F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
September 1, 2006
UNITED STATES CO URT O F APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
M . STEPH EN PETERS,
Plaintiff - Appellant,
v. No. 05-1017
PIK ES PEA K MU SIC IA N S
A SSO CIA TIO N ,
Defendant - Appellee.
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C OLO RA D O SPR IN G S SY M PHONY
O RCHESTR A A SSO CIA TIO N
Debtor.
A PPE AL FR OM T HE UNITED STATES DISTRICT COURT
FOR T HE DISTRICT OF COLORADO
(D.C. NO . 04-M -765, Bankruptcy Case No. 03-10421 HR T)
Philip A. Pearlman, Pearlman & Dalton, P.C., Denver, Colorado, for A ppellant.
Brent R. Cohen (S. Kato Crews with him on the brief), Rothgerber Johnson &
Lyons LLP, Denver, Colorado, for Appellee.
Before H E N RY, M cKA Y, and TYM KOVICH, Circuit Judges.
T YM K O VIC H, Circuit Judge.
This appeal arises from a bankruptcy case in which the Colorado Springs
Symphony Orchestra contested the payment of its musicians’ w ages and benefits
as administrative expenses from the bankrupt Orchestra’s estate. At the time the
Orchestra filed for Chapter 11 reorganization, the parties were subject to a
collective bargaining agreement requiring the musicians to remain available for
rehearsals and performances on a flexible basis. In exchange, the agreement
guaranteed them compensation for a minimum number of pay periods, regardless
of whether their services were used by the Orchestra during that time.
After the Orchestra filed its bankruptcy petition, it continued to plan for
concerts because it was actively seeking to reorganize its business. Accordingly,
although the concert schedule was uncertain during the post-petition period, the
musicians remained available to perform if called upon to do so. Ultimately,
however, the O rchestra was unable to resolve its financial difficulties. It
cancelled all previously scheduled concerts, obtained court-approved rejection of
its collective bargaining agreement, and, finally, comm enced liquidation
proceedings.
The Pikes Peak M usicians Association, which represents the musicians,
sought and obtained payment of their post-petition wages and benefits as
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administrative expenses, which receive first priority under the Bankruptcy Code. 1
See 11 U.S.C. §§ 503(b)(1)(A), 507(a)(1).
Having jurisdiction pursuant to 28 U.S.C. § 158(d), we AFFIRM .
I. Background
The Colorado Springs Symphony Orchestra was a private, community-
based organization that employed local talent who performed pursuant to a
collective bargaining agreement. The Pikes Peak M usicians Association acted as
the musicians’ exclusive agent in contract negotiations. During the 2002–2003
season, the Orchestra encountered financial difficulties, and, on January 10, 2003,
it filed a petition for voluntary Chapter 11 reorganization. At that time, the
collective bargaining agreement between the parties was set to run through
August 31, 2003. The agreement was akin to a minimum quantity contract in that
the musicians were guaranteed compensation for a certain number of pay periods,
regardless of whether the Orchestra held any rehearsals or performances during
those periods. This allowed the Orchestra to schedule events with the assurance
that, even on relatively short notice, its musicians would be available to perform.
On February 13, 2003, a little over one month after filing its Chapter 11
petition, the Orchestra obtained court approval to reject its collective bargaining
1
Although the Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005 amended § 507, shifting administrative expenses to second priority, the
amendment does not affect cases such as this one that were filed prior to April 20,
2005. Pub. L. No. 109-8, § 1406, 119 Stat. 23, 215 (2005).
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agreement with the musicians. During the interim month, the Orchestra had been
seeking to save itself financially, and the status of rehearsals and performances
had remained fluid and uncertain. Although the musicians remained ready,
willing, and able to perform during that period, the Orchestra eventually cancelled
all previously scheduled concerts, and the musicians were never called upon to
play. Ultimately, the Orchestra, having been unsuccessful in its attempts to
reorganize its financial affairs, converted its Chapter 11 reorganization to a
Chapter 7 liquidation proceeding and appointed M . Stephen Peters as trustee.
The Association filed claims for payment of the musicians’ wages and
benefits due under the collective bargaining agreement for the period between the
January 10 petition date and the February 13 rejection date. Styling its request as
an application for allowance and payment of administrative expenses pursuant to
11 U.S.C. § 503(b)(1)(A), the Association sought first priority of payment under
11 U.S.C. § 507(a)(1).
The bankruptcy court issued a thorough written order granting the
application and directing the trustee to pay the Orchestra’s post-petition
obligations as Chapter 11 administrative expenses.
II. Discussion
The trustee contends the musicians’ claims fail to meet the requirements for
administrative expense priority under 11 U.S.C. § 503 and § 507. In particular,
the trustee argues that the musicians’ failure to rehearse or perform after the filing
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of the petition disqualifies their wages from consideration as expenses necessary
to preserve the Orchestra’s business during reorganization.
The Association argues that the musicians’ wage claims are given payment
primacy by Congress under another provision of the Bankruptcy Code, § 1113,
which grants special protections to union members in the collective bargaining
agreement context. The Association claims it is entitled to first priority, even if
its wage claims fail to qualify as administrative expenses.
Our cases construing § 503 and § 507 have not yet considered whether and
how their application is affected by the labor protections contained in § 1113.
Accordingly, we address that question here.
A. Statutory Framew ork
1. Sections 503 and 507
Section 503 establishes that costs incurred in the preservation of a bankrupt
business, such as rent or compensation for ongoing operations, are payable as
administrative expenses. It provides,
After notice and a hearing, there shall be allowed as administrative
expenses . . . the actual necessary costs and expenses of preserving the
estate including . . . wages, salaries, and commissions for services
rendered after the commencement of the case . . . .
11 U.S.C. § 503(b)(1)(A).
Section 507, in turn, assigns priority of payment to different types of claims
against a bankrupt estate and provides,
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The following expenses and claims shall have priority in the following
order . . . . First, adm inistrative expenses allowed under § 503(b) of
this title . . . .
11 U.S.C. § 507(a)(1).
In applying these provisions to past cases, we have granted administrative
expense priority to claims that satisfy two elements: (1) the claim resulted from a
post-petition transaction, and (2) the claimant supplied consideration that was
beneficial to the debtor-in-possession (or trustee) in the operation of the
company’s business. In re Am arex, Inc., 853 F.2d 1526, 1530 (10th Cir. 1988)
(relying on the analysis in In re M ammoth M art, Inc., 536 F.2d 950 (1st Cir.
1976)). These elements derived from the text of § 503(b)(1)(A), which allow s a
claim to be treated as an administrative expense if the claim is (1) for “wages,
salaries, and commissions for services rendered after the commencement of the
case,” (2) which represent “the actual, necessary costs and expenses of preserving
the estate.”
Our subsequent cases have applied this analysis in a number of factual
circumstances. See, e.g., In re Commercial Fin. Servs., Inc., 246 F.3d 1291,
1293–96 (10th Cir. 2001) (rejecting administrative expense priority to employee
claims for lump-sum payments because the employees could not show that the
claim resulted from a post-petition transaction with the debtor-in-possession, or
that the lump sum represented consideration for a benefit provided to the estate);
In re Bayly Corp., 163 F.3d 1205, 1208–1211 (10th Cir. 1998) (denying
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administrative expense status for employee benefit claims that matured due to
post-petition plan termination because such benefits were consideration for labor
provided pre-petition); In re M id-Region Petroleum, 1 F.3d 1130, 1132–34 (10th
Cir. 1993) (disallowing administrative expense priority to claims for payment on
leased railroad cars because post-petition possession was not sufficient to
constitute a benefit to the debtor-in-possession in the operation of its business).
These cases, however, did not present facts implicating § 1113, which was
enacted after our decision in Amarex.
2. Section 1113
Section 1113 was added to the Bankruptcy Code in 1984 2 in response to the
Supreme Court’s decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).
In Bildisco, the Court held that a debtor could avoid the legal obligation “to
comply with the terms of a collective bargaining agreement subsequent to the
[petition] filing date but prior to a determination regarding formal rejection of the
agreement by the bankruptcy court.” Collier on Bankruptcy, ¶ 1113.03[1] (15th
ed. 1990) (providing summary and analysis of Bildisco holding). In the context
of Chapter 11 reorganization, the effect of this decision was to provide incentives
for companies to threaten bankruptcy as leverage in labor contract negotiations.
See In re Certified Air Techs., Inc., 300 B.R. 355, 361 (Bankr. C.D. Cal. 2003).
2
The provision was part of the Bankruptcy Amendments of 1984, Pub L.
No. 98-353, 98 Stat. 333 (1984).
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Congress enacted § 1113 to remove this incentive by prohibiting the debtor-in-
possession or trustee from making unilateral changes to the terms or conditions of
a collective bargaining agreement during reorganization. See In re FBI Distrib.
Corp., 330 F.3d 36, 44 (1st Cir. 2003). Instead, § 1113 required them to obtain
court approval before taking any action on a prior agreement. Specifically, the
amended section declares,
No provision of this title shall be construed to permit a trustee to
unilaterally terminate or alter any provision of a collective bargaining
agreement prior to compliance with the provisions of this section [i.e.,
requirements for court approval].
11 U.S.C. § 1113(f).
3. Reconciling the Provisions
Since the enactment of § 1113, courts have struggled to determine whether
this provision lessens the burden for achieving administrative expense priority
under § 503 and § 507 when claims arise out of collective bargaining agreements.
The circuits have split on the issue.
The minority approach is represented by the Sixth Circuit in In re Unimet
Corp., 842 F.2d 879 (6th Cir. 1988). In that case, the United Steelworkers of
America sought payment of insurance premiums under a collective bargaining
agreement for their members, who were retirees of the bankrupt Unimet
Corporation. The court held that the remedial purpose of § 1113 trumped the
literal language of § 503, thus entitling parties to administrative expense priority
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under § 507 for claims filed pursuant to collective bargaining agreements, even
where the requirements of § 503 had not been satisfied.
A number of district courts following Unimet have concluded that virtually
any claim under a collective bargaining agreement is entitled to a “superpriority”
or automatic priority status because of § 1113. See, e.g., In re Arlene’s
Sportswear, Inc., 140 B.R. 25 (Bankr. D. M ass. 1992); In re St. Louis
Globe-Democrat, Inc., 86 B.R. 606, 609-10 (Bankr. E.D. M o. 1988). The
rationale is that such an interpretation is necessary to give teeth to the protections
against unilateral employer action created by § 1113. If an employer remains
technically bound to a collective bargaining agreement during the post-petition
period but employees are unable to recover for claims under the agreement, the
added protections of this provision are illusory. See Unimet, 842 F.2d at 885–86.
The majority of courts, however, have taken a contrary approach, first
articulated by the Third Circuit in In re Roth American, Inc., 975 F.2d 949 (3d
Cir. 1992). There, the bankrupt company had a collective bargaining agreement
with its employees, who were represented by the local Teamsters union. After the
company filed for Chapter 11 reorganization and ultimately ceased operations, the
union sought vacation and severance pay earned both before and after filing for
bankruptcy. Applying the literal language of § 503(b)(1)(A), the court held that
services have to be “rendered after the commencement of the case” in order to
qualify for payment as administrative expense claims. In that case then, the
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benefits that accrued based on services performed after the filing of the petition
were given priority as § 503 administrative expenses, but the benefits that accrued
beforehand were not.
The court declined the opportunity to alter its analysis based on § 1113
because “no language in section 1113 addresse[d] the priority to be accorded
[such] claims.” Id. at 956. To bolster its interpretation of the text, the Roth court
contrasted § 1113 with the immediately succeeding provision, § 1114. W hereas
§ 1113 creates protections for collective bargaining agreement claims, § 1114
creates protections for retiree benefit claims. Notably, however, where § 1113 is
silent about the priority to be accorded such claims, § 1114 specifically provides
that “[a]ny payment for retiree benefits . . . has the status of an allowed
administrative expense as provided in section 503 of this title.” 11 U.S.C.
§ 1114(e)(2). Thus, the court concluded, if Congress had wished to create an
automatic priority for collective bargaining agreement claims, it would have been
similarly explicit in § 1113. Conversely, its failure to do so should counsel
against a court’s attempts to read such requirements into the statute. See Roth,
975 F.2d at 956.
The Second and Fourth Circuits have followed the Roth approach. The
Second Circuit read § 507 and § 1113 to avoid conflict with one another by
reasoning that “[j]udicial ordering of benefit claims pursuant to § 507 is not
equivalent to employer avoidance of obligations under a collective bargaining
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agreement.” See In re Inosphere Clubs, Inc., 22 F.3d 403, 407 (2d Cir. 1994)
(holding pre-petition claims, even under a collective bargaining agreement, are
not administrative expenses under § 507(a)(1)). Thus, the court concluded that,
by denying administrative expense priority for vacation pay accrued pre-petition
on the grounds that it failed to meet the requirements of § 503 and § 507, it was
not allowing the kind of unilateral employer action prohibited by § 1113.
Along the same lines, the Fourth Circuit allowed claims under a labor
contract to be payable as administrative expense claims but only because it
determined the traditional elements of § 503(b)(1)(A) were met. The court
reasoned,
[T]he language employed by Congress in § 1113 is unequivocal, insofar
as it goes. It plainly imposes a legal duty on the debtor to honor the
terms of a collective bargaining agreement, at least until the agreement
is properly rejected . . . . Section 1113, however, offers no advice as to
how this new category of claims should be treated vis a vis other
categories competing for payment.
Adventure Res., Inc. v. Holland, 137 F.3d 786, 796 (4th Cir. 1998). M oreover,
the court emphasized, “It is imperative to the orderly administration of the
bankruptcy process that § 507 remains, unless otherwise clearly specified by
Congress, the final word on the priorities of competing claims.” Id. at 797.
Therefore, it concluded, “a bankruptcy claim arising from the breach of a
collective bargaining agreement may be accorded priority status only insofar as it
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fits into one of the categories singled out for preferential treatment in § 507.” Id.
(emphasis added).
In sum, the majority of cases continue to limit the administrative expense
priority provided in § 507 to claims that meet the textual requirements of § 503,
even in cases that arise under collective bargaining agreements that implicate
§ 1113.
B. Application
In this case, the Association urges us to adopt the minority position
articulated in Unimet, whereas the trustee argues w e should follow the majority
approach explained in Roth, Ionosphere, and Adventure Resources. The
Association asserts that § 1113 “offers extraordinary protection to employees that
are the subject of collective bargaining agreements,” Aplt. Br. at 6, and urges us
to adopt a “superpriority” for claims implicating § 1113, even where the ordinary
requirements of § 503 have not been met. Conversely, the trustee asks this court
to strictly apply the elements of § 503, as embodied in the Amarex test, in all
contexts, including those arising under collective bargaining agreements. Since
the musicians neither rehearsed nor performed after the Orchestra filed its
bankruptcy petition, the trustee argues, their claims fail to meet either prong of
the traditional two-part test. The musicians’ mere availability, he contends, does
not qualify as a post-petition service. Nor was it beneficial to the Orchestra who
never called upon the musicians to play.
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In our view, § 1113 does not trump the priority scheme set forth in § 503
and § 507. Thus, we reject the minority position on this issue. Section 1113’s
enactment does, however, require us to reconsider the applicability of Amarex’s
tw o elem ents in the context of collective bargaining agreements. Accordingly, w e
address each of its requirements in turn.
1.
The first element of the Amarex test requires that the claim arise from a
“transaction” that occurred after the filing of a bankruptcy petition. This derives
from the portion of § 503(b)(1)(A) that requires “services rendered after the
commencement of the case.” W e have previously construed this element to
require affirmative action from the debtor-in-possession to either (1) accept the
prior agreement between the debtor and claimant, or (2) agree to a new contract.
For example, we previously held, “It is only when the debtor-in-possession’s
actions themselves— that is, considered apart from any obligation of the
debtor— give rise to a legal liability that the claimant is entitled to the priority of
a cost and expense of administration.” 3 Commercial Fin. Servs., 246 F.3d at 1294
(quoting M am moth M art, 536 F.2d at 955).
3
A debtor-in-possession is a “[d]ebtor who, during the pendency of the
case prior to confirmation of the reorganization plan, retains the bankruptcy
estate’s property in the fiduciary capacity of a trustee.” Black’s Law Dict. 280
(1991).
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This interpretation, however, must yield to the effect of § 1113 in the
collective bargaining context. Section 1113 prohibits the debtor-in-possession
from unilaterally taking action to alter a collective bargaining agreement. This
includes replacing the pre-existing agreement with a new post-petition agreement.
Thus, § 503(b)(1)(A) cannot be read to require the debtor-in-possession to take
new action in this context when that is expressly prohibited by § 1113.
M oreover, § 1113 mandates that, in any event, the agreement continues to bind
both parties unless and until its rejection is approved by the bankruptcy court.
Thus, it would similarly create a conflict if we interpreted § 503(b)(1)(A) to allow
alterations to collective bargaining agreements in situations where court approval
was not obtained. To this extent, § 1113 modifies the transaction requirement
established by Amarex in the collective bargaining agreement context. 4
This does not mean, however, that the mere existence of an unrejected
collective bargaining agreement is sufficient to accord priority status to any post-
petition claims. As noted above, the text of § 503(b)(1)(A) requires that claims
rest upon “services rendered after the commencement of the case.” Thus, the
4
Because we resolve the broader issue of the implications of § 1113 claims
on the priority scheme of § 503 and § 507, we need not consider whether the
Orchestra here induced the musicians to remain available to perform by
maintaining rehearsal and concert schedules, thereby implicitly affirming the
collective bargaining agreement under Commercial Fin. Servs., Inc., 246 F.3d at
1295.
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focus is not on the post-petition actions of the debtor-in-possession but on the
post-petition services performed by the claimant.
In this case, although the trustee argues the musicians did not participate in
any rehearsals or productions during the post-petition period, he admits they
remained ready, willing, and able to do so. In order to determine whether this
qualifies as “services rendered” under § 503(b)(1)(A), we must ask whether the
musicians’ continuing availability means they performed under the contract’s
terms.
In these circumstances, we answ er this question affirmatively. It will
typically be a simple matter to determine whether employees have performed
services under a collective bargaining agreement. Here, the service specifically
bargained for was availability. The parties explicitly agreed that, as long as the
musicians remained available, they would be compensated for a minimum number
of pay periods, regardless of whether the Orchestra called upon them to play.
Thus, it was possible for the musicians to comply with the agreement (and be
entitled to full compensation) even if they never played. This interpretation is
confirmed by the facts of this case. Even after the filing of the petition, the
Orchestra scheduled practices and events but subsequently cancelled them.
Accordingly, we conclude that, by foregoing other opportunities and remaining
ready, willing, and able to play, the musicians performed “services” under the
terms of the contract.
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Because the musicians’ availability constitutes post-petition services under
the collective bargaining agreement, the first element of an administrative
expense priority claim is met.
2.
The second element of the Amarex test requires that the claimant provide
consideration that was “beneficial to the debtor-in-possession in the operation of
[its] business.” Amarex, 853 F.2d at 1530. This derives from the portion of
§ 503(b)(1)(A ) that requires the services rendered to be “actual, necessary costs
and expenses of preserving the estate.”
Here, the Orchestra initially bargained with the musicians for their
availability to rehearse and perform. The bankruptcy court concluded that, in
light of § 1113, it need not independently determine whether this constituted a
benefit to the bankrupt Orchestra for purposes of Amarex. It instead needed only
to examine the provisions of the collective bargaining agreement to determine
whether the parties considered the services beneficial. W e disagree. The text of
§ 503(b)(1)(A) requires the services to be necessary to the preservation of the
estate following a Chapter 11 filing. The agreement here contains no provision
expressing the parties’ consensus on this issue under the facts of this case.
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For the following reasons, we conclude that availability was necessary to
the preservation of the Orchestra’s estate. First, after filing its petition, the
Orchestra took steps to survive its financial difficulties, which included
alternately scheduling and cancelling rehearsals and performances in an attempt
to execute a workable business strategy. The musicians performed their end of
the bargain, foregoing the opportunity to seek employment elsewhere.
Second, it is clear that during this unsettled period, the availability of the
musicians w as essential to the success of the attempted reorganization. In fact,
the mass exodus of the Orchestra’s most important assets would have hastened the
organization’s collapse. Consider a similar attempted reorganization of an
entertainment company like the Harlem Globetrotters or the Ice Capades.
Nothing could save current operations if the unique talent in those organizations
fled upon the filing of a Chapter 11 petition. M usicians possess unique talents
and an orchestra has a special chemistry, especially where, as here, the group of
musicians has been practicing and performing together over the course of a
season. The loss of their services would be insurmountable if some or all of the
musicians ceased to remain available to play. 5
5
The Orchestra argues a different outcome is required by our decision in In
re M id-Region Petroleum, Inc., 1 F.3d 1130 (10th Cir. 1993), a case applying
§ 503 outside the collective bargaining agreement context. In that case, M id-
Region Petroleum filed for bankruptcy and retained possession of leased railroad
cars that had been provided pre-petition by General American Transportation
Corporation. M id-Region had already ceased its business operations and
(continued...)
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Accordingly, because the musicians’ availability was not only beneficial
but necessary to the preservation of the Orchestra’s business, the second element
required to achieve administrative expense priority is also met.
* * *
In sum, the enactment of § 1113 requires revision of our previous Amarex
test in the collective bargaining agreement context. W here a claim is made
pursuant to a collective bargaining agreement, it will qualify for administrative
expense priority where (1) the claimant renders post-petition services, (2) which
are necessary to preserving the bankrupt estate. Not only does this recognize the
literal language of § 503(b)(1)(A ), but it avoids conflict w ith § 1113 because it
does not permit the debtor to unilaterally alter the terms of a collective bargaining
agreement.
5
(...continued)
therefore never made use of the railroad cars during the post-petition period.
W hen General American sought to have their lease payments classified as
administrative expenses, we denied the request, holding General American
provided no post-petition consideration that was beneficial to the debtor-in-
possession in the operation of its business.
Here, by contrast, the musicians did provide a post-petition benefit to the
Orchestra. As noted above, the Orchestra was actively seeking to preserve its
business and initially continued to anticipate concerts at which the musicians
were bound to play. Had the musicians refused to comply with the terms of the
agreement and failed to remain available, the Orchestra could not have even
attempted its plan to continue the operation of its business. Thus, in addition to
the § 1113 implications, this case is readily distinguishable from M id-Region
Petroleum on its facts.
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In this case, because the musicians performed under the agreement during
the post-petition period, and because their availability was necessary to the
continuation of the Orchestra’s business, we find they have met both elements
necessary to establish priority under § 507.
C. Value of Services and A pplicable Pay Period
In the event we affirm the district court, the Orchestra asks us to remand
for further proceedings on two issues: (1) the value of the services provided by
the musicians, and (2) the applicable pay period for which the musicians provided
services to the Orchestra.
The first issue was not raised below and has therefore been waived. See
Cummings v. Norton, 393 F.3d 1186, 1190–91 (10th Cir. 2005). In any event,
remand is unnecessary since the value of the services is easily computed from the
terms of the agreement.
The trustee claims secondarily that, if this court concludes the musicians’
claims are payable as administrative expenses, we should reconsider the
applicable time period. The bankruptcy court approved rejection of the collective
bargaining agreement on February 13, 2003, and allowed the musicians to receive
priority of payment for their claims through that date. The trustee urges us to
deem the agreement rejected at the time the Orchestra requested rejection,
January 21.
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This argument conflicts with the plain language of § 1113(f), which
explicitly prohibits unilateral termination of an agreement prior to court approval.
The trustee reasons that the musicians unnecessarily delayed the court’s
determination by filing an opposition to the Orchestra’s motion that it
subsequently withdrew. The trustee’s equity-based argument not only contradicts
the text of the statute but is defeated on its own terms. Section 1113(e) provides
a specific process to obtain interim relief if the collective bargaining agreement
burdens the estate:
If during a period when the collective bargaining agreement continues
in effect, and if essential to the continuation of the debtor’s business,
or in order to avoid irreparable damage to the estate, the court, after
notice and hearing, may authorize the trustee to implement interim
changes to the terms, conditions, wages, benefits, or work rules
provided by a collective bargaining agreement. Any hearing under this
paragraph shall be scheduled in accordance with the needs of the
trustee. The implementation of such interim changes shall not render
the application for rejection moot.
11 U.S.C. § 1113(e). The Orchestra did not seek relief under this provision.
Fault for the delay cannot lie solely with the musicians where the Orchestra had
an alternative means of expediting the process at its disposal, yet failed to do so.
III. Conclusion
For the reasons stated above, we AFFIRM .
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