as payment
of per capita tax, the affiliate
has various contractual rights. Johnston testified that, in 1985, IBT held hearings on whether to
impose a trusteeship upon
Debtor due to the delinquencies in payment of per capita tax, but did not impose one because it
wanted to give Gallegos'
new administration time to make an effort to pay the arrears -- however, Debtor was not
permitted to send delegates to the
IBT convention and IBT did withhold strike benefits from Debtor. Debtor's eligibility to receive
strike benefits was
reinstated in 1988 in view of Debtor making current per capita tax payments as they came due
and having observed a
repayment plan for "several years" with respect to the arrears, and benefits were paid in 1989;
IBT did not reduce or
eliminate any of Debtor's other benefits during the period of arrearage. While Debtor's payment
of per capita tax was in
arrears, IBT did not attempt to dissolve Debtor, or to merge it with another local union, but
Johnston stated that, "In the last
several years", IBT has been "much more aggressive" in imposing trusteeships, with 60 out of
600 locals having been
placed in trusteeship in the past five years, "which is probably as many as it placed in trusteeship
for the entire history of
the Teamsters Union. Various locals that were not financially self-sufficient have been merged
into other locals. There
simply has been, in my observation, at least, a much more aggressive use of the authority of
[IBT] to deal with these kinds
of problems that has coincided with [IBT] being much less rich than it once was". Johnston
testified that trusteeships have
been imposed "on occasion, because of financial mismanagement; on occasion, because of
corruption; on occasion, because
of failure to deliver adequate representation to the members; and, generally, because of a
combination of those things".
Johnston testified that, in April 1989, IBT installed a representative to supervise Debtor's
administrative affairs on behalf of
IBT, due to Debtor's "deteriorating" financial condition.
Mee testified that, when faced with delinquent per capita tax payments with other local
unions in the past, IBT had
performed audits and merged local unions. He stated that "per capita tax belongs all to 1.4
million people, not [IBT]. And
it's not fair for one entity of the union not to pay their bills". As to whether it is in IBT's own
economic interests to help
maintain local unions, Mee said that was so "to a point", but "when we're looking at the big
picture, the entire 1.4 million
people, when a local union becomes such a financial drain with no way to cure it, there has to be
steps taken to protect the
majority of the membership. And at that point I would ask the general executive board to direct
the general counsel to do
what -- legally what we needed to do to bring this situation to a conclusion because it's no longer
tolerable under the
circumstances".
I. Liquidation Issues
Johnston testified that Debtor has "contemplated" converting the case to Chapter 7 but such a
move "would seriously
damage our members, so I have great difficulty imagining a situation in which we would actually
undertake a liquidation
plan. There seems to have no up side and a ton of down side". Gallegos testified that the purpose
of proposing a
reorganization plan (and specifically the Plan that has been offered for confirmation) "was to
make sure that our creditors
are first taken care of and that our organization can function as an organization".
Clark testified that his firm has performed certified audits of Debtor since 1985. He said that
he prepares financial
statements in connection with such audits and has never included as assets of Debtor any CBA
that Debtor has negotiated
on behalf of its members with their employers and to which Debtor is a party.
May testified that he appraised Debtor's real property in February 1995 and estimated a total
value of $705,000 (the Plan
provides for the property to be re-appraised at confirmation, and it is the later value that will
determine the amount paid to
creditors under the Plan).
III.
ANALYSIS
As set forth above, Creditor's objection to confirmation and the failure of Creditor's class to
vote to accept the Plan require
consideration of whether the following criteria for confirmation have been met:
1/ The Plan must have been proposed in good faith, as required by 11 U.S.C.
§1129(a)(3).
2/ The Plan must propose to pay Creditor at least as much as Creditor would receive if
Debtor were liquidated under
Chapter 7, as required by 11 U.S.C. §1129(a)(7)(A)(ii).
3/ The Plan must be "fair and equitable" to Creditor within the meaning of 11 U.S.C.
§1129(b)(1) by not violating the
Absolute Priority Rule of 11 U.S.C. §1129(b)(2)(B)(ii).
As the proponent of the Plan, Debtor bears the burden of establishing each of these elements,
see In re Acequia, 787 F.2d
1352 (9th Cir. 1986), by a preponderance of the evidence, see In re Arnold and
Baker Farms, 177 B.R. 648 (9th Cir. BAP
1994), aff'd, 85 F.3d 1415 (9th Cir. 1996), cert. denied, __ U.S. __,
117 S.Ct. 681 (1997).
A. Good Faith
The term "good faith" in the context of 11 U.S.C. §1129(a)(3) is not statutorily defined but
has been interpreted by case law
as referring to a plan that is "intended to achieve a result consistent with the objectives of the
Bankruptcy Code", see In re
Corey, 892 F.2d 829, 835 (9th Cir. 1989), cert. denied, 498 U.S. 815,
111 S.Ct. 56 (1990) ("Corey"), citing In re Stolrow's,
Inc., 84 B.R. 167 (9th Cir. BAP 1988) ("Stolrow's") and In re Jorgensen,
66 B.R. 104 (9th Cir. BAP 1986) ("Jorgensen").
Further,
... there is a legal distinction between the good faith that is a prerequisite to
filing a Chapter
11 petition for reorganization
and the good faith that is required for confirmation of a plan pursuant to 11 U.S.C. §1129(a)(3).
[Citation omitted] [§]
Good faith in proposing a plan of reorganization is assessed by the bankruptcy judge and viewed
under the totality of the
circumstances. [Jorgensen ]. Good faith requires that a plan will achieve a result
consistent with the objectives and purposes
of the Code. [Jorgensen ]. It also requires a fundamental fairness in dealing with one's
creditors. Id.
Stolrow's, at 172. Stolrow's and Jorgensen are cited with
approval by the Ninth Circuit case of Corey -- taken together,
these cases provide a three part test by which to determine whether a plan has been proposed in
good faith:
1/ It must intend a result that is consistent with the objectives of the Bankruptcy Code;
and
2/ It must demonstrate fundamental fairness in dealing with creditors; and
3/ In addressing the issue of good faith, the totality of the circumstances must be
considered.
(1) Result Consistent
With Objectives of
Bankruptcy Code
Gallegos and Johnston testified that the purpose of the Plan was to address Debtor's
obligations to creditors while enabling
Debtor to remain in operation as a labor union representing over 7,000 members. Such a result is
clearly consistent with the
objectives of the Bankruptcy Code, and there was no evidence suggesting that the Plan was
intended to accomplish some
different or contrary aim. The Court notes that a possible alternative to Debtor's Plan would be
for IBT to merge Debtor
with another local union and thereby create an entity with the financial ability to pay its debts in
full, and it is an open
question whether Congress intended for labor unions to avoid that solution by discharging their
debts in bankruptcy --
however, Creditor has cited no authority, nor has this Court located any, that answers that
question.
(2) Fundamental Fairness Toward Creditors
As discussed below, there is no unfair discrimination among creditors and the Plan proposes
to pay at least as much as
would be available to each creditor if Debtor's estate were to be liquidated under Chapter 7, plus
any gain realized by
Debtor through sale or refinancing of assets during the five years post-confirmation. Gallegos
testified that, to his
knowledge, there is no agreement by or on behalf of Debtor to favor IBT or JC7 over other
creditors by giving them
anything other than that which is provided for them by the Plan. Debtor has demonstrated
fundamental fairness in dealing
with creditors and there is no evidence suggesting otherwise.
(3) Totality of Circumstances
It is obvious that Debtor would have more money to devote to unsecured claims such as that
of Creditor if Debtor could
increase its income (by raising members' dues) or decrease its expenses (by reducing, deferring,
or eliminating payment of
per capita taxes), or both. Creditor considers it to be a lack of good faith for Debtor to propose a
plan that provides for
neither of these steps to be taken, and to have made no genuine effort (in Creditor's view) to
include such measures in the
Plan. Creditor cites no authority (nor has the Court located any) for the proposition that, in order
to propose a plan in good
faith, a Chapter 11 debtor must explore and consider all possible alternative forms of plans, or all
feasible alternative forms,
or even any alternative forms so long as the one that is proposed meets the requirements of 11
U.S.C. §1129(a).(5) However,
the Court will assume for the sake of argument that such considerations might properly be taken
into account as part of the
totality of the circumstances surrounding formulation and presentation of a plan, and will address
each of Creditors'
complaints as follows.
(a) Seeking Dues Increase
Creditor argues that Debtor should not have proposed a plan without first attempting to
increase dues. The evidence is that
Debtor did seek an increase in late 1988 and the members voted against it "by a big margin";
after paring some
administrative expenses and laying off three employees, Debtor again sought a dues increase in
the spring of 1989 and won
"by a small margin"; at some point either before or after these events, 75% of Debtor's members
petitioned for and won
discontinuance of a two cent increase earmarked for organizing campaigns. Gallegos testified
that he did consider seeking
an increase in dues with which to fund a plan of reorganization but, based on those experiences,
he concluded that it would
be futile to ask the members to increase their dues for that purpose.
It is true that the Plan was filed in March 1995, several years after the 1988 and 1989 votes
(it is unclear when the petition
to discontinue the two cent increase occurred), and it is possible that the members' views on the
subject might have been
different by 1995 had they been asked to consider a nominal
HREF="#N_6_">(6) increase at that time. However, it is equally possible
(and
entirely plausible) that members who would not pay additional dues of two cents to benefit
themselves and fellow workers
by increasing union membership might be even more disinclined to pay a larger amount for the
sake of benefitting Creditor,
who sued their union and alleged that some of the members engaged in lawless violence.
Gallegos is in a position to judge
the attitude and likely reaction of the members and there is no evidence suggesting that, in
coming to the conclusion that he
did, his premises were faulty or he was guided by some ulterior motive such as a bad faith desire
to punish Creditor.
The Court notes that, when the members rejected prior requests for dues increases, they were
not told that Debtor would be
forced into liquidation unless dues were increased, which is what would ultimately occur now if
Debtor were unable to
confirm a Chapter 11 plan due to the lack of a provision for increased dues. It is certainly
possible that, faced with such a
choice, the members would agree, although perhaps reluctantly, to raise their dues. Debtor
contends that such an approach
could run counter to federal labor law, for two reasons. First, 29 U.S.C. §411(a)(3) provides that
dues may be increased
only by majority vote of the members and the Ninth Circuit has found that
The clear purpose of [the statute] is to curb the potential for autocratic and
unrepresentative
rule of union officers, see
Rosario v. Amalgamated Ladies' Garment Cutters' Union, Local 10, 605 F.2d 1228,
1239 (2d Cir. 1979), cert. denied, 446
U.S. 919, 100 S.Ct. 1853, 64 L.Ed.2d 273 (1980), by preventing the leadership of a union from
imposing arbitrary financial
exactions unilaterally on its membership. Mori v. International Bhd. of Boilermakers, Local
6, 653 F.2d 1279, 1284 (9th
Cir.1981), cert. denied, --- U.S. ----, 102 S.Ct. 1011, 71 L.Ed.2d 301 (1982);
King v. Randazzo, 346 F.2d 307, 309 (2d Cir.
1965). [The statute] was designed to vest control over increases in rates of dues in the union
members, not the union
management.
Burroughs v. Operating Engineers Local Union No. 3, 686 F.2d 723, 728 (9th Cir.
1982). Debtor argues that putting
pressure upon the members by presenting them with an ultimatum requiring a vote to increase
dues on pain of losing their
union altogether could reasonably be construed as an exercise of the control that unions are
forbidden to assert over the
rates of dues. Second, 29 U.S.C. §185(b) provides that money judgments against unions are
enforceable only against the
union and its assets, not against members and their assets:
When Congress passed [the statute] it declared its view that only the union
was to be made to
respond for union wrongs,
and that the union members were not to be subject to levy. ... [The statute] exempts agents and
members from personal
liability for judgments against the union (apparently even when the union is without assets to pay
the judgment).
Atkinson v. Sinclair Refining Co., 370 U.S. 238, 247 - 248, 82 S.Ct. 1318 (1962).
Debtor maintains that leaving members
with no realistic option other than to raise their dues for the sake of paying Creditor's judgment
against Debtor could be
considered to violate the spirit of the statute, which prohibits Debtor from shifting its own
liability under the judgment to
its members. These are valid points, although the Court discerns a difference between exerting
pressure upon the members
and merely informing them of the ramifications of a course of action, e.g., that a
bankruptcy court might convert a case to
Chapter 7 unless dues are raised to pay creditors, or that IBT might appoint a trustee unless dues
are raised to pay per capita
tax arrears. Further, while the Plan does not directly impose upon Debtor's members the
additional expense of partially
satisfying Creditor's judgment pursuant to the Plan (since members' dues will not be increased),
the members are indirectly
contributing to payment of Creditor in the sense that income devoted by Debtor to repayment of
the reorganization loan
will not be available to be spent on services to members. In any event, Debtor's decision not to
seek a dues increase with
which to fund the Plan appears to have been a rational one that was not based upon bad
faith.
(b) Seeking Affiliates' Consent
To Reduction Or Deferral
Of Per Capita Tax
Creditor also contends that Debtor should not have proposed a plan without first having
sought reduction or deferral of
some or all of the per capita taxes from IBT and JC7. Again, the evidence is that Debtor did just
that; in this case, unlike
Debtor's requests to members for increased dues, some of the overtures were made fairly close to
the time that the Plan was
filed in March 1995.
Gallegos approached both the Vice President and the General President of IBT in 1986, and
then the General
Secretary/Treasurer of IBT in 1988 about forgiving or waiving delinquencies, to no avail.
In 1993, Johnston approached an International Vice President of IBT about relief from future
per capita taxes and was first
laughed at and then lectured about not opening Pandora's box, while another officer of IBT with
fifteen years' experience
handling IBT's finances told him that such a proposal "will never go anywhere". At about the
same time, an officer of JC7
was "very angry" at the suggestion and characterized it as "ridiculous and out of the question",
while Mack said it would be
"frivolous" to bring the matter up because JC7 "would do everything in their power to block
that".
There was uncontroverted evidence that IBT and JC7 had never waived per capita
taxes for any local union. It is true that
JC7 did defer payment of 50% of six months' per capita tax (approximately $35,000)
indefinitely during Debtor's litigation
with Creditor in the District Court, but that fact is not necessarily inconsistent with the position
that Johnston said was
taken by two JC7 officers in 1993 -- if that transaction occurred prior to Johnston's 1993
conversations, it may be that JC7
considered that it had already assisted Debtor and was not prepared to do anything more; if the
transaction occurred after
Johnston's 1993 conversations, it may be that, although JC7 was willing to forgo timely payment
of $35,000 (25% of a
year's per capita tax) in order to assist Debtor with litigation, it was nevertheless unwilling to
make larger contributions for
other purposes. Johnston testified that IBT never offered any similar accommodation to Debtor,
which is consistent with
Mee's testimony about IBT's recent financial difficulties and general "belt tightening" (although
mere deferral is not the
same as outright waiver and would not necessarily open Pandora's box as feared by Mr.
Shay).
It is also true that only one of the IBT officers approached by Johnston was on the executive
board of fifteen or eighteen
members. Nevertheless, the representatives with whom both Gallegos and Johnston spoke were
all high-ranking officers
who could be expected to have familiarity with the organizations' general practices and policies,
and a reliable sense of
what kind of decisions were likely to be made in certain areas. The vehement and unanimous
responses to Debtor's
proposals strongly suggest that both IBT and JC7 had firm policies against relieving local unions
of the per capita tax
obligation, such that Gallegos and Johnston were justified in concluding that it would be futile to
make formal requests for
such concessions in connection with the Plan.
Johnston also stated that a plan that did not propose to pay future per capita taxes as due was
flawed, in his view, for
reasons in addition to his belief that Debtor's affiliates would not permit such action. He
considered it unfair to shift
payment of Creditor's judgment to IBT and JC7 when they were not the judgment debtors.
HREF="#N_7_">(7)
He also believed that such a plan might not be feasible, since it would create future debt in
the form of deferred per capita
taxes that could exceed Debtor's ability to pay.
Under all of these circumstances, Debtor's decision not to make formal application for relief
from future per capita taxes,
and not to file a plan providing for such relief, was justified and the evidence does not suggest
that such decision was the
product of bad faith on the part of anyone connected with Debtor.
(c) Proposal To
Reduce Or Defer Per Capita Tax
Despite Lack of Affiliates' Consent
Creditor also urges that Debtor should have proposed a plan calling for reduction or deferral
of per capita tax regardless of
whether IBT and/or JC7 would consent to such treatment.
It appears from Debtor's Disclosure Statement that neither IBT nor JC7 (nor the combination
of them) could block
confirmation of such a plan, since they do not control (singly or combined) their class of general
unsecured creditors.
However, IBT's secured claim is the sole creditor in its class and that class is impaired, so IBT
theoretically could block
confirmation if it caused its class to reject the Plan and Debtor was unable to effect
cramdown.
Assuming for the sake of argument that Debtor were able to prevail over efforts of IBT to
block confirmation of such a
plan, Creditor cites no authority (nor has the Court located any) that would permit the
Bankruptcy Court, through
confirmation of a Chapter 11 plan, to control the post-confirmation activities of Debtor and its
affiliates by forcing IBT and
JC7 to perform under their contracts with Debtor and render post-confirmation services, while
relieving Debtor from its
contractual duty of having to pay for such services.(8)
Accordingly, if Debtor were to fail to pay per capita tax that arose
post-confirmation, Debtor would be in breach of its contracts with IBT and JC7. Creditor urges
that there is no reason to
believe that such a breach would cause serious repercussions, because it is in the best interests of
affiliates to maintain local
unions intact. However, Johnston testified that Debtor has suffered consequences in the past for
falling behind in per capita
tax payments, in that IBT withheld strike benefits, did not permit Debtor to send delegates to the
IBT convention, and
assigned a representative to supervise Debtor. IBT also considered imposition of a trusteeship
upon Debtor in 1985 and
Johnston testified that IBT has recently been "much more aggressive" in imposing trusteeships,
with 10% of local unions
having been placed in trusteeship within the past five years (a figure that Johnston believed to
equal the total trusteeships
imposed throughout the history of the Teamsters Union); Johnston was also aware of local
unions having been merged with
others due to insolvency.
What, if any, consequences might attend Debtor's failure to pay future per capita taxes as
they fall due can be no more than
a matter of speculation. However, it is clear that IBT would have the right to take various
measures upon such a default,
and has taken them in the past (some of them with respect to Debtor). Further, according to
Johnston's uncontroverted
testimony, IBT is becoming increasingly zealous about exerting control over local unions that do
not meet their financial
obligations; indeed, Mee testified that he would take whatever steps were legally available to IBT
to "protect the majority
of the membership" from a local union that had become an incurable "financial drain". It does not
appear that Debtor is
crying wolf when it expresses concern over how IBT might react if Debtor were to declare a
moratorium on the payment of
per capita taxes. It is not a lack of good faith on Debtor's part to decline to take what appears to
be a tangible risk of serious
sanctions, including the loss of strike benefits and the loss of autonomy through imposition of a
trusteeship and/or
involuntary merger.
(d) Proposal To Terminate Affiliation
Creditor points out that Debtor could eliminate the per capita tax altogether by terminating
its affiliation with IBT and JC7.
Wollett testified that such a step could expose Debtor to litigation with both its affiliates and the
employer parties to
existing CBAs. Gallegos and Johnston testified that Debtor's members had joined an affiliated
local union and it would be
unfair (and perhaps illegal) to divest them of such affiliation. The evidence demonstrated that
affiliation provides Debtor
with tangible and intangible benefits of a value commensurate with what Debtor has been paying
in the form of per capita
tax. Johnston said that, in formulating the Plan, he rejected the possibility of terminating Debtor's
affiliations because of the
negative impact that he believed such a step would have upon the members; his conclusion is
warranted by the evidence
and there is no evidence suggesting that Debtor's decision to retain its affiliations was tainted by
bad faith.
B. Chapter 7 Test
A Chapter 11 plan must propose to pay creditors holding impaired claims who do not vote to
accept the plan at least as
much as the creditor would receive in liquidation under Chapter 7, pursuant to 11 U.S.C.
§1129(a)(7)(A)(ii); this is
commonly referred to as the "best interest of creditors test", or the "Chapter 7 test". Debtor's Plan
proposes to distribute to
creditors an amount equal to the equity value of its real property and tangible personal property at
the time of confirmation,
plus any gains that Debtor may achieve through sale or refinance of assets during the five years
following confirmation. If it
were true that a Chapter 7 liquidation would deal only with real property and tangible personal
property, this proposal
would meet the Chapter 7 test.(9) However, Creditor
contends that Debtors' CBAs represent value to Debtor and should
therefore be included within the liquidation analysis that determines whether the Chapter 7 test is
met.
It is true that, if the CBAs include union security clauses requiring each employer to employ
only workers who join Debtor,
which membership in turn requires the payment of dues to Debtor, the CBAs could be considered
indirectly responsible for
Debtor's receipt of income in the form of dues. However, the CBAs themselves are between the
employers and Debtor and,
while an employer may covenant with Debtor in a CBA not to employ anyone who is not a
member of Debtor, the CBA is
not directly enforceable by Debtor against an employee to compel the employee to pay dues to
Debtor. In fact, as Debtor
points out, the primary effect of CBAs upon Debtor is the imposition of a duty owed by Debtor
to its members to monitor
and enforce the CBAs. Accordingly, the extent to which the CBAs represent assets of any actual
economic value to Debtor
is questionable at best (such conclusion is consistent with the testimony of Clark, who has never
treated CBAs as an asset
in his preparation of Debtor's financial statements).
It is also true that contracts, such as the CBAs, to which a bankruptcy debtor is a party are
property of the debtor's
bankruptcy estate under 11 U.S.C. §541(a), see In re Computer Communications,
Inc., 824 F.2d 725 (9th Cir. 1987).
However, the CBAs to which Debtor is a party do not represent property of Debtor's estate that
would be capable of
liquidation under Chapter 7. If Debtor were in a Chapter 7 bankruptcy case, only the Chapter 7
trustee could operate
Debtor's business, pursuant to 11 U.S.C. §721, and Debtor itself could not continue to do so.
Since members of a collective
bargaining unit are entitled by federal labor law to select their own representative, a bankruptcy
trustee could not take over
the representation of Debtor's members because the trustee was not elected by the members,
see NLRB v. Financial
Institution Employees Local 1182, 475 U.S. 192, 106 S.Ct. 1007 (1986), and the trustee
therefore could not perform
Debtor's role under existing CBAs with respect to employees unless the employees consented.
Further, employers are not
required to recognize or bargain with any representative other than the one elected by the
employees, see Whisper Soft
Mills v. NLRB, 754 F.2d 1381 (9th Cir. 1984), so a bankruptcy trustee could not perform
Debtor's role under existing
CBAs with respect to employers either unless the employers consented. For the same reasons, a
bankruptcy trustee could
not assign the CBAs to another in exchange for consideration, because the assignee would share
the trustee's legal
disabilities with respect to dealing with the employees and the employers under the CBAs;
further, 11 U.S.C. §365(c)(1)
prohibits the assignment of a bankruptcy debtor's executory contracts when applicable law
excuses the other party from
accepting performance from, or rendering performance to, anyone other than the bankruptcy
debtor. Accordingly, while it is
technically true that the CBAs should be included in Debtor's liquidation analysis because they
are property of Debtor's
estate, the liquidation value of such property is zero and their inclusion therefore does not alter
the liquidation analysis.
Rather than asserting that the CBAs must be included in Debtor's liquidation analysis,
Creditor may mean to argue that it is
Debtor's right to receive future dues from its members that should be included. Such a contention
would be untenable for
several reasons. First, under Chapter 7, Debtor would cease to function as an entity and could
therefore no longer collect
dues or provide services in exchange for them. Further, 11 U.S.C. §541(d) provides that property
in which a debtor holds
only legal title but no equitable interest becomes property of the bankruptcy estate only to the
extent of the title held by the
debtor and not to the extent of any equitable interest that is not held by the debtor, and
see Beiger v. Internal Revenue
Service, 496 U.S. 53, 110 S.Ct. 2258 (1990); In re Coupon Clearing Service, Inc.,
113 F.3d 1091 (9th Cir. 1997) -- in this
case, the dues collected by Debtor from its members are subject to 29 U.S.C. §501(a), which
provides (in pertinent part) as
follows:
The officers, agents, shop stewards, and other representatives of a labor
organization occupy
positions of trust in relation to
such organization and its members as a group. It is, therefore, the duty of each such person,
taking into account the special
problems and functions of a labor organization, to hold its money and property solely for the
benefit of the organization and
its members and to manage, invest, and expend the same in accordance with its constitution
and bylaws and any resolutions
of the governing bodies adopted thereunder ....
[emphasis supplied]
Finally, to any extent that Debtor's right to collect dues might somehow become property of
the Chapter 7 estate, a
bankruptcy trustee nevertheless could not enforce that right and compel the members to pay dues
to the estate because, as
discussed above, the members are entitled to elect their own representative and are not required
to accept a bankruptcy
trustee (or an assignee thereof) in Debtor's stead. Accordingly: Debtor's right to collect dues
would not survive the
commencement of a Chapter 7 case, so nothing would exist to become property of the estate; in
any event, such right
represents an interest in only bare legal title to dues collected and nothing more could become
property of the bankruptcy
estate; finally, the liquidation value of such right would be zero, both because it would consist of
only bare legal title, and
also because the right would be unenforceable against the union members by a bankruptcy
trustee.
C. Absolute Priority Rule
Compliance with the Absolute Priority Rule is one of two prerequisites for "cramdown",
which is permitted by 11 U.S.C.
§1129(b)(1) if a plan fails to meet the requirement of 11 U.S.C. §1129(a)(8) that each impaired
class has voted to accept
the plan, but does meet each other applicable requirement of 11 U.S.C. §1129(a):
... if all of the applicable requirements of subsection (a) of this section other
than paragraph
(8) are met with respect to a
plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding
the requirements of such
paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each
class of claims or
interests that is impaired under, and has not accepted, the plan.
With respect to the first prerequisite for cramdown, Creditor has not complained of unfair
discrimination, nor is any such
discrimination apparent to the Court.
A plan discriminates unfairly if it singles out the holder of some claim or
interest for
particular treatment. [Citation
omitted] [§] Courts have denied confirmation of Chapter 11 plans that proposed widely disparate
treatment of similarly
situated creditors as unfairly discriminatory. [Citations omitted].
In re Tucson Self-Storage, Inc., 166 B.R. 892, 898 (9th Cir. BAP 1994). The Plan
forms three classes of unsecured
nonpriority creditors: one consisting of "convenience claims" for $1,000 or less (including the
claims of creditors who are
willing to reduce their claim to $1,000); one consisting of undisputed and liquidated contract
claims; and one consisting of
disputed and unliquidated tort claims. The Plan provides that the "convenience class" is to be
paid in full within sixty days
of the Plan's effective date -- all funds available for distribution to unsecured nonpriority
creditors after payment of the
"convenience class" are to be distributed pro-rata between the class of undisputed and liquidated
contract claims and the
class of disputed and unliquidated tort claims, then pro-rata within each class to the holders of
claims allowed in each class.
At the time the Plan was proposed, Creditor's claim was in litigation and it is appropriately
included in the class of disputed
and unliquidated tort claims along with other claims of the same kind; the classes consisting of
undisputed and liquidated
contract claims and of disputed and unliquidated tort claims are treated the same. The Plan does
not discriminate unfairly,
in terms of either classification or treatment. With respect to the second prerequisite for
cramdown, fair and equitable
treatment of an impaired class that did not vote to accept a plan is defined for purposes of
unsecured creditors by 11 U.S.C.
§1129(b)(2)(B), which embodies what is commonly referred to as the Absolute Priority
Rule:
... (i) the plan provides that each holder of a claim of such class receive or
retain on account
of such claim property of a
value, as of the effective date of the plan, equal to the allowed amount of such claim; or [§] (ii)
the holder of any claim or
interest that is junior to the claims of such class will not receive or retain under the plan on
account of such junior claim or
interest any property.
Thus, as used in 11 U.S.C. §1129(b)(2)(B), the "phrase 'fair and equitable' is not a vague
exhortation to bankruptcy judges
that they do the right thing; rather, it implements the so-called absolute priority rule under which
an objecting class must be
paid in full before any claim or interest junior to it gets anything at all",
In re Perez, 30
F.3d 1209, 1212-1213 (9th Cir.
1994).
Creditors argue that the Absolute Priority Rule is not met here because Debtor will continue
in existence and in possession
of its property, even though Creditor and other unsecured creditors will not be paid in full.
However, the Absolute Priority
Rule does not provide that a debtor entity may not receive or retain property unless all creditors
have been paid in full, it
provides that "the holder of any ... interest" in a debtor entity may not receive or retain property
on account of such interest
unless all creditors have been paid in full. An "interest" is that which is held by an "equity
security holder", pursuant to 11
U.S.C. §501(a); an "equity security holder" is defined by 11 U.S.C. §101(17) as the "holder of an
equity security of the
debtor"; an "equity security" is defined by 11 U.S.C. §101(16) as a share in a corporation "or
similar security" (or certain
warrants or rights concerning the same), or the interest of a limited partner in a limited
partnership (or certain warrants or
rights concerning the same). In the case of a Chapter 11 debtor that is a corporation or
partnership, the Absolute Priority
Rule prevents the shareholders or partners from receiving anything on account of their interests
in the corporation or
partnership, and from retaining the benefits of such interests, unless all creditors have been paid
in full (or agree to different
treatment). Debtor in this case is an unincorporated non-profit
HREF="#N_10_">(10) association (such as a fraternal organization, or
service
organization) whose members have no ownership interest in Debtor akin to that of shareholders
of a corporation or partners
of a partnership. The IBT constitution provides that, if Debtor were to be liquidated, its assets
would escheat to IBT and be
transferred to the general fund, but IBT also has no ownership interest in Debtor equivalent to
that of shareholders of a
corporation or partners of a partnership; further, the Plan does not provide for IBT to receive or
retain anything "on account
of" its escheat rights and provides for IBT merely to the extent that IBT holds a creditor's
claim.
Debtor cites a case involving a similar kind of entity, Matter of Wabash Valley Power
Association, 72 F.3d 1305 (7th Cir.
1995), cert. denied, __ U.S. __, 117 S.Ct. 389 (1996)
("Wabash"). The Chapter 11 debtor in Wabash was a nonprofit
cooperative formed for the purpose of generating and transmitting electric power to its members;
the members were
entitled to vote for the debtor's board of directors, but had no ownership interest in the entity;
upon dissolution, the entity's
assets escheated to the state. The Seventh Circuit held that the Absolute Priority Rule did not
apply under such
circumstances, pointing out (at 1314) that Chapter 11 is "primarily designed" for profit-seeking
enterprises, whereas
By design, "in a co-operative association the concept of profit is
inappropriate, because
profit, in its recognized economic
sense, is the wage of the entrepreneur, and in a co-operative there is no entrepreneur." Emmanuel
S. Tyson, Annotation,
Co-operative Associations: Rights in Equity Credits or Patronage Dividends,
50 A.L.R.3d 435 (1995).
Wabash, at 1313.
Since they do not participate in profits, "[the debtor's] Members are not owners in any usual
sense of the term",
id.. The
Court noted that "almost the only prerogative [the debtor's] Members share with shareholders in
an ordinary business
corporation is the right to elect a board of directors",
id., and rejected a contention that
such right gave rise to or constituted
an "interest" within the meaning of the Absolute Priority Rule:
Control is not essential to an equity interest, as the existence of non-voting
stock
demonstrates. A share of profits, however,
is essential. Control alone, divorced from any right to share in corporate profits or assets, does
not amount to an equity
interest. [§] The mere fact that the Members of [the debtor] are benefited by [the debtor]'s
operation and might be
disadvantaged by its demise alsodoes not give them an "interest" cognizable in bankruptcy.
Employees, managers and
customers, among others, always have an interest, in the broadest sense, in a corporation. The
factor which distinguishes
these parties from stockholders is not"control" per se (managers, after all,
have at least a limited control) but the ability to
make use of that control to generate profits or to increase their own share of
profits.
Wabash, at 1312 - 1319. The
Wabash Court concurred with the analysis
and outcome of
In re Whittaker Memorial Hospital
Association, 149 B.R. 812 (Bankr.E.D.Va. 1993), a case involving a non-profit hospital; the
same result was reached for
the same reasons in
In re Independence Village, Inc., 52 B.R. 715 (Bankr.E.D.Mich.
1985), in which the debtor was a
non-profit organization operating a care facility for the elderly.
In re Eastern Maine Electric
Cooperative, Inc., 125 B.R. 329
(Bankr.D.Maine 1991), concerning a rural electric cooperative, came to the opposite conclusion,
on the basis that the
debtor's members had rights to recover patronage capital, which the Court found to constitute an
"interest" for purposes of
the Absolute Priority Rule. In this case, neither Debtor's members nor Debtor's affiliates nor
anyone else holds any interest
in Debtor, as that concept is defined by the Bankruptcy Code and case law. The Absolute Priority
Rule does not, by its
terms, prohibit a debtor entity from retaining its own assets, and cannot, by its terms, apply to a
situation such as this where
the debtor has no equity security holders.
CONCLUSION
The Court has located reported cases concerning the filing of bankruptcy petitions by only
seven other labor unions --
Highway & City Freight Drivers, Dockmen and Helpers, Local Union No. 600,
576 F.2d 1285 (8th Cir. 1978), cert. denied,
439 U.S. 1002, 99 S.Ct. 612 (1978) (a case decided under the former
Bankruptcy Act) ("Highway & City Freight"); Matter
of American Federation of Television and Radio Artists, 30 B.R. 772 (Bankr.S.D.N.Y.
1983) (a decision concerning four
Chapter 11 cases under the Bankruptcy Code, in which the debtors were a national union and
three of its local affiliates); In
re Highway Truck Drivers and Helpers, Teamsters Local No. 107, 86 B.R. 404
(Bankr.E.D.Pa. 1988), 98 B.R. 698 (E.D.Pa.
1989), 888 F.2d 293 (3d Cir. 1989); 100 B.R. 209 (Bankr.E.D.Pa. 1989) (a Chapter 11 case
under the Bankruptcy Code); In
re Local Union 1397 of the United Steelworkers of America, AFL-CIO-CLC, 133 B.R. 743
(Bankr.W.D.Pa. 1991) (a
Chapter 11 case under the Bankruptcy Code) -- none of which addresses the issues presented by
the case before this Court.
While it is apparently not common for a labor union to seek bankruptcy protection, it is not
unheard of, nor is it forbidden:
the Eighth Circuit held in Highway & City Freight that an unincorporated
association such as a labor union is eligible to file
a voluntary petition under the Bankruptcy Act, and that result is unchanged under the Bankruptcy
Code. Nevertheless, as
can be seen from the foregoing, traditional bankruptcy analysis is not always a comfortable fit
with some aspects of union
organization and labor law.
For example, the Chapter 7 test must be applied to Chapter 11 plan confirmation, even
though it appears that a labor union
would be very unlikely to file Chapter 7 (as Johnston testified with respect to Debtor in this
case), since such a step would
cause the union to disband and leave its members without representation. Despite this practical
reality, Chapter 11 makes
no exceptions for labor unions in the plan confirmation standards that apply to other forms of
bankruptcy debtors.
Another issue is the failure of the Absolute Priority Rule to account for the non-profit and
escheat features of a local union
such as Debtor. In the absence of legislative history or action, the courts are left to the awkward
process of fitting the square
peg of a non-profit association into the round hole of the Absolute Priority Rule as best they can,
as is well explained by the
decision in Wabash. This case presents a somewhat anomalous situation whereby
Debtors' members are not the proponents
of the Plan (since they do not own Debtor and are merely the recipients of services provided by
Debtor), yet the dues they
pay are Debtor's only source of income and the amount of such dues is determined solely by the
members -- thus, the
Absolute Priority Rule cannot be applied and the good faith of the members is not subject to
consideration as a prerequisite
of confirmation, even though they will reap the benefits of reorganization.
A further issue is the apparent conflict between labor law's strong principle of
self-governance for union members and
bankruptcy law's provision for appointment of trustees in both Chapter 11 and Chapter 7 cases.
The policy arguments made
by Debtor could be advanced in support of permitting unions to avail themselves of the benefits
of Chapter 11, while
depriving bankruptcy courts of the power to appoint Chapter 11 trustees despite the Bankruptcy
Code's provision of such
remedy.
Debtor in this case is not a wealthy union, consisting as it does primarily of seasonally
employed agricultural workers
earning an average hourly wage of only $7 (financially, a sympathetic body) -- it is not offensive
for an entity such as this to
resort to bankruptcy to deal with its debts. However, many of the legal principles argued by
Debtor here might be applied to
permit a far richer union to discharge or restructure larger amounts of debt than are at issue in
this case, a result that
perhaps was not even considered by Congress in drafting either labor legislation or bankruptcy
legislation; the parties cited
no legislative history on this point, nor has the Court located any. This Court has been limited to
some extent by the way in
which the parties have presented the case -- Debtor called seven witnesses, of whom one was
qualified as an expert,
whereas Creditor called none; Debtor was represented by highly experienced bankruptcy counsel
and Creditor was not.(11)
As a result, various issues and areas were undeveloped that might have assisted the Court in
making its analysis -- for
example, it could have been relevant to the good faith issue to consider whether it is common
practice for local unions to
"funnel up" income to affiliates to such an extent that they are left essentially judgment proof,
and the ramifications of
merger and imposition by IBT of trusteeship (and their impact upon Debtor's members) might
have been more fully
explored. The Court has attempted to reconcile the laws of labor and bankruptcy and achieve a
result that is consistent with
both: "When confronted with two different statutory schemes, the court must attempt to
harmonize the goals and policies of
each. National Labor Relations Board v. Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79
L.Ed.2d 482 (1984)", In re Capital
West Investors, 186 B.R. 497, 499 (N.D.Ca. 1995).
For the reasons set forth, Creditor's objection to confirmation of Debtor's Plan is overruled
and the Plan shall be confirmed.
Counsel for Debtor shall submit a form of order so providing, after review as to form by counsel
for Creditor.
Dated:
______________________________
ARTHUR S. WEISSBRODT
United States Bankruptcy Judge
1. 1 An objection to confirmation was also filed
by National Union Fire Insurance Company but has been withdrawn.
2. 2 This case was commenced prior to October
22, 1994, the effective date of the amendments to Title 11, United States
Code ("the Bankruptcy Code") enacted in 1994; all references to Title 11 are to that statute as it
provided prior to such
amendments.
3. 3 In that action, Creditor also named IBT and
JC7 as defendants, but the District Court granted summary judgment in
favor of IBT and JC7 by an order of June 16, 1994, finding that neither affiliate was proven to
have "participated in or
authorized the conduct which is the subject of" Creditor's complaint.
4. 4 It was possible to compare Johnston's
projection for 1995 to the actual results for that year: actual income was
approximately $37,000 less than projected and actual expenses were approximately $36,000 less
than projected; actual and
projected net changes in cash flow differed by only $184.
5. 5 Instead, the Bankruptcy Code provides that,
once the exclusivity periods of 11 U.S.C. §1121 have expired (which
occurs during or at the end of the first six months of a case, unless extended by the court for
cause), a creditor is free to file
its own plan; Creditor has not availed itself of that remedy.
6. 6 If 7,000 members each paid an average of an
additional $1 per month, Debtor could collect $84,000 per year, which
would pay Creditor's claim of $526,692 in full within just over six years.
7. 7 In fact, as stated above, the District Court
specifically found that Creditor had not proven the affiliates' participation in
or authorization of the conduct that gave rise to Creditor's judgment against Debtor. The general
rule is that local unions
and their affiliates are separate legal entities without vicarious liability for each other's debts,
see United Mine Workers v.
Coronado Coal Co., 259 U.S. 344, 42 S.Ct. 570 (1922).
8. 8 Debtor's obligation to pay for
post-confirmation services would arise post-confirmation and would therefore constitute
debts beyond the scope of the discharge provided by 11 U.S.C. §1141(d).
9. 9 In fact, it would exceed the requirements of
that test, since it applies fair market values rather than the lower "firesale"
values that are typically achieved in Chapter 7 liquidations, does not reduce those values by costs
of sale and other
administrative expenses of liquidation under Chapter 7, and provides for creditors to receive any
appreciation that Debtor
may realize through liquidation within five years after confirmation (which would be unavailable
under Chapter 7).
10. 10 Debtor is not a non-profit organization in
name only; Johnston's testimony demonstrated that the expense of
operating consistently equals or exceeds income.
11. 11 The Court notes that Debtor spent a
considerable amount of money (some borrowed from its powerful affiliates) to
pursue and litigate this Chapter 11 case, for a relatively modest recov- ery from the affiliates'
standpoint of only some 30%
on unsecured claims -- the principles may be far more important to the union movement than the
dollars involved here,
though the same may not be true for Cred
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