STRINE, Vice Chancellor
I. Introduction
In this opinion, I address a motion to dismiss claims brought on behalf of Insilco Technologies, Inc. ("Insilco"), a bankrupt corporation, by plaintiff Chad J. Shandler, who was appointed by the federal bankruptcy court as Creditor Trustee and to prosecute any claims belonging to Insilco. In his complaint, Shandler alleges that Insilco was victimized by fiduciary wrongdoing committed by its controlling stockholder, a group of affiliated funds (the "DLJ Funds") that Shandler alleges were dominated and controlled by defendants Donaldson, Lufkin Jenrette, Inc. n/k/a Credit Suisse (USA), Inc. ("DLJ, Inc.") and DLJ Merchant Banking, Inc. ("DLJMB") (collectively, "DLJ"), and by a group of DLJ-affiliated directors who comprised a majority of Insilco's board.
In this decision, I address motions to dismiss filed by certain of the defendant directors and entities affiliated with DLJ, as well as defendant KeyBanc Capital Markets, Inc. ("KeyBanc"), an investment bank that performed work for Insilco on a transaction, the fairness of which Shandler challenges. I largely dismiss all of the counts in the complaint against the moving directors and DLJ entities because the counts either fail to state a claim at all or, at best, state an exculpated duty of care claim. In one important respect, however, I sustain the complaint. I find that, insofar as the complaint challenges the fairness of a transaction whereby Insilco sold its automotive business to another corporation that DLJ controlled, it states a claim against DLJ, as a controlling stockholder group, and against all but two of the moving director defendants, for breach of the fiduciary duty of loyalty. I also find that the complaint states a claim against KeyBanc, who was hired by Insilco to give advice on the deal, for aiding and abetting a breach of fiduciary duty.
KeyBanc was formerly known as McDonald Investments, Inc. I use its current name as the parties have generally done in their briefs.
II. Background Facts
The following facts are drawn from the complaint and the documents that the complaint incorporates.
A. The DLJ Funds Acquire A Controlling Stake In Insilco
Before it was liquidated in bankruptcy in 2004, Insilco — a Delaware corporation that was wholly owned by Insilco Holding Co. — manufactured telecommunication and electrical component products for the computer, telephone, automotive, and medical equipment markets. According to the complaint, in late 1997 or early 1998, DLJ, Inc., an investment bank, and its indirect wholly owned subsidiary, DLJMB, identified Insilco as an attractive equity investment. According to the complaint, DLJ and DLJMB made investments using various affiliates they dominated and controlled, including the ten "DLJ Funds" that are named as defendants in this action.
See Insilco Technologies, Inc. Form 10-K for the Fiscal Year Ended Dec. 31, 2002 at Item 1.
See Compl. at 1 n. 1; Credit Suisse (USA), Inc. Form 10-K405 for the Year Ending Dec. 31, 2000 (filed Mar. 30, 2001) at 2. DLJ, Inc. is the successor company of First Boston (USA), and is a wholly owned subsidiary of Credit Suisse (USA), Inc. Compl. at 1 n. 1
DLJMB often operated as DLJ, Inc. Compl. ¶ 50. Credit Suisse Group acquired DLJ, Inc. on November 3, 2000 and DLJ, Inc. now operates as a Credit Suisse (USA), Inc. Compl. at 1 n. 1. For simplicity's sake, I use the DLJ moniker used by Shandler in his complaint.
Id. ¶ 51.
The DLJ Funds include: DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P.; DLJ ESC II, L.P.; DLJ EAB Partners, L.P.; DLJ Merchant Banking Partners II-A, L.P.; DLJ Merchant Banking Partners II, L.P.; DLJ Diversified Partners, L.P.; DLJ Diversified Partners-A, L.P.; MBP II Plan Investor, L.P.; and DLJ Offshore Partners, II, CV. Id. ¶ 2.
Specifically, DLJMB controlled an affiliate entity called DLJ Merchant Banking II, Inc. ("DLJMBII"). Id. ¶ 45. DLJMBII was the managing partner of defendants DLJ Merchant Banking Partners II, L.P. ("Partners II"), DLJ Merchant Banking Partners II-A, L.P. ("Partners II-A"), DLJ Millennium Partners, L.P., and DLJ Millennium Partners-A L.P. Id. ¶ 45. DLJMBII was also the general partner of defendants DLJ EAB Partners, L.P., and DLJ Offshore Partners, II, C.V. Id. ¶ 46. Partners II and Partners II-A made side-by-side investments with two other DLJ Funds called DLJ Diversified Partners, L.P. and DLJ Diversified Partners-A, L.P. Id. ¶ 46. Additionally, DLJ, Inc. was the sole owner of an entity called DLJ CI, which owned the stock of DLJ LBO Plans Management Corporation ("LBO Corp."). LBO Corp. is the managing partner of defendant DLJ ESC II, L.P. Id. ¶ 47.
In August 1998, DLJ Inc. and DLJMB allegedly utilized the DLJ Funds to acquire 74% of Insilco's common stock in exchange for an investment of $43 million. DLJ Inc. in particular paid over $28 million of the $43 million used to purchase those shares in the names of the DLJ Funds. At the time that the DLJ Funds acquired a majority stake in Insilco, Insilco had three primary independent operating divisions: (1) a specialized automotive components business called "ThermaSys;" (2) a publishing business, which primarily printed and designed student yearbooks; and (3) a technology segment, split into four sub-units, that manufactured telecommunications and electrical components for, among other things, computer networking, digital telephones, and automotives. Shandler alleges that ThermaSys and the publishing business were Insilco's most valuable assets.
Id. ¶ 51.
Id. ¶ 49.
Id. ¶ 53.
Id. ¶ 6.
B. DLJ Takes Control Of Insilco's Board And Business Strategy
Shandler alleges that once DLJ obtained a majority equity stake in Insilco, DLJ moved rapidly to implement a new business strategy. This strategy was premised on the notion that Insilco would be more valuable if it focused on its technology business, and spun off ThermaSys and its publishing business. Consistent with a tension that permeates the complaint as a whole, Shandler alleges that DLJ was acting in its self-interest by pursuing this strategy to maximize the value of its equity position in Insilco. To this precise point, Shandler alleges that DLJ "caused Insilco to pursue an aggressive acquisition and divestiture strategy with a goal of preparing Insilco for a public offering pursuant to which the defendant DLJ Funds would `cash out' [their] investment in Insilco." Of course, in order for the strategy to work, the moves DLJ made to portray Insilco as a focused, technology-based company with genuine value and upside potential had to be sufficiently attractive to the market to position the company to successfully make a public offering. If that were the case, one would hope that a rational marketplace would therefore have had to be persuaded that Insilco had the capacity to pay its debts.
Id. ¶ 54.
To solidify its control, DLJ, according to the complaint, installed its designees as a majority of Insilco's board. In 1999, four individuals who were allegedly affiliated with DLJ, Inc. and DLJMB — defendants William Dawson, Thompson Dean, John Fort, and Keith Palumbo — were elected as directors of Insilco's seven-member board. The proxy statement submitted to Insilco's shareholders for the 1999 board election disclosed that Dawson was a principal of DLJMB and a senior vice president of defendant Donald, Lufkin Jenrette Securities Corp. ("DLJ Securities"), that Dean was a managing director and managing partner of DLJMB, and that Palumbo was a vice president of DLJMB. But, according to the complaint, the proxy statement did not mention that Fort was associated with DLJ, Inc. by his role as a member of the DLJ Merchant Banking Advisory Board.
Id. HI} 31-32, 35, 58.
Insilco's other directors in 1999 were defendant Randall Curran, defendant David Howe, and CEO Robert Smialek. The complaint alleges that DLJ forced out Smialek and replaced him with Insilco's then-CFO David Kauer. None of these directors were associated with DLJ. In 2000, Curran resigned from the board and was replaced by another DLJ insider, defendant George Peinado, a principal of DLJMB. The addition of Peinado raised the number of DLJ "insider" directors to five out of seven, if Fort is counted as Shandler wishes. In mid-2000, the board appointed defendant James Ashton to the Insilco board by unanimous written consent. Although the board initially identified Ashton as independent and disinterested, he later identified himself as "associated with DLJ Merchant Banking Partners II." In addition, Ashton had previously served as president and CEO of Fiberite Holdings, Inc. from 1995 to 1997, when a DLJ-related entity controlled that company.
Id. ¶ 56.
Id. ¶ 59.
Id. ¶ 60.
Id. 60.
C. DLJ Pursues An Allegedly Self-Interested Business Strategy For Insilco
With the DLJ-affiliated directors making up a majority of the Insilco board, the board allegedly managed Insilco in such a way that benefitted DLJ to the detriment of Insilco. Specifically, Shandler claims that the Insilco board, and DLJ as majority shareholder, engaged in three forms of self-dealing to further the interests of DLJ. First, the board allegedly caused Insilco to retain various DLJ-related companies as financial advisors in connection with several M A transactions and to facilitate Insilco's entry into certain credit agreements, and caused Insilco to pay those advisors excessive fees for those roles. Second, the board and DLJ allegedly caused Insilco to sell ThermaSys to a company controlled by the DLJ Funds for an unfair price. Finally, once it was clear that DLJ's business strategy for Insilco had failed and the company was insolvent, the Insilco board, at the behest of DLJ, supposedly delayed the filing of insolvency petitions for Insilco so as to allow DLJ to recoup some of its losses through the generation of additional advisory fees and through sales by the DLJ Funds of the Insilco debt that they owned.
The complaint also makes a cursory allegation that Insilco sold its publishing business to an entity controlled by DLJ, Inc.'s former CEO for an unfairly low price. See id. ¶¶ 6, 122. This transaction occurred in March 1999, and the allegation is therefore time-barred. See id ¶ 64; infra pages 21-22.
1. The Board Retains DLJ-Related Financial Advisors
According to the complaint, from 1998 to 2002, DLJ caused the board to repeatedly hire DLJ Securities and DLJ Capital Funding, Inc., n/k/a Credit Suisse Capital Funding ("DLJ Capital") (collectively, the "DLJ Advisors"), companies that were associated with DLJ, to generate fees for DLJ. Without attempting to identify what work was done and what the appropriate market rate for that work was, Shandler simply makes the cursory allegation that the fees paid to these advisors were "excessive," "unnecessary," and "exorbitant." In particular, Shandler alleges that the board hired DLJ Capital and DLJ Securities to serve as financial advisors for eight M A transactions that the board caused Insilco to enter into between January 1999 and January 2000. These were transactions related to DLJ's strategy of focusing Insilco's identity and future on the technology industry.
Compl. ¶¶ 8, 64-65, 89-115, 132-33.
Specifically, from January 1999 to January 2000, Insilco: (1) purchased Eyelets for Industry; (2) sold its Steel Parts Corporation subsidiary; (3) sold its Taylor Publishing Company subsidiary; (4) purchased T.A.T. Technologies; (5) conducted a study of the Heat Exchanger industry; (6) sold Steward Connector Systems; (7) purchased Serck, a U.K. heat exchanger manufacturing company; and (8) purchased Precision Manufacturing. Id. ¶ 64.
Shandler also claims that the board and DLJ caused Insilco to undertake certain credit agreements and that DLJ Capital and DLJ Securities received fees for various roles in preparing and executing those credit agreements. On October 31, 1998, the Insilco board hired DLJ Securities to serve as the arranger and DLJ Capital to serve as the underwriter for a $300,000,000 amended credit facility, which closed shortly thereafter. In January 2000, DLJ Capital was retained again to amend Insilco's credit facility after Insilco sold two companies and purchased another. And, in August 2000, DLJ Capital was retained a third time to serve as the Lead Arranger and Syndication Agent for the refinancing of Insilco's credit facility (the "Credit Agreement").
Id. ¶ 63.
Id.
Id.
The Credit Agreement — which was officially termed the Second Amended and Restated Credit Agreement — was executed on August 25, 2000. In particular, the Credit Agreement provided for three credit facilities: (1) a $50 million, 6-year senior secured revolving loan (the "Revolving Loan"); (2) a $35 million, 6-year senior secured amortizing term-A loan (the "Term-A Loan"); and (3) a $125 million, 7-year senior secured amortizing term-B loan (the "Term-B Loan"). Initially, DLJ had the exclusive responsibility for funding the loans extended to Insilco under the Agreement, but eventually assigned some of its interest to other lenders. That is, although the complaint says that DLJ later sold off a part of its senior lender interest, the only reasonable inference to be drawn from the complaint as a whole is that DLJ remained a major holder of the company's senior debt at all relevant times.
Id. ¶ 88. The Revolving Loan matured on the sixth anniversary of the Credit Agreement but did not require payments of interest or principal before maturity. But, the term loan facilities required Insilco to make regular quarterly payments. The Term-A Loan required quarterly payments in each of its six years, which set amounts of payment required for each year, beginning in December 2000. Specifically, the Term-A Loan required payment of: $875,000 for the first two years; $1,312,500 for the third year; $1,750,000 for the fourth and fifth years; and (6) $2,187,500 for the sixth year. The Term-B Loan required quarterly payments of only $312,500 for the first six years, and quarterly payments of $29.4 million for the seventh year. Id.
Id. ¶ 87, 103.
Id. ¶¶ 103, 108, 111.
For its role as the Lead Arranger and Syndication Agent of the Credit Agreement, Insilco paid DLJ Capital $5.3 million in fees, in addition to $1.4 million that DLJ Securities was paid for retainer and advisory functions that it had served in 2000. That is, DLJ Capital and DLJ Securities were allegedly paid $6.7 million by Insilco in 2000 alone.
Id. ¶ 87.
2. The Board Allegedly Sells ThermaSys To A DLJ-Related Entity For Unfair Value
Shandler's most clearly pled allegations relate to his claim that the board and DLJ caused Insilco to sell one particular asset of Insilco to a DLJ-related company at an inadequate price. That asset sale was the last in a series of transactions whereby Insilco had sold off various of its businesses outside of the technology sector, consistent with DLJ's strategy of streamlining and focusing Insilco on that sector. In keeping with that strategy, DLJ also allegedly caused Insilco to make certain acquisitions of businesses related to that sector.
In the complaint, Shandler details that Insilco sold three businesses in 1999, and purchased four in 1999 and 2000. Id. ¶ 64.
In the complaint, however, Shandler only focuses substantively on attacking one of the transactions, the sale of ThermaSys. In early 2000, defendant Dawson allegedly recommended to Insilco's CEO Kauer that Insilco engage in a so-called "value creation strategy" which involved Insilco selling ThermaSys for cash, and thereafter restructuring Insilco's debt (the "ThermaSys Transaction"). Rather than implement that strategy in the usual fashion that would involve the appointment of a special committee of independent directors to, in the first instance, determine whether such a sale was in Insilco's interest and at what price a sale made sense, the Insilco board instead struck a preliminary bargain whereby an entity in which the DLJ Funds owned a majority stake would buy ThermaSys for $147 million. Only after the deal terms were struck was defendant Ashton appointed to the board on July 5, 2000 and immediately named as a single person special committee. The resolution appointing Ashton indicated that he was "completely disinterested in the Proposed [ThermaSys] Transaction and [had] no financial interest in common with the proponents of the Proposed [ThermaSys] Transactions." The complaint alleges that the resolution was misleading, one must assume (as the complaint is otherwise silent on this point) because the resolution does not address the fact that Ashton had served as the CEO of a DLJ portfolio company from 1995 to 1997.
Id. ¶ 68.
Id. ¶ 68.
Id. ¶ 73.
Id.
Within five days, Ashton ratified all prior actions of the board related to the deal, including its prior retention of supposedly independent counsel Baker Botts and financial advisor, defendant KeyBanc, a subsidiary of Key Corp., and blessed the $147 million sales price. According to the complaint, Ashton made no effort to negotiate better terms or to seek other buyers for ThermaSys. Rather, Ashton relied upon a fairness opinion by KeyBanc, a banker who Shandler alleges had a previous underwriting relationship with DLJ.
Id. ¶ 75.
Id. 79.
KeyBanc made a presentation on July 14, 2000 at which it conveyed its opinion that the fair value of the ThermaSys Transaction was $143 million as of July 14, 2000 (the "Fairness Presentation"), and, thus, that the $147 million price was fair to Insilco. But, according to the complaint, the Fairness Presentation was flawed because it adopted an EBITDA multiple that was below the floor of the range of EBITDA multiples for automotive transactions during that time period. Specifically, Shandler argues that KeyBanc's Fairness Presentation represented that the average EBITDA multiple of automotive transactions from January 1998 to July 2000 was 7.7, with the high of that range being 12.3 and the low being 5.6. But, the Thermasys Transaction used an EBITDA multiple of only 4.1. If the Thermasys Transaction had been at the average EBITDA multiple of 7.7, Shandler argues, the price of ThermaSys would have been $274.89 million.
Id. ¶ 78.
Id. ¶ 76.
Id.
Moreover, Shandler argues that KeyBanc had given DLJMB a fairness opinion for the ThermaSys Transaction just three weeks before KeyBanc was retained by Insilco. An internal analysis of the Investment Committee of DLJMB valued the ThermaSys Transaction at $174 million as of February 29, 2000, but reduced that valuation estimate to $150 million on June 8, 2000. According to an internal memorandum, DLJMB's reduced valuation relied, in part, on a fairness opinion that KeyBanc had created for DLJMB. That is, KeyBanc had been advising DLJMB on the ThermaSys Transaction weeks before it was hired by Insilco to provide the same service.
Id. ¶ 77.
Id. ¶ 78.
After the ThermaSys Transaction closed, Ashton was installed as the chairman of the ThermaSys board, and later as CEO of ThermaSys. Thus, Ashton again became what he had been from 1995 to 1997 — the CEO of a DLJ portfolio company. A year later, on August 6, 2001, Ashton allegedly abstained from voting on a transaction involving the DLJ Funds, acknowledging his association with DLJ. Although the complaint suggests that this rendered the prior board resolution false, the complaint does not address whether Ashton's later acknowledgement was because of some prior connection with DLJ that preceded his service on the Insilco board, or rather because Ashton was by then the CEO of ThermaSys, which was now a DLJ portfolio company.
Id. ¶ 80.
Id . ¶¶ 60, 80.
Id.
In sum, Shandler alleges that the ThermaSys Transaction is a classic example of unfair self-dealing and that Ashton's hurried blessing of a fully-baked deal, rather than representing a genuine effort to simulate arms-length bargaining, actually highlights the unfairness of the transaction.
3. The Board Delays Insilco's Bankruptcy Filing
Shandler alleges that DLJ's strategy for Insilco soon unraveled. Even though it had revised its credit agreements as recently as August 2000, by late 2000, Insilco began to experience serious financial difficulty. As of December 31, 2000, Insilco's working capital was just half of its level from the previous year, dropping to $75 million from $150 million. And, Insilco had over $380 million in debt but only $356 million in assets.
Id. ¶ 90.
Id.
In early 2001, Insilco was suffering the effects of a downturn in the economy, particularly in the telecommunications industry, and its customers were reducing orders. Insilco avoided breaching its debt covenants in the first quarter of 2001, but by mid-year was in default. As of mid-year 2001, the complaint alleges, Insilco was insolvent. The complaint alleges that the board knew at that time that Insilco could not survive in its current form and that bankruptcy was inevitable. But the complaint says that DLJ prevented Insilco from seeking bankruptcy protection immediately or exploring other strategic options. The complaint then immediately contradicts itself in material part by saying that the board and DLJ delayed a bankruptcy filing so that it could retain Bain Company to review Insilco's options and to consult with a DLJ-related workout specialist about its options. These moves, of course, are exactly the kind one takes when one is "consider[ing] strategic alternatives."
Id. ¶ 96.
Id.
Id.
To enable Insilco to weather the moment, Insilco's lenders asked that Insilco generate cash, and suggested that the DLJ Funds contribute additional equity capital. The DLJ Funds were initially open to making the capital infusion but, after an internal meeting at DLJMB, the DLJ Funds decided to advance the funds as debt rather than equity. Insilco's lenders eventually agreed to waive Insilco's defaults under the Credit Agreement after the DLJ Funds agreed to make a "cash infusion" of $15 million, and the Credit Agreement was amended to reflect this infusion effective June 30, 2001 (the "Term-C Loan"). Shandler alleges that the Term-C Loan violated the terms of an Insilco 12% note indenture (the "12% Note"), which prohibited the issuance of debt that was subordinate to the senior debt in the Credit Agreement but senior in right of payment to the Noteholders.
Id. ¶ 98.
Id. ¶ 99.
Id. ¶ 100.
Shandler further avers that the Insilco board and DLJ knew or "should have known" that the time bought by the Term-C Loan funds would not avert eventual bankruptcy. According to the complaint, the "purpose and effect was merely to prolong and deepen the period of insolvency prior to the filing of the insolvency petitions to permit defendants DLJ Capital and the DLJ Securities (sic) to collect fees, to buy time to sell and assign the DLJ Funds' interests in the revolving facility and Term-A and Term-B facilities and, thereby reduc[e] the exposure of the defendants DLJ Funds to the risk of Insilco's bankruptcy."
Id. ¶ 101.
The stop-gap financing provided by the Term-C Loan did not get Insilco over the hump. On November 13, 2001, Insilco reported that its insolvency had worsened, and that its third quarter sales totaled only $65.5 million compared to $114.2 million the prior year. By early 2002, DLJ allegedly knew the game was up for sure but still caused Insilco to refrain from filing for bankruptcy immediately. Shandler alleges that DLJ wanted to sell Insilco outside of a bankruptcy proceeding because that would insulate DLJ from claims in bankruptcy relating to its prior self-dealing with Insilco. The complaint is, again, very confusing on this point because it then alleges that DLJ, in response to further defaults, soon sought to arrange a sale of Insilco's assets in a Chapter 11 bankruptcy proceeding.
Id. ¶ 104.
Id. ¶ 112.
At this point in the complaint, Shandler focuses more on whether DLJ was placing its interest as a senior creditor ahead of the interests of other less-senior creditors, such as the unsecured creditors. According to the complaint, DLJ had conflicts arising out of its many roles as majority equity holder, financial advisor, lender, syndication agent, and lead arranger for Insilco's debt agreements. DLJ allegedly "required their appointees (who controlled the Board) to maximize the recovery for [the] DLJ Funds and the Lenders at the expense of Insilco's other creditors." Insilco's "lenders" of course, included DLJ as major Revolving, Term-A, and Term-B Loan lenders under the Credit Agreement and sole provider of the Term-C Loan. Among the many confusing aspects of this convoluted part of the complaint, the complaint never defines the term "Lenders" that it capitalizes and uses. But the complaint does make clear that DLJ was a major "Lender" in its obscure lexicon. Most sensibly, the term Lenders seems to refer to Insilco's senior creditors.
Id. ¶¶ 111, 114.
Id. ¶ 111.
Id. (emphasis added).
Id. ¶¶ 98, 101, 103, 108.
Id. ¶ 98.
Id. ¶¶ 101, 103, 108, 111.
Supposedly to the end of benefitting the so-called Lenders and the DLJ Funds (who owned a majority of Insilco's equity), DLJ and the board supposedly worked with the company's senior lenders, some of whom DLJ controlled, for a period of forbearance, during which the company worked to find a buyer. In the forbearance agreement, Insilco's lenders secured a pledge of the remainder of Insilco's foreign subsidiaries. The period of forbearance did not yield a buyer, Insilco missed other obligations for payments, including those it owed to DLJ a lender under the Credit Agreement, and Insilco was forced to file for bankruptcy in December 2002.
Id. ¶ 98, 103.
Id. ¶ 113.
Id. 114.
Id. ¶ 114.
D. Insilco Commences Bankruptcy Proceedings
Insilco filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on December 16, 2002. Insilco continued to operate its business as debtor-in-possession. On February 13, 2004, Insilco's debtors filed an Amended Joint Liquidating Plan Pursuant to Chapter 11 of the Bankruptcy Code (the "Liquidating Plan") and, on June 10, 2004, the Bankruptcy Court confirmed the Liquidating Plan, which became effective on October 6, 2004.
Id. ¶ 40.
Central to the Liquidating Plan was an Asset Allocation and Settlement Agreement (the "Settlement Agreement") among Insilco's debtors, Insilco's Creditors Committee, senior lenders, and other key parties. The Settlement Agreement created a Creditor Trust, and Shandler became the Creditor Trustee. Shandler's duties are governed by the terms of the Insilco Liquidating Trust Agreement between the debtors and Shandler. For present purposes, what is important is that the Creditor Trustee, as successor-in-interest to Insilco, had the right to bring any causes of action belonging to Insilco. The Settlement Agreement also allocated Insilco's assets among the signatories of the Agreement, or their constituencies, on an agreed basis, released certain of Insilco's non-DLJ senior lenders from certain claims, and released the Term-C lenders from claims arising from the Term-C Loan. Specifically, the released Term-C lenders included DLJ Securities, DLJ Capital, and eight of the DLJ Funds (the "Term-C Lenders").
See Brauerman Aff. Ex. 2 (Insilco Technologies, Inc. Amended Disclosure Statement and Amended Joint Liquidating Plan) (the "Liquidating Plan") at 16; id. Ex. 3 (Asset Reallocation and Settlement Agreement) (the "Settlement Agreement"). The Moving Defendants filed an affidavit in support of their motion to dismiss, which contained the Liquidating Plan, Settlement Agreement and other documents — including Insilco's certificate of incorporation, a proxy statement that Insilco filed with the SEC, and other documents that were filed in Bankruptcy Court. I take judicial notice of these documents for background purposes only, and where their undisputed terms are properly considered, such as in addressing DLJ's res judicata argument. See West Coast Management Capital LLC v. Carrier Access Corp., 914 A.2d 636, 641 (Del. Ch. 2006) (taking judicial notice of federal court decisions and orders in determining whether a federal court decision barred a subsequent suit in the Court of Chancery).
See Brauerman Aff. Ex. 4 (Motion of the Official Committee of Unsecured Creditors for an Order Appointing a Chapter 11 Trustee or in the Alternative an Examiner with Expanded Powers) (the "Trustee Motion").
Settlement Agreement ¶¶ H. K.
Liquidating Plan at ¶ H(3) (stating that the Creditor Trustee was authorized "to pursue and prosecute, to settle, or to decline to pursue, the Rights of Action, including all pending adversary proceedings and contested matters, whether or not such causes of action ha[d] been commenced . . . and [was] substituted as the real party in interest in any such action" on behalf of Insilco).
Settlement Agreement ¶¶ 4A, 4C; In re Insilco Techs., Inc., 330 B.R. 512, 521 (Bankr. D. Del. 2005), aff'd, 394 B.R. 747 (D. Del. Sept. 15, 2008) (noting that claims involving the Term-C Loan had been dismissed because the court determined that "the `Term C Lenders,' (which were defined to include the same entities that [were] defined as `DLJ' in the Amended Complaint) had been released as part of the Settlement Agreement").
Settlement Agreement ¶ 4C.
E. Shandler Brings Claims In The Bankruptcy Court
Shortly after his appointment as Trustee, on December 14, 2004, Shandler brought claims on behalf of Insilco against DLJ, the DLJ Advisors, the individual members of the Insilco board, and KeyBanc in Bankruptcy Court based on the same allegations raised here. Specifically, Shandler's complaint alleged that the defendants had harmed Insilco and its creditors by "wrongfully exercising their control over the company and taking unfair and harmful actions to advance their own interests, while compromising, prejudicing, and aversely affecting [Insilco's] interests." The DLJ entity defendants and certain Insilco directors who were full-time DLJ employees filed a motion to dismiss on March 18, 2005. On September 27, 2005, the Bankruptcy Court dismissed many of Shandler's claims because it lacked subject matter jurisdiction over his non-core breach of fiduciary duty claims. That is, the Bankruptcy Court found that many of Shandler's claims, including his breach of fiduciary duty claims, were not "core" proceedings under Title 11 of the Bankruptcy Code. The United States District Court for the District of Delaware affirmed the Bankruptcy Court's dismissal of the proceeding on September 15, 2008.
Shandler named the following eight Insilco directors as defendants: Dawson, Dean, Fort, Peinado, Palumbo, Curran, Howe, and Ashton.
Shandler v. DLJ Merchant Banking, Inc., Adv. Pro. No. 04-57950 (KJC); see Insilco, 330 B.R. at 512.
Insilco, 330 B.R. at 515.
Specifically, DLJ, DLJ Capital, DLJ Securities, and directors Dean, Dawson, Peinado, and Palumbo moved to dismiss. Id. at 515 n. 6.
Id. at 519-20.
Id.
In re Insilco Techs., Inc., 394 B.R. 747 (D. Del. Sept. 15, 2008).
F. Shandler Brings Suit In This Court And The Defendants Move For Dismissal
After the Bankruptcy Court's dismissal became final on October 14, 2008, Shandler filed this action on August 11, 2009, re-pleading the "non-core" breach of fiduciary duty claims and related claims against DLJ, the DLJ Advisors, and the Insilco directors. Specifically, the complaint brings claims for breach of fiduciary duty, professional malpractice, and-pa-st-troopers-assn#p89656 A.2d 83, 89 (1995). As it had done in PLRA, in Section 1 of the Act, the General Assembly followed NLRA's model in granting the right. That is, the General Assembly did not undertake in Act 111 to list or define all of the specific topics that the right covers, but instead adopted NLRA's broad language to indicate the topics that are subject to collective bargaining. See 43 P.S. § 217.1; 29 U.S.C. §§ 158(d), 159(a).
Act 111 and PLRA are to be read in pari materia. Philadelphia Fire Officerss'n v. PLRB, 470 Pa. 550, 369 A.2d 259, 261 (1977). In Commonwealth v. State Conference of State Police Lodges of FOP, 513 Pa. 285, 520 A.2d 25 (1987), reading Act 111 and PLRA together under the in pari materia doctrine, we upheld an agency shop award as falling within the scope of collective bargaining under the Act.
Two years after enacting Act 111, in 1970, the General Assembly enacted a comprehensive statute governing collective bargaining in the public sector, the Public Employe Relations Act ("PERA"). Act of July 23, 1970, P.L. 563, No. 195 § 101 ( 43 P.S. § 1101.101 et seq.). PERA does not cover those employees who are covered by Act III. 43 P.S. § 1101.301(2).
At the time the General Assembly passed Act 111, a body of law had developed in the federal arena with respect to distinguishing between those subjects that must be bargained under NLRA and those subjects of managerial policy and control that, despite NLRA's expansive language, remained committed to an employer's sole discretion. See, e.g., Jays Foods, Inc. v. NLRB, 292 F.2d 317, 320 (7th Cir. 1961) (concluding that employer's decision to make changes in operations and abandon part of business was a basic management decision falling outside of NLRA's purview).
In 1964, the U.S. Supreme Court addressed the issue. In the landmark case of Fibreboard Paper Products Corp. v. NLRB, 379 U.S. 203, 85 S.Ct. 398, 13 L.Ed.2d 233 (1964), the Court was asked to determine whether an employer's decision to contract out plant maintenance work that had been performed by his employees fell within the "wages, hours, and other terms and conditions of employment" collective bargaining provision of NLRA. In holding that the matter was bargainable under the circumstances presented, the Court found, inter alia, that the employer's decision fell literally within the words of the provision and that bargaining about the matter would not significantly abridge the employer's freedom to manage the operations of his business. Id. at 212-13, 85 S.Ct. 398.
In a highly influential concurring opinion, Justice Potter Stewart wrote that even though the right of collective bargaining was stated broadly in NLRA, the right was limited by the statute's words to a particular class of topics, and that even though most employer decisions had an impact upon the terms and conditions of employment, it was never Congress' intent to subject all such decisions to collective bargaining. Id. at 217-226, 85 S.Ct. 398 (Stewart, J., concurring). In the Justice's view, given the aims of NLRA and the history of its enactment, Congress' intent to limit the right of collective bargaining would be served by recognizing that those employer decisions that had an indirect or uncertain impact on the employment relationship, as well as those employer decisions that concerned matters that were fundamental to an employer's entrepreneurial control, were not to be included in the class of bargainable topics. Id., at 223, 85 S.Ct. 398.
Ultimately, the Supreme Court adopted Justice Stewart's views that NLRA delineates a limited category of issues that are subject to the right of collective bargaining and that Congress did not intend in the statute to extend the right to those management decisions deemed fundamental to an employer's entrepreneurial direction and control. In First National Maintenance Corp. v. NLRB. 452 U.S. 666, 101 S.Ct. 2573, 69 L.Ed.2d 318 (1981), the Court discussed and relied upon Justice Stewart's Concurring Opinion in Fibreboard when it determined that an employer's decision to shut down part of its business "represented a significant change in petitioner's operations, a change not unlike opening a new line of business or going out of business entirely[,]" and thus, was not "part of [NLRA]'s `terms and conditions' over which Congress has mandated bargaining." Id. at 686, 688, 101 S.Ct. 2573.
In light of the historical development of collective bargaining for firefighters and police, the General Assembly's objective in extending the right of collective bargaining to these essential public employees, the occasion for Act Ill's enactment, the legal landscape that existed at the time of the Act's passage, and the consequences of particular interpretations, it is apparent that the General Assembly intended that the scope of collective bargaining set forth in Section 1 be viewed broadly, to encompass any subject that is rationally related to the "terms and conditions of employment," including employee "compensation, hours, working conditions, pensions, retirement and other benefits." 43 P.S. § 217.1. See Borough of Ellwood City v. PLRB, 606 Pa. 356, 998 A.2d 589 (Pa. 2010), J-7A B-2009, Op. at 464, 999 A.2d at 565 (concluding that under Act 111, working conditions, a topic of mandatory collective bargaining, are those matters that bear a rational relationship to the employees duties, i.e., germane to the working environment). At the same time, and in light of the very same considerations, it is equally apparent that the General Assembly had no intention or expectation that the collective bargaining process would permit public employees to set matters of public policy or participate with their public employer in administering the public enterprise. Accordingly, we construe the General Assembly's use of open-ended language in Section 1 and its silence in the Act on matters of managerial prerogative as conveying the intent that matters of managerial decision-making that are fundamental to public policy or to the public enterprise's direction and functioning do not fall within the scope of bargainable matters under Section 1. See id. at 465, 999 A.2d at 566 (recognizing that under Act 111, matters that are managerial in nature and implicate significant policy concerns are not subject to collective bargaining). Such managerial prerogatives include standards of service, overall budget, use of technology, organizational structure, and the selection and direction of personnel. Id. at 464-65, 999 A.2d at 565-66.
Borough of Ellwood City concerned the right of collective bargaining granted in Act 111 in a different, but related, setting. In that case, this Court considered whether Ellwood City Borough committed an unfair labor practice by implementing a ban on the use of tobacco products in the workplace and in vehicles and equipment without first collectively bargaining the matter with the labor organization that represented the Ellwood City Police. We concluded that the ban was a mandatory subject of bargaining and not an inherent managerial prerogative within the meaning of Act 111, and thus, was a subject that had to be collectively bargained under the Act and PLRA. Id. at 20.
In our view, this construction of Section 1 advances the General Assembly's aim to foster peaceful and productive labor relations between public employers and their firefighter and police employees and gives effect to the General Assembly's recognition that a public employer is also a public entity responsible to all of its citizens for a number of decisions that concern the public welfare. Indeed, a different construction of Section 1, which would include managerial prerogatives within its purview and thus give to only a select few the right to participate in decisions that have far-reaching political and economic implications for an entire community, would be unreasonable and inconsistent with principles upon which our system of democratic governance is founded.
The Commonwealth Court has recognized the managerial prerogatives of public employers and has concluded that they do not fall within the scope of Section 1. See, e.g., FOP Rose of Sharon Lodge, No. 3 729 A.2d at 1281-82; City of Philadelphia v. PLRB, 588 A.2d at 72; City of Scranton, 429 A.2d at 781.
B
Turning to the application of Section l's framework in interest arbitration appeals such as this one, it is clear that if an award bears no rational relationship to the terms or conditions of employment or acts solely on a managerial prerogative, the arbitration board has exceeded its statutory powers under Act 111 and the award must be set aside. Commonwealth Court decisions reveal, however, that assessing the propriety of most arbitration awards is not so straight-forward. Because management decisions regarding policy or direction almost invariably implicate some aspect of employer-employee relations or the workplace, disputed arbitration awards more often than not concern both the terms and conditions of employment and the public employer's managerial prerogatives. Since the General Assembly did not provide a statutory standard in Act 111 for the courts to use to distinguish between those awards of this type that are consistent with the scope of collective bargaining in Section 1 and those awards that are not, this Court must.
As it did here, at times, the Commonwealth Court has applied a balancing test, determining that since the managerial policy an award implicated outweighed any impact it would have on employees, the award was invalid for concerning a non-bargainable topic. See, e.g., Schuylkill Haven Borough, 914 A.2d at 941. At other times, however, the Commonwealth Court has not applied a weighing analysis, but has rejected an arbitration award because it was deemed to fall within the scope of managerial discretion, City of Scranton, 429 A.2d at 781, or has upheld an award because the topic at issue was deemed to affect the working conditions and safety of the employee, City of Erie v. International Ass'n of Firefighters, Local, 2 9374 Pa.Cmwlth. 245, 459 A.2d 1320, 1321 (1983). While these formulations may represent a reasoned attempt on the part of the intermediate appellate court to vindicate both sets of competing interests in Act 111, they do not closely reflect the Act's statutory scheme.
Given the General Assembly's intent in passing Act 111, we conclude that, when reviewing a disputed provision in an Act 111 interest arbitration award, a court should first inquire whether the provision concerns a topic that is subject to the right of collective bargaining, i.e., is rationally related to the terms and conditions of employment. If the topic is so subject, the court should next inquire whether the award also implicates the non-bargainable managerial prerogatives of a public employer. If the award does, the court must then determine whether the award unduly infringes upon the exercise of those managerial responsibilities. If the award does not unduly infringe upon their exercise, the award concerns a subject that lies within the scope of collective bargaining under Section 1, falls within the arbitration board's Act 111 powers, and is confirmable. If, however, the award unduly infringes upon the exercise of managerial responsibilities, then the award concerns a managerial prerogative that lies beyond the scope of collective bargaining, reflects an excess of the board's Act 111 powers, and is voidable.,
We observe that this test mirrors the one that we articulated in Borough of Ellwood City. There we stated:
Consistent with the history of Act 111, as well as the above-stated policy concerns, when addressing topics which straddle the boundary between ostensibly mandatory subjects of bargaining and managerial prerogatives, we believe once it is determined that, as here the topic is rationally related to the terms and conditions of employment,
i.e., germane to the work environment, the proper approach is to inquire whether collective bargaining over the topic would unduly infringe upon the public employer's managerial responsibilities. If so, it will be considered a managerial prerogative and non-bargainable. If not, the topic is subject to mandatory bargaining.
Borough of Ellwood City, 998 A.2d at 600.
Mr. Justice McCaffery's CO/DO takes a radically different approach to the excess of powers aspect of narrow certiorari review; and, respectfully, we are not persuaded. Under the CO/DO's approach, if the arbitration board's award addressed the terms and conditions of employment, stated that it considered and incorporated the managerial prerogatives of the public employer, and did not mandate an illegal act, the award is unreviewable and will be upheld. Likewise, even if the board "`insufficiently considered' management rights with respect to the working conditions at issue," the CO/DO posits that the award falls "within the realm of `legal error,"' and is "not reviewable." CO/DO at 5 (citation omitted). In these circumstances, again, the award must be upheld.
The CO/DO's framework amounts to virtually no judicial review at all and advocates a review paradigm that even the Union has not forwarded. By contrast, as we have set forth at some length, the test we articulate squares with the review the courts have traditionally exercised in applying the excess of powers prong of narrow certiorari and reflects an approach that the General Assembly has not undertaken to revisit.
IV
It remains for us to apply these principles to Paragraphs 9 and 12 of the Award. As the parties discuss Paragraph 12 first in their respective briefs, and then Paragraph 9, we also will evaluate the provisions in that order.
In the interests of judicial economy and efficiency, and because there is no dispute between the parties concerning the governing test and the essential elements of the test, we will apply the test where relevant to the Award, rather than remand this case to the Commonwealth Court for application of the test in the first instance.
A
As discussed, the disagreement over Paragraph 12 involves whether the arbitration panel exceeded its powers by mandating that the City first come to agreement with the Union over the effects of a fire company closure before implementing the closure. The Union contends that the question of whether this provision is rationally related to the health and safety of the firefighters and, thus, to their working conditions, is a factual issue to be determined by the fact-finder; it stresses that the arbitrators here found, upon an extensive evidentiary record, that a rational relationship exists between company closure and firefighter safety. That being the case, the Union asserts that this Court must defer to such finding and uphold the award under narrow certiorari review. The City responds that because a requirement of pre-implementation bargaining interferes significantly with its managerial decision-making, it is non-bargainable under Act 111. In this regard, the City emphasizes that the Commonwealth Court has consistently upheld the principle that fire station closure implicates the level of services that a municipality is willing and able to afford its citizens and, as such, must fall outside the ambit of issues properly subject to arbitration. The City also argues that the underlying purpose of the mandated pre-closure bargaining is to permit the Union to influence and ultimately alter the City's decision concerning which fire companies to close. The City proffers that allowing the Union to interfere with its organizational plan in this manner would render its "right" to implement fire company closures meaningless.
The City does not dispute that the closure of fire companies may have an effect on the safety of the firefighters and the conditions in which they work. The reasons are self-evident: fire company closures may mean a greater average travel time and distance to a given fire, resulting in a higher probability of accidents en route, as well as a more dangerous situation upon arrival. Thus, it is clear and undisputed that Paragraph 12, in addressing the safety issues that firefighters may confront when firehouses are eliminated, rationally relates to the terms and conditions of employment. At the same time, however, the parties agree that final decisions concerning the size of a municipality's fire department, the creation, continuance, and closure of companies, and the redistribution of resources and a workforce are recognized as classic examples of managerial prerogatives that a public employer decides on its own. See generally City of Scranton, 429 A.2d at 780-81 n. 3.
Since Paragraph 12 concerns both the terms and conditions of employment of the City's firefighter employees and the City's managerial responsibilities, it must be determined whether Paragraph 12 unduly infringes upon the latter, through its requirements that the City reach an agreement with the Union regarding the effects of such closure and, follow a prescribed course of action of several steps, which includes grievance arbitration, in the event that such an agreement with the Union is not reached. We conclude that it does unduly infringe on the City's managerial responsibilities.
In our view, the procedure a public employer adopts for making essential decisions on managerial matters is no less significant than the decision on substance that the employer ultimately reaches. As to decisions regarding fire company closures, in Paragraph 12, the Award takes from the City the complete control it had over of its own decision-making process as to a subject that indisputably lies within its sole discretion under Act 111. That is, Paragraph 12 modifies the decision-making process the City has heretofore followed in decommissioning fire companies and imposes a further procedure upon the City that it must undertake, before a fire company can be closed. Under this provision, decisions of closure cannot be made upon the City's analysis alone, but only after what the Union considers a proper evaluation, and eventual arbitration, of the impacts of the closures. In addition, by the terms of Paragraph 12, the City is not permitted to put its closure plan into place until after it has completed the specified multi-step process. Even if no change is made to the City's initial closure plans because of those requirements, the fact remains that the City is precluded from moving forward with its plan in the timeframe that City officials believe would implement closure in an economical and efficient manner and best serve its citizens. This is no small matter in times of public fiscal economic scarcity, such as the City unquestionably faces now. Further, because Paragraph 12 inserts the Union as a participant into the City's decision making process and requires that the City bargain with the Union over a proposed closure's effects prior to implementation, the provision has the capacity to assert a profound influence over the City's closure decisions, and ultimately, the City's policy judgments as to spending, budgeting, levels of fire protection and emergency medical services it should provide, and the prioritization and allocation of competing essential services.
Therefore, we conclude that even though Paragraph 12 is rationally related to the terms and conditions of employment of the City's firefighters, the process it mandates unduly infringes upon the City's essential management responsibilities. Because Paragraph 12 unduly infringes upon the City's managerial prerogatives, it falls outside the scope of collective bargaining in Section 1. Accordingly, we hold that the arbitration board exceeded its powers under Act 111 in the Award in question.
B
In Paragraph 9(A) of the Award, the arbitration board sought to put into place a new type of service to be offered by the City — an ALS Engine Pilot Program. According to the arbitration board, this new service would allow paramedics to rotate to engine duty which, apparently, is comparatively less stressful than the work performed as part of a medic unit. The Union, which devised the program, asserts that this was a permissible award when viewed against the backdrop of a long history of health and safety concerns arising out of paramedic burnout owing to the large volume of emergency medical assistance calls to the Department. The Union also maintains that this provision is limited and narrow, and only obligates the City to assess the utility of rotating paramedics into engine companies.
Although the ALS Engine Pilot Program was scheduled to run through June 30, 2008, the record and briefs do not indicate whether it was delayed pending the outcome of judicial review. As the parties have not raised the question of mootness, we will proceed to the merits.
The City answers that the arbitration board apparently thought that the City should provide more ALS units than it does at present, and that such care should be offered not only through medic units, but also through fire engines specially equipped with sophisticated medical equipment that the engines do not currently incorporate. The City states that this implies it must create a new type of vehicle to offer this higher level of care, but without any ability to transport critically ill individuals, since fire engines do not transport patients. Particularly as the greatest need, in the City's view, is for additional BLS services rather than services at the more sophisticated ALS level, the City urges that this portion of the award interferes with its managerial functions to decide the level and types of services it should provide to city residents, and to direct its personnel. The City argues that the level of services its fire department should provide — whether through the first responder engines, medic units, or something that does not currently exist such as ALS engines — as well as the type of personnel best suited to perform those services in each instance, are the province of policymakers accountable to the voters.
The Union asserts that Paragraph 9(A) is aimed at ameliorating the workload and stressful working environment that paramedics face, and it is obvious that Paragraph 9(A) is rationally related to employee duties and working conditions. But, as the City points out, Paragraph 9(A) just as obviously implicates its managerial interests in determining the level of services that it can afford to make available to its citizens, the staffing that is needed, and the manner by which its workforce should be selected and deployed. Thus, here too, the disputed issue is whether Paragraph 9(A), though rationally related to terms and conditions of employment, unduly infringes upon the City's managerial responsibilities.
We certainly do not discount the seriousness of the problem of stressful working conditions and attrition among the City's paramedic corps. But, the difficulty with Paragraph 9(A) is that it usurps the City's essential managerial responsibilities to determine the types and levels of medical emergency protection it deems necessary to provide and to select and direct its financially-strapped resources and personnel. Again, the issue involves far more than simply working conditions. As the City indicates, under Paragraph 9(A), it must now secure ALS-equipped engines that it does not have; it must alter the way that it assigns firefighters and paramedics who will be providing medical services; and it must abandon its plan to meet an increased need for BLS services among its residents. Notably, even the Union itself touts the ALS Engine Pilot Program as a more efficient way of delivering services and managing a work force, demonstrating its implicit recognition that the program implicates managerial prerogatives. We find that Paragraph 9(A), while certainly aimed at working conditions, unduly infringes upon the City's managerial responsibilities to make workforce assignments and decide upon the levels of emergency medical services that the City can afford to provide and the manner by which such services will be delivered. Accordingly, we conclude that Paragraph 9(A) falls outside of the scope of collective bargaining in Act 111, and thus, we hold that the arbitration board acted in excess of its powers in the Award in question.
C
Paragraph 9(B) of the Award mandates that the Fire Department assign extra points to, and hire as a firefighter, any paramedic whose name has been reached on the eligible list. The City advances several reasons to affirm the invalidation of this provision. Among the reason asserted is the contention that the arbitration board exceeded its authority in awarding Paragraph 9(B) because the provision is unrelated to any topic that was certified by the parties as being in dispute before the board. In this regard, the Union counters that, although the specific requirements memorialized in Paragraph 9(B) were not placed in dispute as such, a board's ability to act within the scope of the issues actually certified is "expansive," and Paragraph 9(B) is sufficiently related to the proposals submitted by the Union aimed at improving the safety and working conditions of its paramedics because these proposals raised issues relating to compensation, health and safety, paramedic scheduling, and paramedic staffing. The Union indicates, moreover, that throughout the hearings it addressed its concerns regarding paramedic burnout. Because all past attempts by Act 111 arbitrators to address this difficulty had been unsuccessful, according to the Union, it was reasonable for the present panel to consider the required hiring as a firefighter of any paramedic certified from the eligible list to be related to the issues actually submitted.
Although the Union is the appellant, its opening brief includes neither a developed argument on Paragraph 9(B), nor any citation to authority. See Brief for Appellant at 46. Rather, the Union elected to answer the City's arguments in its reply brief. See Reply Brief for Appellants at 18-22. Hence, the City's argument is summarized first.
We agree with the City that Paragraph 9(B) is insufficiently related to any issue that was placed in dispute. Here, the record shows that other than the ALS Engine Pilot Program, the Union submitted four specific proposals pertaining to paramedic schedules and compensation. These included provisions to: (1) provide paramedics with a one-hour lunch break during each work shift; (2) enhance compensation for paramedics designated to serve as preceptors for paramedic trainees; (3) make the percentage wage differential between paramedic lieutenants and paramedics fourteen percent (so as to align it with the existing wage differential between fire lieutenants and firefighters); and (4) develop and use a paramedic performance evaluation form, rather than using the firefighter evaluation form. None of these proposals is related to the concept of facilitating paramedics to leave their jobs entirely by giving them hiring preference when they apply for a different job. The Union's argument reduces to the position that Paragraph 9(B) is subsumed within these proposals because it, like the proposals, is addressed to the topic of paramedic stress and burnout. This simply is not a sufficiently direct connection to render the paramedic transfer provision an issue in dispute before the board. Therefore, we hold that the arbitration board exceeded its powers in awarding Paragraph 9(B).
V
For the reasons set forth above, the Order of the Commonwealth Court, reversing the order of the court of common pleas in part and vacating Paragraphs 9(A), 9(B), and 12 of the Award, is affirmed, but on different grounds as to Paragraph 9(B). Jurisdiction is relinquished.
Former Justice GREENSPAN did not participate in the decision of this case.
Justices EAKIN and TODD join the opinion.
Justice SAYLOR files a concurring and dissenting opinion in which Justice BAER joins.
Justice McCAFFERY files a concurring and dissenting opinion.
Appendix A
Paragraph 12 of the Award requires that the following provision be added to the collective bargaining agreement:
Company Reductions or Eliminations. It is understood that the determination of the overall size of the Fire Department is ultimately a managerial decision. However the City remains obligated to negotiate the effects of the decision. Such decisions when made are usually irrevocable. Accordingly the parties must reach a resolution on the effects of the reduction or elimination of any engine or ladder company prior to its implementation. The following procedure is intended to reach such a resolution as quickly as possible:
1.
Discussion. In the event that the City determines it is necessary to reduce or eliminate any fire company, it will advise the Union of its intention and promptly meet with the Union to discuss its plan.
2.
Impact Study. In the event the City and the Union are unable to reach agreement on the effects of the City's plan, and the Union asserts that the City's plan increases the risk to Firefighter safety, then the City must commission and complete an impact study, conducted by an independent third party mutually agreed to by the parties, which study shall include but not [be] limited to:
a. Detailed projections of the savings to be achieved by the proposed reduction or closure; and
An analysis of the impact of the proposed action on the delivery of emergency services, the safety of bargaining unit members, and compliance with relevant safety standards including but not limited to NFPA 1710. Once the study has been completed, a copy shall be provided to the Union.
3.
Negotiations. In the event that the Union, within thirty (30) days, registers opposition to the findings contained in the Impact Study or with the proposed reduction or elimination of companies as they relate to Firefighter safety, the City shall negotiate in good faith with the Union to resolve any disputes over Firefighter safety arising from the proposed reductions or closures.
4.
Dispute Resolution. In the event the City and the Union are unable to resolve their issues related to the effects of proposed reduction or closure, the Union may submit any unresolved issues to the grievance procedure pursuant to the Safe Workplace provision of this Award. In addition to any other arguments raised by the parties, the arbitrator will consider the impact of the proposed reductions and/or closures on the City's financial ability to provide emergency services to the public, the City's compliance with relevant safety standards, including but not limited to NFPA 1710, and the impact o[f] the reductions and/or closures on the health and safety of firefighters. The arbitrator may not impose his or her judgment with respect to the City's decision to reduce or eliminate companies but may order any necessary modifications to the plan which would maintain compliance with relevant safety standards.
5. Nothing herein shall diminish the applicability or enforceability of other staffing provisions of the collective bargaining agreement.
Award at 21-23; see RR. 57-59.
Paragraph 9 of the Award states, in relevant part:
9.
Paramedics
A. Effective January 1, 2007, the Fire Department will implement a two-year ALS Engine Pilot Program that will run through June 30, 2008. Cross-trained Firefighter/Fire Service Paramedics assigned to work on ALS Engine companies as part of the Pilot Program will be selected from the pool of Firefighters who have previously worked as Fire Service Paramedics within the Philadelphia Fire Department. The Fire Department may also cross-train Fire Service Paramedics who are on the Firefighter eligible list and utilize those employees on an ALS Engine. Such employees will rotate from their regularly-assigned company to work as part of an ALS-Engine company every fourth tour-of-duty.
B.
Paramedic Transfer. The current transfer process from the class of Fire Service Paramedic to class of Fire-fighter will be revised as follows with regard to any appointment made on or after July 1, 2005:
1. Any Fire Service Paramedic with five (5) or more years of service who takes and passes the open, competitive examination for the class of Firefighter pursuant to Civil Service Regulations, shall receive an additional ten (10) points added to his or her examination score which will be in addition to any veteran or other points applicable under the Civil Service Rules and Regulations.
The City may not refuse to appoint any Fire Service Paramedic whose name has been reached on the Firefighter eligible list.
Award at 19-20; see RR. 55-56 (emphasis added).
The final sentence above is emphasized to indicate the change from the prior award covering the 2002-2005 time period. The final sentence of the corresponding paragraph in that award provided as follows:
Any Fire Service Paramedic who is appointed to the class of Firefighter under this provision shall be appointed as an
entry-level Firefighter, provided that their pensions continue to accrue without a break in service.
In re Arbitration between Local 22, IAFF, AFL-CIO, and City of Phila., American Arbitration Association Case No. 14-L-360-00317-02-W, at 11-12 (March 20, 2003);
see RR. 697-98.