Journal Register Company and Pulp Finish 1 Company (f/k/a Journal Register Comp

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Chapter 11
JOURNAL REGISTER COMPANY, et al., 	: 	Case No. 12-13774 (SMB)
: 	(Jointly Administered)
Debtors. 	:
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MEMORANDUM DECISION AND ORDER
OVERRULING OBJECTION TO SALE MOTION
A P P E A R A N C E S:
MORGAN, LEWIS & BOCKIUS LLP
101 Park Avenue
New York, New York 10178
Neil E. Herman, Esq.
Patrick D. Fleming, Esq.
Of Counsel
– and –
YOUNG CONAWAY STARGATT &
TAYLOR, LLP
1270 Avenue of the Americas
Suite 2210
New York, New York 10020
Kenneth J. Enos, Esq.
Andrew L. Magaziner, Esq.
Of Counsel
Counsel to the Debtors and Debtors in Possession
COHEN, WEISS and SIMON, LLP
330 West 42nd Street, 25th Floor
New York, New York 10036
Richard M. Seltzer, Esq.
David R. Hock, Esq.
Of Counsel
Counsel for the Communications Workers of America
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AKIN GUMP STRAUSS HAUER & FELD LLP
One Bryant Park
New York, New York 10036
Lisa G. Beckerman, Esq.
Robert A. Johnson, Esq.
Arun Kurichety, Esq.
Of Counsel
Counsel for Alden Global Distressed Opportunities
Master Fund, L.P., Alden Global Value Recovery
Master Fund, L.P., and 21st CMH Acquisition Co.
STUART M. BERNSTEIN
United States Bankruptcy Judge:
The Debtors seek to sell substantially all of their assets pursuant to Bankruptcy Code §
363. Two unions have objected because, among other things, the purchaser will not assume the
Debtors’ obligations under their collective bargaining agreements. The Court reserved decision
on the objection following the sale hearing, and now overrules the objection for the reasons that
follow.
DISCUSSION
The material facts are not in dispute and the resolution of the objection presents an issue
of law. At all relevant times prior to the filing of these chapter 11 cases on September 5, 2012,
the Debtors were engaged in the business of providing local news, sports, business and lifestyle
information to its customers through print and digital platforms. On or about November 29,
2012, the Debtors entered into an agreement with 21st CMH Acquisition Co. (the “Buyer”) to
sell substantially all of their assets (the “Agreement”).1 The Buyer is an affiliate of the holders
of the interests in the Debtors, and to ensure fairness, the sale process was overseen by an
1 	The Agreement was amended and restated as of December 19, 2012, but the amendments are not material
to the disposition of the matter before the Court. Hence, references to the Agreement in this decision include the
original agreement and the amended and restated agreement.
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independent director with additional oversight and input by the Official Committee of Unsecured
Creditors and its professionals. The Buyer contemplates a different business model that will
affect the terms and conditions of the employment of Debtors’ current employees as well as their
continued employment.
The Debtors are parties to collective bargaining agreements with several affiliates of the
Communications Workers of America, including the Newspaper Guild/CWA (the “INI Guild”)
and the Detroit Typographical Union No. 18 (the “INI ITU”). The Debtors’ collective
bargaining agreements with the INI Guild and the INI ITU (collectively, the “Unions”) will
expire on March 31, 2013. Relevant to the current dispute, they contain identical “successor”
clauses that condition the sale of the Debtors’ “operation” on the purchaser’s assumption of the
Debtors’ obligations under its collective bargaining agreements:
This agreement shall be binding upon the parties hereto, their successors,
administrators, executors and assigns. In the event an entire operation or any part
thereof is sold, leased, transferred or taken over by sale, transfer, lease
assignment, receivership or bankruptcy proceeding, such operation shall continue
to be subject to the terms and conditions of this Agreement for the life thereof . . . .
In the event that the employer sells, transfers, or otherwise assigns its operations
it shall require as a condition of the purchaser, transferee or assignee assume the
obligations of this Agreement. In the event that the employer fails to require the
purchaser, transferee or assignee to assume the obligations of this Agreement, the
employer (including partners and shareholders thereof) shall be liable to the local
union and the employees covered for all damages sustained as a result of such
failure to require assumption of the terms of this Agreement.
(Emphasis added).
The proposed sale does not comply with the successor clauses. Under the Agreement, the
Buyer will not assume any of the collective bargaining agreements:
Purchaser does not accept any CBAs between any Seller and its Employees, and
expressly declines to be bound by or accept the terms of any such CBAs.
Purchaser is not obligated and does not accept or adopt any wage rates, employee
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benefits, employee policies or any other terms and conditions of employment
currently or previously maintained by Sellers. Instead, Purchaser will set initial
terms and conditions of employment.
(Agreement § 6.8.)
Notwithstanding the terms of the Agreement, the Buyer reached out to the Debtors’
unions to bargain over the effect of the transaction on the Debtors’ union employees. As a result
of the these efforts, the Buyer entered into initial, ratified collective bargaining agreements with
five of six Guilds, the INI Guild being the lone exception. The Debtors also entered into
shutdown agreements with four of the five typographical unions, the INI ITU being the lone
exception. In addition, the Buyer has agreed to pay severance related to any employee not
offered employment. (Agreement § 3.1.)
The Unions filed grievances based upon the alleged violations of the successor clauses,
and demanded that the Debtors “cease the violation and make all bargaining unit employees
whole for all wages and benefits lost as a result of the [Debtors’] violation.” The Unions have
also objected to the sale for several other reasons, including the violation of the successor
clauses. The Unions contend, inter alia, that the Debtors may only consummate the Agreement
if they reject their respective collective bargaining agreements pursuant to Bankruptcy Code §
1113, and if necessary, obtain interim relief under § 1113(e).
DISCUSSION
Bankruptcy Code § 1113 governs the rejection of a collective bargaining agreement. It
establishes a negotiation process that the debtor must satisfy before a bankruptcy court will
approve a rejection motion. Bankruptcy Code § 1113(e) allows for interim relief during the
pendency of the rejection motion. Finally, Bankruptcy Code § 1113(f) states:
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No provision of this title shall be construed to permit a trustee [including a debtor-
in-possession] to unilaterally terminate or alter any provisions of a collective
bargaining agreement prior to compliance with the provisions of this section.
“Subsection 1113(f) evinces an intent that other provisions of the Bankruptcy Code are
inoperable to the extent that they allow the debtor to bypass the requirements of §1113.”
Shugrue v. Air Line Pilots Ass’n Int’l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 989 (2d Cir.
1990), cert. denied, 502 U.S. 808 (1991); accord Air Line Pilots Ass’n v. Continental Airlines (In
re Continental Airlines), 125 F.3d 120, 137 (3d Cir. 1997) ( Section 1113 precludes the
application of other provisions of the Bankruptcy Code to allow a debtor “to escape the terms of
the collective bargaining agreement without complying with the requirements of section 1113”),
cert. denied, 522 U.S. 1114 (1998). Pending compliance with § 1113, the collective bargaining
agreement remains in effect and the collective bargaining process continues after the filing of a
bankruptcy petition. Ionosphere, 922 F.2d at 990.
The Debtors have not moved to reject their collective bargaining agreements with the
Unions or sought any interim relief from the successor clauses. Accordingly, the question
presented by the sale motion and the Unions’ objection is whether the Court can approve the sale
if the Debtors have not procured the Buyer’s agreement to assume the Debtors’ obligations under
the pertinent collective bargaining agreements. The Unions have brought two decisions to the
Court’s attention that addressed this issue. In In re Stein Henry Co., No. 91-15491S, 1992 WL
122902 (Bankr. E.D. Pa. June 1, 1992), the debtor proposed to sell its assets under a plan. The
debtor’s collective bargaining agreement with Teamsters Local 500 contained a successor clause
stating that the agreement “shall be binding upon [the Debtor’s] successors . . . and assigns.”
The sale agreement did not include such a provision. The bankruptcy court concluded that the
failure to preserve the union’s rights against the purchaser violated Bankruptcy Code § 1113, and
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a collective bargaining agreement cannot be terminated or modified except through the medium
of Bankruptcy Code § 1113(f). Id., 1992 WL 122902, at *2. One year later, however, the same
bankruptcy judge questioned Stein Henry’s broad reading of Bankruptcy Code § 1113(f). After
Six, Inc. v. Philadelphia Joint Board (In re After Six, Inc.), Adv. Proc. No. 93-0339S, 1993 WL
160385, at *2 (Bankr. E.D. Pa. May 13, 1993).
In re Agripac, Inc., No. 699-60001, slip. op., (Bankr. D. Or. Apr. 2, 1999) is more on
point. There, the debtor sought to sell its canned foods division. The debtor’s collective
bargaining agreement with Teamster Local 670 included a successor clause similar to those at
issue in this case. It stated that if the business was sold the agreement would be binding on the
parties and their successors and the purchaser would continue to be subject to the collective
bargaining agreement, and in the event the debtor failed to require the purchaser to assume the
obligations of the collective bargaining agreement, the debtor would be liable in damages to the
union and the employees. The proposed agreement did not comply with the successor clause,
and the union objected to the sale on that basis.
The bankruptcy court sustained the union’s objection on two different grounds. First, the
breach of the collective bargaining agreement could result in substantial administrative expense
claims against the estate. Id. at 11. Second, the sale of the canned foods business without
compliance with the collective bargaining agreement amounted to a rejection of the contract
under Bankruptcy Code § 1113, and the sale could not go forward until the debtor complied with
§ 1113 or the union and the new buyer reached an agreement rendering compliance moot. Id. at
12; see United Food & Commercial Workers Union v. Family Snacks, Inc. (In re Family Snacks,
Inc.), 257 B.R. 884, 896 n.8 (B.A.P. 8th Cir. 2001) (“A debtor may not, however, fail to take
steps to reject the CBA under § 1113 and, at the same time, fail to comply with the terms of the
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CBA.”); see generally 7 ALAN N. RESNICK & HENRY J. SOMMER, COLLIER ON BANKRUPTCY ¶
1113.02[1][c], at 1113-9 (16th ed. 2012).
The Agripac court’s conclusion is consistent with the intent of Bankruptcy Code § 1113.
The collective bargaining agreement continues to bind the debtor post-petition, and a debtor
cannot reject a collective bargaining agreement except in accordance with Bankruptcy Code §
1113. Generally speaking, a rejection represents a decision not to perform a burdensome
executory contract. A debtor cannot bypass § 1113 and obtain a de facto rejection of its
collective bargaining agreement simply by refusing to perform it. Although the obligation to
comply with the successor clause is only one duty among many under a collective bargaining
agreement, a debtor’s intentional breach of a material provision of the collective bargaining
agreement is tantamount to a rejection, or alternatively, a unilateral alteration of its provisions in
violation of Bankruptcy Code § 1113(f). Thus, as a general proposition, a sale under Bankruptcy
Code § 363 cannot circumvent the condition imposed under a successor clause absent
compliance with § 1113.
While this general proposition is unexceptionable, it does not preclude the sale in this
case given the unique circumstances. The successor clauses do not speak to the contents of the
purchase and sale agreement. Instead, they condition the actual sale or transfer of the Debtors’
“operations” on the successor’s assumption of the Debtors’ obligations under the collective
bargaining agreements for the remaining life of the collective bargaining agreements.2 If the
2 	Although the Unions contend that the interpretation of the successor clause must be resolved pursuant to
the grievance procedure by an arbitrator in accordance with the collective bargaining agreements, the Unions raised
the alleged violation of the successor clause as the reason to deny the sale motion. The Court cannot resolve the
Unions’ objection without deciding whether the proposed sale violates the successor clause or requires the Debtors
to comply with Bankruptcy Code § 1113. Given that the Unions raised the issue, the core nature of the sale motion,
and the need for a speedy disposition, it would be inappropriate for the Court to defer the interpretation of the
successor clauses to an arbitration that has not even been commenced. After Six, 1993 WL 160385, at *1.
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collective bargaining agreements expire prior to the sale, there will be no remaining life and no
obligations to assume. 3 Furthermore, Bankruptcy Code § 1113 does not apply after a collective
bargaining agreement terminates. San Rafael Baking Co. v. N. Cal. Bakery Drivers Sec. Fund
(In re San Rafael Baking Co.), 219 B.R. 860, 866 (B.A.P. 9th Cir. 1998); In re Hostess Brands,
Inc., 477 B. R. 378, 382 (Bankr. S.D.N.Y. 2012).
Rule 6004(h) of the Federal Rules of Bankruptcy Procedure automatically stays an order
authorizing a sale for fourteen days unless the Court orders otherwise. Thus, even if the Court
signed a sale order today, the sale could not close until after the expiration of the collective
bargaining agreements. In light of fact that the transaction will not close until after the
termination of the collective bargaining agreements, the Court overrules the Unions’ objection.
The Court has considered the other arguments raised by the Unions on this issue and concludes
that they lack merit. The Debtors are directed to contact chambers to schedule the conclusion of
the sale hearing.
So ordered.
Dated: New York, New York
March 21, 2013
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
3 	The Court expresses no view on the Buyer’s obligations, if any, that may arise from sources following the
consummation of a sale.
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