United Retired Pilot v. United Airlines Inc

In the
United States Court of Appeals
For the Seventh Circuit
____________

No. 05-3121
IN RE:
UAL CORPORATION, et al.,
Debtors.
UNITED RETIRED PILOTS BENEFIT
PROTECTION ASSOCIATION, et al.,
Appellants,
v.

UNITED AIRLINES, INC., et al.,
Debtors-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 1202—John W. Darrah, Judge.
____________
ARGUED FEBRUARY 24, 2006—DECIDED MARCH 31, 2006
____________

Before BAUER, POSNER, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. In the course of United Airlines’
bankruptcy, the bankruptcy judge, seconded by the dis-
trict judge, allowed United to eliminate the contractual
pension rights of its 3,000 or so retired pilots without a
hearing to determine whether they should receive “replace-
ment” benefits (compensation for giving up those rights),
2 No. 05-3121

which United had given its active pilots. The association
representing the retired pilots has appealed. (The “et al.”
parties on both sides of the case can be ignored.) Recently
United emerged from bankruptcy, and it argues that this
renders the appeal moot. That is incorrect. All that the
retired pilots are seeking in the first instance is a hearing
before the bankruptcy judge, and we shall see that the judge
could at that hearing deny any relief that would jeopardize
United’s newly recovered solvency. And there is no argu-
ment that the confirmed plan resolves the claims made by
the retired pilots in this appeal.
United had a (frequently amended) collective bargain-
ing agreement with the Air Line Pilots Association
(ALPA) that among other things established defined-benefit
pension plans for both active and retired pilots employed by
United. The plans provided both tax-qualified and non-tax-
qualified pension benefits; the distinctions relevant to this
case are that the latter are not insured by the Pension Benefit
Guaranty Corporation or protected by the provisions of
ERISA relating to the termination of pension plans. 29
U.S.C. §§ 1321(a), (b)(8).
Normally a bankruptcy trustee, or as in this case a
debtor in possession, can freely reject the executory por-
tion of a contract. But section 1113 of the Bankruptcy
Code permits the rejection of the executory portion of a
collective bargaining agreement only with the approval of
the bankruptcy judge after negotiations looking to mutually
satisfactory modifications of the agreement, 11 U.S.C.
§ 1113(b)(2), and only if (the negotiations failing) the
judge determines that “the balance of the equities clearly
favors rejection of such agreement.” § 1113(c)(3). Wanting
to lift the albatross of pension obligations from its shoulders
as well as to reduce the pilots’ wages, United filed an
No. 05-3121 3

application under section 1113 for rejection of the collec-
tive bargaining agreement and proceeded to the negotiation
phase with ALPA. When ALPA made clear that it would
not represent the interests of the retired pilots in
the negotiations, the latter moved the bankruptcy judge
to appoint a representative to participate in the negotiations
on their behalf. The purpose of the motion is a little obscure.
The retired pilots already had a representative—the United
Retired Pilots Benefit Protection Association, the appellant.
What they really wanted was for the judge to order United
and ALPA to negotiate with URPBPA as well. The judge
refused, and as a result the retired pilots did not participate
in the negotiations. The judge’s refusal is one of the orders
that the association is asking us to reverse.
While the section 1113 proceeding was going on,
United and ALPA negotiated an agreement (the parties
call this the “Letter Agreement”) to modify the collec-
tive bargaining agreement. The modification was in-
tended to eliminate the pension plans created by the
agreement but compensate the active pilots, that is, the
pilots represented by ALPA, by giving them con-
vertible notes valued at $550 million and other consider-
ation, including a defined-contribution pension plan. In
exchange for these concessions ALPA agreed not to
oppose United’s attempt to terminate the collectively
bargained pension plans under 29 U.S.C. § 1341, the provi-
sion of ERISA that governs the voluntary termination of
pension plans.
With the agreement to modify the collective bargaining
agreement, United’s application under section 1113 to reject
the agreement entered a state of suspended animation, since
the modification of the collective bargaining agreement
by the Letter Agreement would, if that agreement was
4 No. 05-3121

approved, give United the relief it wanted without its
having to persuade the bankruptcy judge to reject the
collective bargaining agreement.
United asked the bankruptcy judge to approve the Let-
ter Agreement under 11 U.S.C. § 363(b)(1), which requires
that the bankruptcy judge’s approval be obtained for
contracts made by the debtor during the bankruptcy that are
outside the ordinary course of business, as the Letter
Agreement obviously was. The judge gave his approval,
and this is the other order challenged on this appeal.
The retired pilots argue that he shouldn’t have approved the
agreement without giving them a chance to participate in
the negotiations for replacement benefits; such participation
might, they argue, have resulted in their receiving replace-
ment benefits too.
The order of approval extinguished any rights that
the retired pilots might have had under the collective
bargaining agreement. It was the equivalent of a final
judgment in a suit for breach of contract, and therefore
appealable as a severable phase of the bankruptcy pro-
ceeding. Bank of America, N.A. v. Moglia, 330 F.3d 942, 944
(7th Cir. 2003). The earlier order refusing to appoint a
representative to negotiate with United and ALPA on the
retired pilots’ behalf over replacement benefits to compen-
sate for the modification of the collective bargaining
agreement was interlocutory, but interlocutory to the
order extinguishing their contract rights and therefore
reviewable by us with it.
After the bankruptcy judge approved the Letter Agree-
ment, United withdrew its section 1113 motion for rejection
of the collective bargaining agreement. The approval did
not, however, terminate the pension plans. For that to
happen an application had to be made to and approved by
No. 05-3121 5

the bankruptcy judge under one of two sections of ERISA.
Under the first, 29 U.S.C. § 1341 (voluntary termination), the
employer asks for termination. Under the second, 29 U.S.C.
§ 1342 (involuntary termination), the Pension Benefit
Guaranty Corporation, which insures vested rights under
ERISA pension plans, 29 U.S.C. § 1322(a); Pension Benefit
Guaranty Corp. v. LTV Corp., 496 U.S. 633, 637-38 (1990),
asks. United started down the voluntary-termination road,
as we know, but withdrew when the PBGC applied for
involuntary termination. The PBGC anticipated that if the
pension plans were not terminated, and so continued
generating new vested pension rights, the plans would go
into default and as the insurer of those rights the PBGC
would face a staggering liability.
The bankruptcy judge granted the PBGC’s application
in an order that is currently on appeal to the district court.
Assuming the order is upheld, the PBGC will become the
obligor of the retired pilots’ vested pension rights, though
only to a limited extent. Although airline pilots must retire
at the age of 60, the PBGC does not begin to pay full benefits
until the retiree reaches the age of 65. Also, as we noted
earlier, it does not replace any non-tax-qualified benefits.
And it pays a maximum of $44,388 in benefits to partici-
pants in plans terminated, as this one was, in 2004. What is
more, while the benefits that PBGC will be paying the active
pilots when they retire will be on top of the replacement
benefits that United has given them in exchange for the
surrender of their rights under the pension plans, the
retirees have received no replacement benefits. They
do have unsecured claims arising from their contractual
pension rights, to the extent they’re not compensated by the
PBGC insurance, but according to the parties the value of
those claims has not yet been determined by the bankruptcy
court. (That’s a puzzle; the retired pilots have debt claims
6 No. 05-3121

and debt is converted to stock in United’s plan of reorgani-
zation and it isn’t possible to confirm the plan without
knowing who gets how much stock. But it not a puzzle we
need to unravel in order to decide this appeal.) Nor do we
know what fraction of the claims will actually be paid. All
that is clear is that the retired pilots have some financial
stake in pursuing this litigation.
In the negotiations leading up to the Letter Agreement,
the active pilots, represented by ALPA, received as
we know sizable compensation for surrendering their
right to fight for their pension rights. The retired employees
were bound to receive less. They lost less; a retired pilot will
have enjoyed the benefit of full pension payments since his
retirement, while an active pilot who is near retirement will
have been contributing to the pension plan for many years
without receiving any benefits. More important, the active
pilots had a stick to use against United—the threat of a
strike—that the retirees didn’t have. But the retired pilots
received not merely lower replacement benefits than the
active pilots; they received nothing—and with no opportu-
nity to negotiate for something.
United defends this result primarily on the ground that
two parties to a contract are always free to modify it
without considering the views of any third parties. United
and ALPA are the only parties to the collective bargain-
ing agreement, and a union’s duty to bargain collectively on
behalf of the members of the bargaining unit that the union
represents does not extend to retired workers, because they
are not members of the unit. Allied Chemical & Alkali Workers
of America, Local Union No. 1 v. Pittsburgh Plate Glass Co., 404
U.S. 157, 166, 182 n. 20 (1971). The retirees do not argue that
they are third-party beneficiaries of the collective bargaining
agreement. The argument would be unlikely to prevail,
No. 05-3121 7

which may be why it hasn’t been made. The test for whether
someone is a third-party beneficiary is whether the express
parties to the contract intended the third party to have the
right to enforce the contract. A.E.I. Music Network, Inc. v.
Business Computers, Inc., 290 F.3d 952, 955 (7th Cir. 2002);
Vidimos, Inc. v. Laser Lab Ltd., 99 F.3d 217, 219-20 (7th Cir.
1996). Generally, the test is deemed satisfied if a member of
the bargaining unit seeks to enforce the collective bargain-
ing agreement. E.g., United Food & Commercial Workers Local
951 v. Mulder, 31 F.3d 365, 370 (6th Cir. 1994). It is satisfied
if the beneficiary under a welfare plan established by a
collective bargaining agreement sues for benefits. Hazen
v. Western Union Tel. Co., 518 F.2d 766, 767-70 (6th Cir. 1975).
But neither employer nor union would want to create a
situation in which retirees, whose interests diverge from
those of the active employees, would be able to
block modification of the collective bargaining agreement.
ALPA adds, rather unhelpfully, that the Railway
Labor Act, 45 U.S.C. §§ 151 et seq., which governs labor
relations in the airline industry as well as the railroad
industry, does not permit an employer to engage in col-
lective bargaining with any entity other than the union that
represents its employees. 45 U.S.C. §§ 152 Fourth, Seventh.
That rule would not prevent the employer from negotiat-
ing with retirees, who are no longer members of the bar-
gaining unit, if the retirees could derail or impede the
negotiations between the parties to modify the collective
bargaining agreement. An agreement to modify or abro-
gate a collective bargaining agreement doesn’t affect tax-
qualified pension rights created by the agreement until
those rights are terminated by a separate order under
ERISA. United needed that order for its negotiations with
ALPA to give it what it ultimately wanted, namely the
termination of the pension plans.
8 No. 05-3121

The plans have been terminated, as we said, subject to
appeal. The retired pilots are not complaining about the
termination in this appeal but about being cut out of an
opportunity to obtain replacement benefits, as the active
pilots were able to do by virtue of their representation
by ALPA, in the negotiations that resulted in the Letter
Agreement that the judge approved under 11 U.S.C.
§ 363(b)(1). The question presented by the retired pilots’
appeal boils down to whether the bankruptcy judge
could approve that agreement without giving any con-
sideration to the retired pilots’ interests.
What interests? More precisely, what legally protected
interests? United points out that only “interested parties”
may participate in a hearing on the debtor’s proposal to
reject a collective bargaining agreement, 11 U.S.C.
§ 1113(d)(1), and we have held that “interested parties”
include only the parties to (or a guarantor of) the agreement.
In re UAL Corp. (IFS), 408 F.3d 847, 851 (7th Cir. 2005). It is
true that In re Century Brass Products, Inc., 795 F.2d 265, 274-
76 (2d Cir. 1986), had held that retirees are “employees”
within the meaning of section 1113(b), and so are entitled to
be consulted about the proposal that the employer is
required to make as a preliminary to moving the bank-
ruptcy judge to reject the collective bargaining agreement.
But Century Brass had not discussed whether the retirees
were interested parties under section 1113(d), entitling them
to oppose the rejection of the agreement, which was the
subsection in question in IFS. At most, Century Brass injects
some uncertainty concerning the retired pilots’ rights in a
section 1113 proceeding, and we shall see that despite the
abandonment of that proceeding by United this uncertainty
could have a bearing on our decision. For the moment,
however, the only relevant point is that United’s argument
No. 05-3121 9

puts the cart before the horse. There was no section 1113
hearing.
United notes that section 1114, which governs give-ups of
medical benefits, expressly requires the appointment of a
representative for the beneficiaries in negotiations for such
give-ups (corresponding to the pre-rejection negotiations
under section 1113). This implies, United argues, that no
representative need be appointed for section 1113 negotia-
tions. The argument is unpersuasive. In enacting section
1114, Congress was reacting to a particular issue, that of
termination of medical benefits, in a particular bankruptcy,
that of the LTV corporation. Susan J. Stabile, “Protecting
Retiree Medical Benefits in Bankruptcy: The Scope of
Section 1114 of the Bankruptcy Code,” 14 Cardozo L. Rev.
1911, 1926-27 (1993). There is no indication that Congress
was specifying or disallowing procedures to be used in
section 1113 proceedings. In any event, the question pre-
sented by this appeal is not the procedures required by
section 1113, since no order was ever issued under that
section. It is what negotiating rights if any the retired pilots
should have had with regard to the agreement that the
bankruptcy judge approved under section 363(b)(1), an
agreement that confirmed the receipt of replacement
benefits by the active pilots and the receipt of nothing by the
retired ones.
Normally, as we said, the parties to a contract can modify
it freely without regard to the impact on the financial
interests of third parties who are not third-party beneficia-
ries. But the setting here is abnormal. The modification of
the collective bargaining agreement had to be approved
by the bankruptcy judge under section 363(b)(1) because it
involved payment from the debtor’s estate (the replacement
benefits) other than in the ordinary course of the debtor’s
10 No. 05-3121

business. In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004).
The reason for the requirement of obtaining judicial ap-
proval in such a case is that contracts made by a debtor in
bankruptcy that are not in the ordinary course may have an
impact on the other creditors in the bankruptcy proceeding.
United States v. Goodstein, 883 F.2d 1362, 1367 (7th Cir. 1989);
In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 150
(3d Cir. 1986); In re Continental Air Lines, Inc., 780 F.2d 1223,
1227-28 (5th Cir. 1986). The criteria for approval, therefore,
are whether the transaction makes good business sense, in
which event the creditors as a whole should benefit, In re
Schipper, 933 F.2d 513, 515 (7th Cir. 1991), and whether it
preserves the priorities among the creditors. In re Kmart
Corp., supra, 359 F.3d at 872-73.
United argues that allowing the retired pilots into the
negotiations that resulted in the Letter Agreement that the
bankruptcy judge approved could not have increased the
value of the estate because the retired pilots have no right to
enforce the collective bargaining agreement. Which is true,
but does not carry quite as far as United thinks. Remember
that the Letter Agreement provided that ALPA would not
oppose United’s effort to terminate the pension plans. Well,
the retired pilots could oppose too, though probably not in
a section 1113 proceeding (that is the uncertainty we
mentioned earlier). The pension plans could be terminated
only by proceedings under 29 U.S.C. §§ 1341 or 1342, and
the retired pilots both participated in and argued against the
PBGC’s application for involuntary termination of the
pension plans under 29 U.S.C. § 1342. They lost—maybe; the
case is on appeal. Surrendering the right to oppose, which
doubtless they, like the active pilots, would have done in
exchange for replacement benefits (better the bird in the
hand), might have been worth something to the debtor’s
estate, for example if it had headed off the appeal from
No. 05-3121 11

termination now pending in the district court, with the
possibility of a further appeal to this court (and beyond).
Had United thought the retired pilots worth buying off, it
would have offered them something for a “no fight” clause
similar to the one in the Letter Agreement. The fact that
United did not do this is evidence that the retired pilots had
nothing to “sell.” But it is not conclusive evidence. Section
363(b)(1)’s requirement that the debtor obtain judicial
approval of agreements that are outside the ordinary course
of business signifies a degree of congressional distrust of the
contractual process in bankruptcy. In re Lionel Corp., 722
F.2d 1063, 1071 (2d Cir. 1983). The fear is that the debtor
who steps out of the ordinary course of business may be
harming creditors as a whole or favoring one creditor over
the others without a valid ground. But the criteria for
approval—whether the transaction makes good business
sense and does not disturb the creditors’ rights inter se—do
not argue compellingly for requiring the debtor to negotiate
with creditors seeking special consideration just because
they may be in a position to throw a monkey wrench into a
transaction otherwise highly advantageous to the debtor
and the creditors as a whole.
The fact that United is warning us that the retired pilots
are threatening to derail the reorganization and plunge
United back into bankruptcy is hardly evidence that getting
the retired pilots “on board” the Letter Agreement might
indeed have been in the best interests of the estate; it is
forensic advocacy; it is the argument we would expect to be
made any time someone claimed compensation for not
having tried to derail the bankruptcy proceeding. But what
is true is that the already daunting complexity of major
corporate bankruptcies would be multiplied if anyone
with some potential blocking power, yet whom the trustee
or debtor in possession had not thought it worthwhile
12 No. 05-3121

trying to pay to buy peace with, could insist on negotiat-
ing rights as a condition of the bankruptcy judge’s approv-
ing a transaction out of the ordinary course.
Even if, despite what we have just said, the bankruptcy
judge should have conditioned approval of the section
363(b)(1) agreement on the retired pilots’ being made
negotiating partners with United and the union, there is
no longer any feasible remedy that a court could order. To
avoid the unraveling of the section 1342 proceeding and
perhaps of the entire bankruptcy (though that seems
unlikely), we would not order the Letter Agreement va-
cated. That would be a “logical” remedy but unnecessarily
disruptive. All we could do would be to direct the bank-
ruptcy judge on remand to determine what he would have
insisted that the retired pilots receive in the agreement, as a
condition of his approving it, had he realized they had the
same kind of interest as the active pilots, namely the interest
conferred by a right to mount an opposition to the termina-
tion of the pension plans. But there would be no objective
basis for calculating the value that such a right would
command in a hypothetical negotiation.
We conclude that the denial of relief to the retired pilots
should be, and it is,
AFFIRMED.
No. 05-3121 13

A true Copy:
Teste:

_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—3-31-06