In Re Horsehead Industries, Inc.

Citations: 300 B.R. 573; 51 Collier Bankr. Cas. 2d 50; 32 Employee Benefits Cas. (BNA) 1655; 2003 Bankr. LEXIS 1435; 42 Bankr. Ct. Dec. (CRR) 39; 2003 WL 22504425Docket: 19-10369

Court: United States Bankruptcy Court, S.D. New York; November 5, 2003; Us Bankruptcy; United States Bankruptcy Court

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Horsehead Industries, Inc. and its affiliated companies (the "Debtors") filed for bankruptcy in August 2002, experiencing continuous financial losses attributed to low zinc prices. They sought to reject seven collective bargaining agreements and terminate retiree benefits, requiring compliance with 11 U.S.C. §§ 1113 and 1114. An evidentiary hearing on this matter took place on October 3, 2003. The Court's decision, delivered by Chief Judge Stuart M. Bernstein, granted the Debtors' motions in part and denied them in part.

The Debtors, involved in zinc production, reported average monthly losses of $3 million from May to July 2003, with a further loss of approximately $3.3 million in August 2003. Zinc prices have fluctuated, reaching a low of $0.33 per pound in late 2001 and 2002 before a slight increase to $0.37 per pound. A price rise to between $0.44 and $0.45 per pound is necessary for the Debtors to break even. They anticipate a gradual increase in zinc prices over the next two years, projecting $0.40-$0.41 in the upcoming year and $0.45 thereafter.

The Debtors are managing their operations under Chapter 11 with debtor-in-possession financing from prepetition secured lenders, who currently limit their cash draw to $1.7 million. The Debtors predict that they will exceed this limit in October 2003 and will need $2.0 to $2.5 million in November and December. Without an increase in their credit line, the Debtors face potential liquidation, leading to significant environmental compliance shutdown costs.

In a liquidation scenario, Lenders are expected to recover 40% to 50% of their claims, while unsecured creditors will receive nothing. The Debtors have attempted to reduce operating expenses by switching to an all-recycled materials feedstock and have not compensated their bankruptcy professionals since May 2003. Current financial challenges limit further cuts to labor costs, specifically wages and benefits, which are substantial. Proposed reductions to non-retiree benefits could save approximately $6.5 million annually, while actuarial studies estimate retiree obligations at a discounted present value of $34 million, or about $2.5 million per year. Overall, the Debtors aim to save around $9 million yearly through these concessions, though this relief is deemed a temporary solution. Their Chapter 11 exit strategy hinges on selling their businesses as going concerns and confirming a liquidating plan, with previous sale efforts failing twice and ongoing negotiations with a third potential buyer.

The Debtors employ 1,000 individuals across six locations, with around 75% unionized in three unions: United Steel Workers of America (USWA), Paper, Allied-Industrial, Chemical and Energy Workers' Union (PACE), and Security, Police, Fire Professionals of America (SPFPA). The majority, 85%, belong to the USWA, represented by various locals in Pennsylvania, while PACE covers 15% of the workforce across three states, and SPFPA represents five security guards at the Monaca plant. In late May 2003, the Debtors began procedures to modify collective bargaining and retiree obligations, sending letters to the unions requesting wage and benefit concessions to facilitate an asset sale. The proposed sale required unions to waive successorship claims under their agreements or for the Debtors to seek court approval to reject those agreements. The letters indicated a potential sale closure by mid-July, prompting urgent negotiations, followed by tailored proposals to each union aiming for an 18% to 20% reduction in wage and benefit obligations.

Proposals submitted by the Debtors to address financial challenges included a stark warning about the necessity of significant cost reductions for continued operation. Key components of the proposals were: 1) a reduction in hourly wages, 2) a 30% employee contribution for medical, dental, and vision benefits, 3) a four-week vacation limit, 4) a revised profit-sharing plan that reduced or eliminated the Debtors' contributions, 5) the breaking of seniority and the elimination of seniority rights under certain conditions, and 6) the elimination of retiree medical benefits, Debtors’ contributions to the 401(k) plan, Sunday work premiums, and holiday pay.

Regarding USWA Local No. 8183, which represents workers in Monaca, Pennsylvania, the Debtors provided a proposal on June 13, 2003, followed by discussions and a counter-proposal from the union on June 19, 2003. A tentative agreement was reached by September 5, 2003, addressing all issues except retiree health benefits. The Debtors proposed to eliminate these benefits, while the union suggested retirees contribute $20 towards medical costs. The union maintained a firm stance against negotiating away retiree benefits, blaming the impasse on the Debtors, who insisted that retirees must cover 100% of their medical costs and later indicated they would seek legal relief from these obligations instead of negotiating. The tentative agreement ultimately failed to pass a vote from the membership.

For USWA Local No. 2599-16 in Palmerton, Pennsylvania, a similar proposal was issued on June 18, 2003, leading to multiple meetings and negotiations. A tentative agreement was reached around October 1, 2003, but like in Monaca, it addressed future retirees' health benefits while neglecting current retirees. The union proposed to retain health benefits for current retirees while eliminating them for new hires, but the Debtors countered that retirees would have to pay 100% of their costs. The union adjusted its proposal again, reiterating these terms.

Current retirees and employees are required to contribute 25% of their monthly premium. As of the hearing date, the USWA/Palmerton rank and file had not voted on the tentative agreement but subsequently rejected it on October 15, 2003. USWA Local No. 8586 represents fourteen unionized employees at the idle Beaumont plant. On July 24, 2003, the Debtors sent a proposal to USWA/Beaumont but declined to negotiate, focusing instead on agreements with the Monaca and Palmerton units, which represent 83% of their unionized workforce.

PACE Locals No. 6-0210, 5-990, and 5-401 represent unionized workers at the Bartlesville, Calumet, and Rockwood plants, respectively. After delivering proposals on June 26, 2003, PACE insisted on the participation of Sun Capital in negotiations. The PACE locals did not provide counter-proposals and overwhelmingly rejected the initial proposals from the Debtors. Revised proposals were sent on September 16, 2003, which included concepts negotiated with USWA/Monaca, but the locals did not submit them for a vote. Instead, a PACE official requested negotiating dates after the Debtors filed a motion for relief under sections 1113 and 1114.

SPFPA Local No. 502, representing five security guards at the Monaca Plant, received a proposal on July 16, 2003, but did not submit a counter-proposal, stating they would wait for an agreement with the USWA at Monaca.

The Debtors also have non-union employees and retirees. After filing a motion to terminate retiree benefits, the Court appointed the Salaried Retirees Committee on September 9, 2003, which retained counsel approved on October 3, 2003. Prior to this appointment, the Debtors communicated their financial difficulties to a salaried retiree and expressed a desire to meet with the newly formed committee. During the hearing, both the committee and the Debtors indicated they had reached an agreement to resolve the motion concerning retiree benefits, though the specifics of this agreement were not submitted to the Court.

Sections 1113 and 1114 establish the framework for rejecting collective bargaining agreements and terminating retiree benefits, with identical statutory requirements for compliance. Section 1113, enacted in 1984 in response to the Supreme Court's decision in NLRB v. Bildisco, replaced the more lenient standard with one that emphasizes the importance of collective bargaining. It mandates that a chapter 11 debtor-employer engage in good faith negotiations with the union before rejecting any labor contract, promoting a negotiation-focused approach to corporate reorganization while preventing abuse of chapter 11 provisions.

The procedural requirements outlined in Section 1113(b) necessitate that the debtor, prior to seeking rejection, must make a well-informed proposal to the employees' authorized representative that includes necessary modifications to benefits and protections, ensuring fair treatment of all affected parties. Additionally, the debtor must provide relevant information to the union for evaluation and engage in good faith negotiations to reach mutually satisfactory modifications.

Key aspects of the proposal include fairness and equity, necessitating that the changes are not minimal but essential for the successful reorganization of the debtor. The debtor must demonstrate that the proposal as a whole is reasonable and that the burden of sacrifice is equitably distributed among all constituencies. Finally, both parties must negotiate in good faith, and if these procedural requirements are met, two further substantive requirements must be fulfilled before court approval for rejection can be granted.

Section 1113(c) mandates court approval for the rejection of a collective bargaining agreement only if certain conditions are met: 1) the trustee must have submitted a proposal that meets the requirements of subsection (b)(1) prior to the hearing; 2) the employees' authorized representative must have rejected this proposal without good cause; and 3) the balance of equities must favor the agreement's rejection. The good cause standard encourages good faith negotiations and voluntary modifications, ensuring that the debtor proposes only essential changes while protecting against unjustified union rejections. If a union opposes a fair and necessary proposal, it must provide a rationale. Conversely, if the union presents counter-proposals that address its needs while allowing for necessary savings, its rejection of the debtor’s proposal is justified.

The balancing of equities, as established by the Bildisco standard, requires bankruptcy courts to prioritize the reorganization's success over labor law concerns. In this case, the parties acknowledge the Debtors’ significant financial struggles, necessitating cost reductions, and the unions have not disputed the financial data provided. The USWA, however, contests the necessity of the proposed modifications, the equity balance, and the lack of negotiation regarding retiree benefits.

The USWA argues the Debtors did not demonstrate the necessity of modifications for three reasons: 1) there is no evidence that failing to implement changes would lead to liquidation or improve the Debtors' position amidst a potential strike; 2) the Debtors did not show that accepting USWA's counter-proposal would lead to liquidation; and 3) there is no evidence that modifications are essential to attract buyers. Evidence indicates the Debtors are losing approximately $3 million monthly, face rising zinc prices that may not yield profitability for two years, and have insufficient cash flow to cover operating expenses. Additionally, the Debtors have exhausted other cost-cutting options, and their obligations under collective bargaining agreements may threaten their viability. 

The court must evaluate whether rejecting the bargaining agreement would enhance the likelihood of successful reorganization, recognizing that while modification or termination of obligations does not guarantee reorganization success, it may facilitate a longer operational period and attract potential investment. The Debtors are not obligated to prove that their proposals are necessary to prevent liquidation or that the union's counter-proposals could avert it.

The union references the Third Circuit's decision in Wheeling-Pittsburgh Steel Corporation, which narrowly defined "necessary modifications" as measures aimed solely at avoiding liquidation. In contrast, the Second Circuit's Carey Transportation adopts a broader interpretation, emphasizing long-term reorganization goals. The Debtors do not need to demonstrate that modifications are essential for attracting buyers; rather, evidence suggests they must reduce labor costs to sustain operations. The USWA's opposition centers on the equity balance, arguing that rejection of agreements could lead to a strike, that employees have less ability to absorb costs compared to non-employee creditors, and that significant employee claims may arise from rejection. If operations cease, approximately 1,000 employees will lose their jobs, and assets would be sold as scrap. The Debtors' proposals aim to significantly lower costs and require shared sacrifices from unions. The USWA warns of a strike if the Debtors reject agreements, but it acknowledges that a strike would not benefit employees if it results in operational termination. While the USWA claims non-employee creditors could better absorb cost reductions, it lacks supporting evidence. Additionally, any employee damage claims resulting from rejection would become unsecured debts, making rejection more favorable for other creditors. The ongoing negotiations do not impede rejection; the union's prior tentative agreement, which was not supported by members, does not fulfill the good cause standard for counter-proposals. Union representatives should present proposals that are both rank-and-file supported and economically viable for the Debtors.

The Debtors are allowed to reject the collective bargaining agreements for Monaca and Palmerton, excluding retiree health benefits, provided that negotiations continue and wages and benefits adhere to tentative agreements. This decision does not extend to Beaumont, as the Debtors failed to engage in negotiations with the USWA/Beaumont representatives, neglecting the procedural requirements under 1113(b). Consequently, their motion to reject the Beaumont agreement is denied. 

The Debtors also did not demonstrate good faith negotiations regarding the termination of health benefits for current retirees. Although Bechdel claimed the union refused to negotiate, the record shows that both USWA/Monaca and USWA/Palmerton made proposals that included retiree contributions to health benefits, but discussions stalled as both parties viewed each other’s positions as unreasonable. Therefore, the motion to terminate retiree health benefits under 1114 is also denied.

Conversely, negotiations with PACE were deemed satisfactory under 1113(b) as the Debtors made equitable proposals supported by reliable information and offered to meet for discussions. PACE, however, conditioned negotiations on the presence of a prospective buyer, Sun, and did not submit counter-proposals, opting instead to vote on the Debtors' proposals, which were rejected. PACE later claimed that the Debtors did not negotiate in good faith, alleging that the proposals were a guise for Sun's interests. Yet, evidence indicates that the proposals were genuinely tied to the Debtors' operational viability needs, which were discussed in meetings.

Debtors' motion linked concessions to ongoing operations and indicated the necessity of these concessions during negotiations with PACE. The submission of the Debtors' opening offer for a membership vote was deemed unusual, and Lofton's assertion that it was to gauge membership position lacked credibility. After the rejection motions, PACE sought negotiations without voting on a new proposal, effectively "stonewalling" discussions. PACE's demand for Sun's participation in negotiations was seen as unreasonable since the Debtors were the actual parties to the collective bargaining agreements, emphasizing their need to reduce labor costs to survive. Sun’s non-involvement in the acquisition agreement allowed it to withdraw from the deal after negotiating more lenient concessions with PACE. Consequently, the motions to reject collective bargaining agreements with PACE and terminate retiree health benefits were granted, contingent upon continued negotiations and adherence to the Debtors' September 16 proposal.

SPFPA rejected the Debtors' counter-proposal offer until an agreement with USWA/Monaca was reached and did not engage in court proceedings. The Debtors demonstrated compliance with procedural requirements under Sections 1113 and 1114 of the Bankruptcy Code, indicating that the equities favored rejecting the collective bargaining agreement and terminating retiree health benefits. SPFPA's refusal to negotiate was deemed without good cause, leading to the granting of motions against SPFPA under the same conditions applied to USWA and PACE.

The Salaried Retirees Committee participated in the hearing but did not present post-trial findings, suggesting a settlement of the Debtors' 1114 motion, which would be denied as moot unless otherwise indicated by the parties. In conclusion, the motions under Sections 1113 and 1114 were fully granted against PACE and SPFPA, denied against USWA at Beaumont, granted for rejecting agreements with USWA/Monaca and USWA/Palmerton, but denied for terminating current retiree health benefits. The motion regarding salaried retirees' health benefits was also denied as moot. The Debtors are not permitted to reduce wages and benefits below their latest proposal, and all parties are encouraged to continue negotiations to maintain operations, preserve jobs and retiree benefits, and ensure creditor distributions.

The transcript from the October 3, 2003 hearing includes various pieces of evidence related to collective bargaining agreements and the financial status of the Debtors. The operating statement for September 2003 indicated a significant operating loss exceeding $2.2 million. Collective bargaining agreements from Beaumont, Monaca, Palmerton, Bartlesville, Rockwood, Calumet, and SPFPA were admitted as Debtors' exhibits (DXs 1-7). The Debtors currently cover all related expenses and have not proposed to terminate retirees' life insurance benefits. 

Evidence of initial and subsequent proposals was documented as DX 10 and 11, with a notable letter from Leonard emphasizing the necessity of affordable retiree health care, suggesting that affordability concerns imply potential cost-sharing by members. The Debtors' proposal was viewed as more favorable than terminating retiree benefits, though the distinction was unclear. Despite PACE's challenge regarding Anderson's authority to represent certain locals, it was acknowledged that no counterproposals were submitted by those locals.

Key considerations from Carey Transportation Court regarding equitable factors for bargaining agreement rejection were noted, including the consequences of liquidation, creditor claim reductions, potential strikes, employee breach of contract claims, cost-spreading abilities, and the parties' good or bad faith in negotiations. The Debtors were found to have met procedural obligations under 1113(b) concerning Monaca and Palmerton, as they proposed based on reliable information, shared necessary data with the union, engaged in good faith negotiations, and reached tentative agreements, despite rejection by the rank and file. These agreements are regarded as prima facie evidence of good faith negotiation efforts.

Parties are encouraged to continue negotiations, as the Debtors should not overlook the implications of a potential strike if negotiations cease. The USWA raises concerns regarding the risk of a strike, which will be considered in the context of balancing equities under Section 1113(c) of the Bankruptcy Code. The USWA advocates for adopting the Third Circuit's perspective over the Carey Transportation precedent, suggesting that the Third Circuit's interpretation should carry more weight. However, this argument is dismissed since the Second Circuit has explicitly rejected the Third Circuit's stance. Additionally, "liquidation" is defined as the sale of the Debtors' assets by a Chapter 7 trustee after operations have halted, distinct from a liquidating plan that involves selling businesses as ongoing entities and converting estate property into cash.