It may not be as easy for a faltering company to get out of its union contract as it seemed just a few months ago.
In 1984, the U.S. Supreme Court held that a collective bargaining contract can be repudiated as part of a bankruptcy proceeding, just like any other contract. Congress reacted to that by changing the Bankruptcy Code to require any company trying to get out of such a labor deal to prove to the court that the proposed modifications "are necessary to permit the reorganization" and that "all of the affected parties are treated fairly and equitably."
The first time the courts were called on to interpret just what Congress meant by that language was in a dispute between the United Steelworkers of America and Wheeling-Pittsburgh Steel Corp., which, in a District Court decision handed down last August, came out as a clear win for the company. "Necessary" does not mean "absolutely essential," Judge Glenn E. Mencer ruled, and forcing unions to make enough concessions so that corporate management has some elbow-room to deal with future crises makes good sense.
Now the U.S. Court of Appeals in Philadelphia has overturned the Mencer decision, giving a much more pro-labor reading to the language Congress added to the bankruptcy law. On May 28, in Wheeling-Pittsburgh v. United Steelworkers, the appellate judges said that Mencer went off the track in focusing on what kind of labor concessions were needed for the long-term health of the manufacturer. All Congress had in mind, they said, was the immediate goal of preventing liquidation -- and courts can okay repudiations of labor contracts only if necessary to achieve that shorter-term goal.
More important, however, the reviewing court said that the trial court gave far too little attention to the demand that any deal offered labor be a fair one. In the Wheeling-Pittsburgh case, the substandard pay and benefits were to run for five years, an unusually long time for such concessions.
The court accepted the argument that the five-year term was supported by a "worse-case" scenario of the company's future. But the judges insisted that no contract based on such gloomy projections is equitable unless it includes goodies for the workers in case the company's fortunes brighten. Mencer found that it was enough to assure the workers that their pay package would not be going down any more. But the appellate judges thought that wasn't much of a benefit -- especially because the plan already was based on a pretty poor economic performance.
The clear message of the appellate decision is that courts are supposed to move very cautiously before imposing restrictive contracts on unions from companies going through reorganization. It is likely to become a standard feature of such contracts that the workers get bonuses or pay increases if the company manages to make the turnaround work.
In other cases, courts ruled that:
Lenders have millions of dollars coming back from the Treasury. When a financial institution forecloses on a mortgaged property and recovers more than its adjusted tax basis, the Internal Revenue Service has been calling the excess interest payments and levying an income tax on it. But the U.S. Claims Court has now ruled that interpretation is wrong, and that all of the income from the foreclosure sale should be credited to bad debt reserve. That means it is not taxable -- and that institutions that have paid the tax in the past can file for refunds. (Gibralter Financial v. U.S., May 9)
Litigants have a right to know something ahead of time about the educational background of potential jurors. In a warranty action pitting a printer against the manufacturer of a paper-cutting machine, both sides asked the judge to ask those on the jury panel the extent of their formal education, but the judge refused. He feared that the lawyers would refuse to accept the better-educated candidates. But when the jury later awarded damages to the buyer, the U.S. Court of Appeals in Chicago threw out the judgment and ordered a new trial, explaining that such skeletal questioning did not give the parties enough information to select an unbiased jury. (Art Press v. Western Printing Machinery, May 30)
Even a regulated business cannot be searched without a warrant if the police are looking for evidence of a crime. The New York Court of Appeals struck down as unconstitutional laws okaying such searches of junkyards and of automobile-dismantling businesses. The police had argued that they needed to be able to check out such businesses without prior court approval in order to curb car thefts, and cited U.S. Supreme Court precedents approving warrantless searches of businesses when they were closely regulated, as the auto junkyards are. But the state justices said that those exceptions to the need for a warrant apply only to administrative proceedings looking for violations of regulations, not to probes intended to uncover criminal goings-on. (People v. Burger, May 8)
Moskowitz covers legal affairs for McGraw-Hill World News.