Appeals from the United States Bankruptcy Court for the District of Kansas Bankr. Nos. 05-17094, 05-15334, 05-15333, 05-16951, 05-17430, 05-15728, 05-16484 & 05-14936 Chapter 7
The opinion of the court was delivered by: Bohanon, Bankruptcy Judge.
Before BOHANON, BROWN, and WEAVER*fn1, Bankruptcy Judges.
Appellants Linda S. Parks and Carl B. Davis ("the Trustees") appeal the bankruptcy court's summary judgment order holding that post-petition cash and stock distributions received by the debtors through their employment are not property of the debtors' estates under 11 U.S.C. § 541.*fn2 For the following reasons, we AFFIRM.
This Court has jurisdiction to hear timely filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.*fn3 The bankruptcy court's judgment is a final order subject to appeal under 28 U.S.C. § 158(a)(1). The Appellants timely filed their notices of appeal.*fn4 No party elected to have this appeal heard by the United States District Court for the District of Kansas, thus consenting to review by this Court.
We review de novo the bankruptcy court's legal determination that the post-petition distributions were not property of the Debtors' estates under 11 U.S.C. § 541.*fn5
III. The Facts and the Bankruptcy Court's Holding
The complete facts underlying this appeal are fully set out in the bankruptcy court's detailed Findings of Fact and Conclusions of Law and will not be repeated here except as necessary to discuss the legal arguments on appeal.*fn6
Debtors are former employees of The Boeing Company ("Boeing") who became employees of Spirit Aerosystems, Inc. ("Spirit") on June 17, 2005, the date Spirit acquired Boeing's Wichita plant. At the time of the sale, Debtors' Unions ratified a collective bargaining agreement ("CBA") with Spirit.*fn7 Under the CBA, Spirit agreed to establish an equity participation program ("EPP") for union-represented employees, and contribute stock appreciation rights to the program. Upon the occurrence of certain events, certain employees were eligible to receive distributions under the anticipated, but not yet formed EPP.
While each Debtor has a different filing date, each of the Debtors filed their bankruptcy cases before October 17, 2005, after the CBA was ratified, but before the EPP was created.*fn8
On October 27, 2006, Spirit created the EPP and issued stock appreciation rights ("SARS") to vest upon an initial public offering ("IPO") or other defined triggering event. The EPP identified which employees were eligible to participate in the EPP:
The employees who are eligible to participate in the Plan are those hourly employees of Spirit who (a) are represented by one of the Unions or were represented by one of the Unions while employed by Spirit, (b) are former employees of The Boeing Company who either (I) became employed by Spirit on the day after the Closing Date, or (ii) were on an approved leave of absence on the Closing Date and became employed by Spirit immediately upon conclusion of such leave, and (c) were employed by Spirit for at least ninety (90) consecutive days during the period commencing on the day after the Closing Date, and ending on December 31, 2005.*fn9 On November 27, 2006, Spirit completed the IPO and the employees' rights to the SARS vested. Distributions were made to the debtors in December 2006, and March 2007. Debtors received a cash distribution of $34,556 around December 6, 2006, and 1,034 shares of Spirit Class A common stock around March 15, 2007.
Following Spirit's payment of distributions to Debtors, the Trustees filed motions for turnover of all distributions received from Spirit, contending they were property of the estates under 11 U.S.C. § 541.*fn10 The Debtors objected, and, after a hearing, the bankruptcy court entered an interim order denying turnover of the distributions.*fn11 A pretrial order followed. After discovery, various parties filed motions for summary judgment on the Trustees' motions for turnover of the distributions.
On December 24, 2007, the bankruptcy court issued a memorandum opinion (the "Appealed Order") granting Debtors' motion for summary judgment and denying the trustees' motion, finding the distributions were not property of the bankruptcy estate.*fn12 The bankruptcy court, relying upon Kansas state law, held that the CBA did not grant the Debtors an enforceable right in the distribution because it did not clearly define which employees would have rights under the EPP. The term "participating employees" was not defined until the post-petition creation of the EPP in October 2006. Thus, until the EPP was created, an enforceable right to the SARS did not exist. As a result, the bankruptcy court concluded the rights to the distributions were not property of the estate because there was no prepetition document or agreement establishing that these Debtors would qualify as participating or eligible employees having a contingent, future interest under the EPP.
The Trustees claim that the bankruptcy court erred in concluding that the Debtors' rights to the SARS are not property of the estate under § 541. The gist of the Trustees' appeal is that the bankruptcy court erroneously applied state contract law in construing the CBA, and disregarded federal collective bargaining law that recognizes and enforces oral agreements at the bargaining table. The Trustees claim that the parties to the CBA had orally agreed at the bargaining table which employees were eligible to receive the distributions in June 2005.
The bankruptcy court's analysis was based on its belief that Kansas law requires the Debtors to be expressly identified as third-party beneficiaries in order to enforce a provision of the CBA. Because the Debtors' interest in the property must exist as of the commencement of the case, the bankruptcy court focused its attention on which agreement clearly expressed these Debtors would qualify as participating employees. The bankruptcy court's analysis is flawed for two reasons. First, the bankruptcy court's reliance on the Kansas Stovall case is misplaced.*fn13 Stovall is distinguishable because it does not involve a CBA. Second, focusing on the issue of who is eligible to receive the distributions presumes that the rights/interests granted under the CBA/EPP are of the kind that may be included in "property of the estate."
We begin our analysis by reviewing the interest granted by the CBA/EPP. Section 541(a)(1) defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." The purpose of § 541(a) is to bring anything of value that the debtors have into the estate. Courts have construed the term "property" broadly and "an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed."*fn14
State law defines and creates property interests.*fn15 Once property rights are determined under state law, federal bankruptcy law establishes the extent to which the property interest is property of the bankruptcy estate.*fn16 A "legal interest" is an interest recognized by law.*fn17 An "equitable interest" is an interest held by virtue of an equitable title or claimed on equitable grounds, such as the interest held by a trust beneficiary.*fn18
The rights at issue are contractually-based, rather than state-created; thus resolution of this case requires interpretation of the CBA and EPP. The determinative issue is whether the Debtors had an enforceable right to the distribution when they filed their respective petitions. A leading treatise provides:
While federal labor law governs the enforcement of collective bargaining agreements, traditional principles of contract law frequently apply. Consequently, the enforcement of collective bargaining agreements is governed by traditional rules governing the enforceability and interpretation of contracts, so long as their application does not conflict with federal labor policy. However, since a "collective bargaining agreement is not an ordinary contract for the purchase of goods and services, nor is it governed by the same old common-law concepts, which control such private contracts," not all common-law concepts are applied to determine if a contract exists; thus, for example, a stipulation under which an employer agreed to abide by any collective bargaining agreement between a union and an employers' association was not invalid for lack of consideration.*fn19
The basic canons of interpretation of collective bargaining agreements are (1) the writing will be read as a whole, and every part will be interpreted with reference to the whole, (2) the court will if possible give effect to all parts of the instrument, and an interpretation which gives a reasonable meaning to all its provisions will be preferred to one which leaves a portion of the writing useless or inexplicable, (3) the court must try to put into concrete form what the intentions of the parties were, not by slavishly following the words but to say what the underlying purpose was as expressed by the language used, and (4) the court should seek to ascertain the meaning of a collective bargaining agreement not only by viewing the language used by the parties to the collective bargaining agreement, but also by considering the parties' past interpretations and practices. In other words, in interpreting a collective bargaining agreement, the fundamental canons of contract interpretation require that a court not only examine the plain language of the contract in the abstract, but that it seek to ascertain and effectuate the parties' intent, as evidenced by the contract's purpose and the surrounding circumstances.*fn20
The SARS were first referenced in the CBA. Under both the IAM and IBEW versions of the CBA, Spirit agreed to establish an EPP that would provide for represented employees to participate in profit earned by Spirit on ten percent of its initial common stock upon one of three events: (1) a substantial sale by its investors; (2) a change of control merger; or (3) an initial public offering ("IPO") of the stock. The bankruptcy court interpreted this provision as simply giving these Debtors the hope, anticipation, or expectation that in the event of a triggering event, they would receive a share of the profits, stating:
First, these cases do not appear to involve stock options. Indeed, eligible employees did not receive an option to be exercised by them; rather, upon the effective date of the EPP, appreciation rights were issued. The appreciation rights did not confer upon the eligible employees any ownership of any stock or the right to purchase stock. If and when the IPO yielded a stock price in excess of the threshold price, the appreciation rights would be converted into the right to receive a distribution payable to eligible employees in cash and stock. They had no "option" per se and did not have to take any steps to "exercise" the option.
Second, and far more important for today's purposes, the record shows that neither the IPO nor the EPP existed at the time these debtors filed their cases. All the debtors had before the EPP was executed on October 27, 2006 was the hope, anticipation, or expectation that in the event of an IPO, they would receive a share of the profits. That is the only "future" or ["]contingent" interest the Court can glean from the CBA terms.
. . . Here, these debtors' expectations, if any, were based on the possibility or hope that a sale, merger, or IPO might occur during the term of the CBA. The employees had no control whatever over when or if that might occur because the decision to sell, merge, or publicly offer stock remained entirely within Spirit's discretion.*fn21
Because the Debtors' interests were entirely dependent upon the economic decisions of Spirit, the bankruptcy court concluded that such an expectancy did not rise to the level of a legal or equitable interest in property. We agree.*fn22
The dispositive characteristic in Palmer, Sharp, and Chappo is that under the terms of the bonus plan, payment of the bonus was solely at the employer's discretion. The Palmer court concluded that the debtor had no enforceable claim because the employer, as of the date the debtor filed for bankruptcy, could have decided not to pay any bonus at all under the terms of the plan itself. Here, the distribution is conditioned on a sale, merger, or IPO, all of which are occurrences entirely within Spirit's discretion.
Interpreting the CBA as merely granting an expectancy is further supported by the provisions of the EPP. Section 3.01 states:
Notwithstanding anything herein, no individual Eligible Employee shall have any rights with respect to or interest in the Appreciation Rights, or any right to be allocated any portion of any Net Proceeds and no Eligible Employee is assured that ...