01:15948681.6
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ---x
In re : Chapter 11
:
Rural/Metro Corporation, et al.,1 : Case No. 13-11952 (KJC) :
Reorganized Debtor. : (Jointly Administered) :
: Hearing Date: October 15, 2014 at 10:00 a.m. (ET) ---x
REORGANIZED DEBTOR’S OBJECTION, AND MEMORANDUM OF LAW IN SUPPORT THEREOF, TO CLASSIFICATION OF CLAIMS OF THE UNITED
EMERGENCY MEDICAL PROFESSIONALS OF ARIZONA, INTERNATIONAL ASSOCIATION OF FIRE FIGHTERS LOCAL I-60
The above-captioned reorganized debtor (the “Debtor” or the “Reorganized Debtor”), hereby files this objection, and memorandum of law in support thereof (collectively, the “Objection”) to the claims filed by The United Medical Professionals of Arizona,
International Association of Fire Fighters Local I-60 (“IAFF” or the “Union”) against the estate of Debtor Rural/Metro Corporation,2 solely for purposes of determining the priority of the monetary portions -- not the amount or the enforceability of the non-monetary portions of the Union’s claims under applicable non-bankruptcy law -- (the “Claims”) against the estates (the “Estates”).3 In support of the Objection, the Reorganized Debtor respectfully states as follows:
1
The last four digits of the Reorganized Debtor’s federal tax identification number are (6929). The Reorganized Debtor’s headquarters are located at 9221 E. Via de Ventura, Scottsdale, AZ 85258.
2 The Initial Claims were filed against Debtor SW General Inc. (f/k/a Southwest Ambulance, Inc.) The
consolidated proof of claim filed to amend the Initial Claims was filed against Debtor Rural/Metro Corporation.
3
As confirmed on the record at the Hearing (as defined below), all of the Reorganized Debtor’s rights to object to the Claims on any other basis, substantive or otherwise, are fully preserved, notwithstanding the applicability of Rule 3007-1(f)(iii).
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PRELIMINARY STATEMENT4
The Union appears to assert that some part of its Claims are entitled to priority treatment under the Bankruptcy Code,5 notwithstanding the fact that the Claims are asserted under a collective bargaining agreement that expired prior to the Petition Date and relate to alleged prepetition violations of that agreement. During the course of ongoing post-effective date negotiations over a new collective bargaining agreement, the Union, prematurely and without prior discussion, filed the Plan Injunction Relief Motion on an expedited basis, seeking to enforce the Arbitration Award and intervene in the appeal of the Longevity Decision. For the reasons stated in the Reorganized Debtor’s Response and on the record at the Hearing, (a) based on the information the Reorganized Debtor had at the time of the Hearing, (b) in light of the enactment eight days prior to the Hearing of a new law that directly impacted the cash outlay required to comply with the Arbitration Award,6 and (c) dismayed by the disruption in what it believed to be fruitful, good faith negotiations with respect to a new collective bargaining
agreement, the Reorganized Debtor was not then and is not now in a position to consent to lifting the Plan Injunction. Among other things, the instant dispute exists with respect to the asserted priority of the Claims, which is not only potentially relevant to the payment percentage of any damages that may be awarded in a non-Bankruptcy Court proceedings, but is relevant to the source of payment with respect to any such award (i.e., payment as an Other Unsecured Claim through the Plan or payment by the Reorganized Debtor).
4
Capitalized terms utilized in this Preliminary Statement shall have the meanings ascribed to such terms below.
5
When read together, neither the Initial Claims, nor the Claims provide a clear picture as to the priority of the claims asserted, which, in part, is what precipitated the Objection and the Reorganized Debtor’s request that the priority of the Claims be determined by this Court. To the extent that the Union asserts additional bases for priority treatment in its response to this Objection, the Reorganized Debtor reserves all rights and defenses with respect thereto.
6 As noted in the Response, the Highway and Transportation Funding Act of 2014 was signed into law on August
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Upon further analysis, with respect to the portions of the Union’s Claims that fall within the prepetition period, such claims should be deemed to be general unsecured claims, perhaps with the exception of any portion of the Claims that may fall under the priority scheme set forth in sections 507(a)(4) and/or (a)(5) of the Bankruptcy Code, subject to the statutory caps set forth in the Bankruptcy Code, which the Union will ultimately have the burden to prove. To date, the Union has not asserted any claims that fall after the Petition Date and, to the extent such claims are asserted, the Reorganized Debtor reserves all of its rights.7
JURISDICTION
1. This Court has jurisdiction to consider the Objection pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Standing Order of Reference from the United States District Court for the District of Delaware dated as of February 29, 2012. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The statutory and legal predicates for the relief sought herein are section 502(b) of title 11 of the United States Code (the “Bankruptcy Code”) and Rule 3003 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).
BACKGROUND A. General Background Information
2. On August 4, 2013 (the “Petition Date”), Rural/Metro Corporation and certain of its affiliates (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”).
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For the sake of clarity, through the Objection, the Reorganized Debtor is in no way seeking to avoid its obligations pursuant to Section 10.5 of the Plan with respect to the Pension Plan (as defined in the Plan).
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3. On August 15, 2013, the United States Trustee for the District of Delaware appointed an official committee of unsecured creditors [Docket No. 114]. No trustee or examiner was appointed in any of the Debtors’ cases.
4. Information regarding the Debtors’ businesses, their capital and debt structure, and the events leading to the filing of these Chapter 11 Cases is contained in the Declaration of Stephen Farber in Support of Chapter 11 Petition and First Day Pleadings [Docket No. 2].
B. The Claims
5. On or about October 22, 2013, the Union filed 5 separate claims (collectively, the “Initial Claims”) against the estates arising from that certain Labor Agreement between IAFF and Southwest Ambulance (a subsidiary of Rural/Metro Corporation), which expired by its own terms on July 1, 2012 (the “Collective Bargaining Agreement” or the “CBA”):
Claim No. Debtor Amount Priority Asserted
1320 SW General Inc. Unliquidated General Unsecured Claim 1321 SW General Inc. Unliquidated Priority Claim in an amount not
less than $200,000 plus interest 1322 SW General Inc. Unliquidated Unknown priority amount 1323 SW General Inc. Unliquidated Unknown priority amount 1324 SW General Inc. Unliquidated General Unsecured Claim
6. On March 3, 2014, the Reorganized Debtor filed the Debtors’ Third Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 [Docket No. 1047] (the “Third Omnibus Objection”), wherein the Reorganized Debtor objected to, among other things, the Initial Claims as being duplicative, and sought to expunge Claim Nos. 1320-1323.
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7. On March 21, 2014, the Union filed IAFF Local I-60’s Objection to Debtors’ Third Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 [Docket No.1096], wherein the Union asserted that the Initial Claims were not duplicative in nature, but in fact asserted independent bases for the claims set forth therein.
8. To resolve the Third Omnibus Objection as it pertained to the Union, at the request of the Reorganized Debtor, on April 18, 2014, the Union amended its Initial Claim and filed one consolidated claim (Claim No. 1997) asserting all of the bases for its Claims against the Estates. The Initial Claims were expunged pursuant to the Order Sustaining Debtors’ Third Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 [Docket No. 1115] and Claim No. 1997 was the sole remaining claim – herein referred to as the “Claims.” 8
9. The Claims are based on various unfair labor practice charges that the Union filed with the National Labor Relations Board (the “NLRB”) asserting that the Southwest Ambulance, Inc. (“Southwest Ambulance” and, together with IAFF, the “Parties”) underfunded pension benefits (the “Pension ULP Charge”) and unilaterally ceased making longevity payments to eligible employees (the “Longevity ULP Charge”) in violation of the expired Collective Bargaining Agreement.
a. The Pension ULP Charge
10. After the Union filed a complaint with the NLRB relating to the Pension ULP Charge, the Parties attempted to resolve these charges consensually. As a result, the NLRB deferred processing the Pension ULP Charge. After failing to reach an agreement, the Parties
8
A copy of Claim No. 1997 is attached hereto as Exhibit A. The CBA, the Arbitration Award, and the Longevity Decision (all as defined herein) are attached to the Claims as exhibits.
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submitted the Pension ULP Charge to binding arbitration. As of the Petition Date, the arbitration was substantially complete—all that remained outstanding was the issuance of the arbitration decision. The Debtors agreed to allow the arbitration to move forward solely to permit the arbitrator’s decision to be issued without the need for the Union to obtain relief from the automatic stay from this Court. On April 14, 2014, the arbitrator issued his decision on the Pension ULP Charge (the “Arbitration Award”). The Arbitration Award, among other things, ordered Southwest Ambulance to cease and desist from continuing to underfund the pension plan and to make any retroactive contributions necessary to ensure that the pension plan was fully funded. Through its filed proof of claim, the Union asserts that some specified portion of the Arbitration Award is entitled to priority pursuant to section 507(a)(5) of the Bankruptcy Code.
b. The Longevity ULP Charge
11. Unlike the Pension ULP Charge, the NLRB issued a complaint in connection with the Longevity ULP Charge and referred the matter to an administrative law judge. The administrative law judge ruled against Southwest Ambulance and recommended that the NLRB issue a decision requiring Southwest Ambulance to, among other things, resume the longevity payments, make any outstanding payments, and to cease and desist from unilaterally terminating longevity pay. On May 8, 2014, the NLRB issued an order affirming the administrative law judge’s findings with respect to the Longevity ULP Charge (the “Longevity Decision”). On June 9, 2014, Southwest Ambulance commenced an appeal of the NLRB Decision before the D.C. Circuit Court of Appeals (“Longevity Decision Appeal”). The Union is not a party to the Longevity Decision Appeal. Through its Claims, the Union asserts that a
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portion not less than $200,000 of the Longevity Decision is entitled to priority pursuant to section 507(a)(4) of the Bankruptcy Code.9
C. IAFF’s Motion for Relief from the Plan Injunction
12. On July 31, 2014, IAFF filed the Motion of International Association of Fire Fighters, Local I-60, United Emergency Medical Professionals of Arizona for Relief from Plan Injunction Pursuant to 11 U.S.C. § 362(d) [Docket No. 1240] (the “Plan Injunction Relief Motion”), seeking relief from the injunction (the “Plan Injunction”) set forth in section 12.7 of the First Amended Joint Chapter 11 Plan of Reorganization for Rural/Metro Corporation and Its Affiliated Debtors (as amended or supplemented, the “Plan”), which was confirmed by this Court on December 17, 2013 [Docket No. 830], in order to allow it (a) to prosecute and enforce the terms of the Arbitration Award by either filing a lawsuit in the United States District Court for the District of Arizona and/or requesting that the NLRB enter an order with respect to the Pension ULP Charge, and (b) to intervene in the Longevity Decision Appeal.
13. On August 13, 2014, the Reorganized Debtor filed the Reorganized Debtor’s Response to Motion of International Association of Fire Fighters, Local I-60, United Emergency Medical Professionals of Arizona for Relief from Plan Injunction Pursuant to 11 U.S.C. § 362(d) [Docket No. 1254] (the “Reorganized Debtor’s Response”), and on August 14, 2014, the Union filed a reply [Docket No. 1258] (the “IAFF Reply”).
14. On August 19, 2014, the Court held a hearing on, among other things, the Plan Injunction Relief Motion, the Reorganized Debtor’s Response, and the IAFF Reply (the “Hearing”), at the conclusion of which, the Court adjourned the Plan Injunction Relief Motion until October 15, 2014, and directed the parties to submit briefs in support of their respective
9
The Reorganized Debtor reserves the right to assert in the proceedings surrounding the Longevity Decision Appeal that the Union is not appropriately a party in interest to intervene or otherwise directly recover on account of the Longevity ULP Charge.
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positions with respect to the priority of the Union’s Claims. On August 20, 2014, the Court entered a Scheduling Order Regarding Motion of International Association of Fire Fighters, Local I-60, United Emergency Medical Professionals of Arizona for Relief from Plan Injunction Pursuant to 11 U.S.C. § 362(d) and a Determination of the Priority of the Claims of International Association of Fire Fighters, Local I-60, United Emergency Medical Professionals of Arizona [Docket No. 1268] (the “Scheduling Order”).
ARGUMENT
I. The Union’s Claims Should be Deemed General Unsecured Claims
A. The CBA Was Not Executory on the Petition Date, No Portion of the Union’s Claims Constitute Cure Costs Under Section 365(b) of the Bankruptcy Code10
15. It is axiomatic under bankruptcy law that contracts that expired prior to the filing of a petition may not be assumed pursuant to section 365(a) of the Bankruptcy Code, because they are not executory.11 See, e.g., Counties Contracting & Constr. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1061 (3d Cir. 1988) (“Once the contract is no longer in existence, the right to assume it is extinguished. A contract may not be assumed under § 365 if it has already expired according to its terms.”); In re Triangle Laboratories, Inc., 663 F.2d 463, 467 (3d Cir. 1981) (“[F]or Section 365 to apply, the contract or lease must be in existence. If the contract
10 The CBA was included on a list of contract and leases to be assumed dated November 27, 2013, along with over
a thousand other contracts and leases.
11 Section 1113 of the Bankruptcy Code applies to the rejection or modification of a collective bargaining
agreement. Although section 1113 references “assumption,” this provision does not provide any guidance on what must be done to assume a collective bargaining agreement. UFCW, Local 211 v. Family Snacks, Inc. (In re Family Snacks, Inc.), 257 B.R. 884, 899 (B.A.P. 8th Cir. Mo. 2001). As a result, some courts, including the Third Circuit Court of Appeals, have held that section 1113 does not apply to the assumption of a collective bargaining agreement and that assumption is governed by section 365 of the Bankruptcy Code. American Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 82 (3d Cir. 1999); Adventure Resources v. Holland, 137 F.3d 786, 798 (4th Cir. 1998); Family Snacks, Inc., 257 B.R. at 900; Mass. Air Conditioning & Heating Corp. v. Mc Coy, 196 B.R. 659, 663 (D. Mass. 1996).
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or lease has expired by its own terms or has been terminated prior to the commencement of the bankruptcy case, then there is nothing left for the trustee to assume or assign.”) (citing 2 COLLIER ON BANKRUPTCY ¶ 365.02[13] (15th ed. 1981); EBC I, Inc. v. Am. Online, Inc. (In re EBC I, Inc.), 356 B.R. 631, 638 (Bankr. D. Del. 2006) (“[I]f a contract is terminated pre-petition it is no longer executory and section 365 is not applicable.”); Allied Corp. v. Frola, Case No. 87-862, 1992 U.S. Dist. LEXIS 15778, at *11-12 (D.N.J. Oct. 6, 1992) (citing Counties Contracting & Constr. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1061 (3d Cir. 1988)) (“A contract may not be assumed under § 365 if it has already expired according to its terms.”).
16. The CBA was effective between July 1, 2009 and July 1, 2012, and therefore, had expired by its own terms prior to the Petition Date. Pursuant to the National Labor Relations Act (the “NLRA”), parties to a collective bargaining agreement have an obligation to maintain the status quo during the post-expiration period while the parties negotiate the terms of a new collective bargaining agreement. See 29 U.S.C. §§ 8(a)(5) and 8(d). More specifically, the NLRA require employers to bargain in good faith with respect to certain terms of collective bargaining agreements until an impasse is reached. See id.; Litton Fin. Printing Div. v. NLRB, 501 U.S. 190, 198 (U.S. 1991). As such, during the bankruptcy cases and thereafter, the parties to the CBA continued to operate under its terms while they attempted to negotiate the terms of a new CBA notwithstanding the fact that the CBA at issue had expired prior to the Petition Date.
17. That being said, after a collective bargaining agreement expires, the agreement itself does not govern; rather certain provisions of the expired collective bargaining agreement continue only by operation of the NLRA, not the contract, in order to define the status quo. Litton, 501 U.S. at 206. In other words, the obligations imposed by the NLRA to maintain the status quo are not contractual obligations. Id.; see also In re Hostess Brands, Inc., 477 B.R.
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378, 380 (Bankr. S.D.N.Y. 2012) (“[The] post-expiration regime is not one in which the collective bargaining agreement itself governs, but, rather, that the NLRB governs in a way that leaves key provisions, but not all of the provisions, of the collective bargaining agreement in effect under the law.”). Indeed, the terms of an expired collective bargaining agreement “retain legal significance only because they define the status quo. Rights and duties under a collective bargaining agreement do not otherwise survive a contract’s termination at an agreed expiration date.” Derrico v. Sheehan Emergency Hospital, 844 F.2d 22, 26-27 (2d Cir. 1988).
18. As the CBA expired prior to the Petition Date, it was not assumed pursuant to section 365(a) of the Bankruptcy Code, and any purported or attempted assumption was a legal nullity. In re Commodity Merchants, Inc., 538 F.2d 1260 (7th Cir. 1976); Allied Corp. v. Frola, Case No. 87-462, 1992 U.S. Dist. LEXIS 15778 (D.N.J. Oct. 6, 1992). Accordingly, the substantial bulk of the Arbitration Award and the Union’s Claims generally cannot be properly categorized as cure claims pursuant to section 365(b), but are more accurately categorized as general unsecured claims for prepetition damages.
B. The Union’s Claims Arise from Prepetition Actions Based on an Expired Prepetition Collective Bargaining Agreement
19. At issue is a private dispute between parties with respect to the appropriate funding calculations for the Pension Plan in connection with the Arbitration Award and the amount due in connection with the Longevity Decision currently under appeal, both of which arise under an agreement that arose, and terminated by its own terms, prior to the Petition Date. More specifically, the Arbitration Award directs Southwest Ambulance to fund the pension plan retroactively to July 1, 2008 – more than five years prior to the Petition Date. Thus, the majority of the Arbitration Award relates to the prepetition period and is not entitled to priority status,
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with, perhaps, very limited exceptions (as described below).12 The Longevity Decision likewise directs retroactive payments for a time period that occurred prior to the Petition Date.
20. Claims that arise prepetition that relate to prepetition actions are treated as general unsecured claims under the Bankruptcy Code. Stewart Foods v. Broecker (In re Stewart Foods), 64 F.3d 141 (4th Cir. 1995); In re Hechinger Inv. Co. of Del., Inc., Case No. 00-171-JJF, 2001 U.S. Dist. LEXIS 25552, at *10 (D. Del. Mar. 21, 2001). To hold otherwise, would run afoul of one of the key purposes of the Bankruptcy Code – an equitable distribution to similarly-situated creditors of a debtor’s estate. In re Semcrude, L.P., 399 B.R. 388, 399 (Bankr. D. Del. 2009) (“One of the primary goals -- if not the primary goal -- of the [Bankruptcy] Code is to ensure that similarly-situated creditors are treated fairly and enjoy an equality of distribution from a debtor[.]”). The claims at issue in the Union’s filed proof of claim arise from damages in what is akin to an alleged prepetition breach of contract dispute, and the law is clear that such claims do not confer a benefit to the estate. Indeed, “[p]re-filing debts are not administrative expenses; they are the antithesis of administrative expenses.” In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004), cert. denied sub nom. (emphasis supplied); see also Former Emps. of Builders Square Retail Stores v. Hechinger Inv. Co. (In re Hechinger Inv. Co.), 298 F.3d 219, 226 (3d Cir. Del. 2002) (holding that prepetition services cannot give rise to an administrative expense); In re Hackney, 351 B.R. 179, 195 (Bankr. N.D. Ala. 2006) (same). As such, the Court should rule that all portions of the Claims that fall prior to the Petition Date are general
unsecured claims that should be paid in accordance with the terms of the Plan.
12 As set forth on the record at the Hearing and in the Reorganized Debtor’s Response, the Parties disagree as to
the amount required, if any, the Reorganized Debtor would have to pay if the Arbitration Award were enforced. The Reorganized Debtor further noted at the Hearing that as the Pension Plan has not been amended, the Arbitration Award is not ripe for enforcement and that the Reorganized Debtor is hopeful that these and the other complex, non-bankruptcy issues involved in this contested matter can be resolved through a global resolution under a new collective bargaining agreement.
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II. To the Extent that Any Portion of the Arbitration Award and/or the Longevity Decision Are Entitled to Elevated Treatment Under the Bankruptcy Code, Such Priority is Limited to Sections 507(a)(5) and (a)(4) of the Bankruptcy Code, Respectively.
21. Finally, to the extent that the Union is able demonstrate13 that any portion of the Claims are entitled to priority, it would solely be pursuant to sections 507(a)(4) and/or (a)(5) of the Bankruptcy Code. That being said, any amounts entitled to priority would be (a) subject to the statutory caps set forth in sections 507(a)(4) and (a)(5) of the Bankruptcy Code, and (b) would necessarily be reduced by any payments on prepetition claims made, including, among other things, under those sections pursuant to Order (I) Authorizing Debtors to Pay (A) Prepetition Employee Wages, Salaries and Other Compensation, (B) Prepetition Employee Business Expenses, and (C) Other Miscellaneous Employee Expenses and Employee Benefits; and (II) Granting Related Relief [Docket No. 55] and the Order Granting Continuation of Severance Program and Authorizing Debtors to Pay PTO in the Ordinary Course of Business [Docket No. 162] (collectively, the “Wage Orders”) entered at the outset of these Chapter 11 Cases.
22. To be clear, the Reorganized Debtor is not asking this Court to determine the amount of the Claims that could be subject to priority treatment under sections 507(a)(4) and/or (a)(5), but is merely seeking a ruling as to the priority of the Union’s Claims that are not subject to these provisions. Indeed, given the ongoing global settlement negotiations that were well underway when the Plan Injunction Relief Motion was filed, and given the fact that the Claims remain unliquidated, the Reorganized Debtor felt that it was premature to formally reconcile the priority of the Union’s Claims before this Court. Unfortunately, the advent of the
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The Union bears of the burden of demonstrating that any parts of its claims are entitled to administrative priority under section 507 of the Bankruptcy Code. “The party seeking to establish a priority claim bears the burden of proving that the party's claim qualifies for priority status.” 4 Collier on Bankruptcy ¶ 507.01.
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Plan Injunctive Relief Motion left the Reorganized Debtor with no choice but to address the issue of the priority of the Union’s Claims prior to the final adjudication of the Longevity Decision and the determination of the appropriate funding calculations under applicable non-bankruptcy law as to the Pension ULP Charge.
CONCLUSION
23. For the reasons set forth above, the Union’s Claims relate to prepetition actions under a Collective Bargaining Agreement that expired prior to the Petition Date. As such, the bulk of the Union’s Claims should be deemed general unsecured claims against the Estates.
RESERVATION OF RIGHTS
24. The Reorganized Debtor reserves all rights and defenses under the Plan and otherwise to dispute the priority of the Union’s claims to the extent set forth in the Claims, as well as any additional arguments that the Union may assert in response to this Objection.
Dated: September 10, 2014 Wilmington, Delaware
YOUNG CONAWAY STARGATT & TAYLOR, LLP /s/ Maris J. Kandestin
Edmon L. Morton (No. 3856) Maris J. Kandestin (No. 5294) Ashley E. Markow (No. 5635) Rodney Square
1000 North King Street Wilmington, DE 19801 (302) 571-6600 (302) 571-1253 (Fax) emorton@ycst.com mkandestin@ycst.com amarkow@ycst.com
