Conflict between Bankruptcy Code, NLRA resolved: Ch. 11 debtor can reject terms of expired CBA
Tuesday, January 19, 2016

Conflict between Bankruptcy Code, NLRA resolved: Ch. 11 debtor can reject terms of expired CBA

By Ronald Miller, J.D. In a case of first impression, the Third Circuit ruled that a Chapter 11 debtor-employer can reject the continuing terms and conditions of a CBA under 11 U.S.C. §1113 of the Bankruptcy Code after the CBA has expired. In affirming the order of the bankruptcy court, the appeals court concluded that Section 1113 does not distinguish between the terms of an unexpired CBA and the terms and conditions that continue to govern after the CBA expires. In view of Chapter 11’s overarching purpose to preserve jobs through a rejection of a CBA, the court concluded that the bankruptcy court did not err in granting the debtor’s motion (In re: Trump Entertainment Resorts, January 15, 2016, Roth, J.). The undisputed facts were that the debtors owned and operated a gambling casino in Atlantic City, New Jersey. It employed around 3,000 employees, nearly 1,500 of whom were unionized. The most recent CBA between the union and the debtors was negotiated in 2011 for a three-year term ending on September 14, 2014. In early 2014, due to the casino’s deteriorating financial health, the debtors attempted to negotiate a new agreement. However, not until August 20, did the union meet with the debtors to discuss the terms of a new agreement. Although the debtors emphasized their critical financial situation, the union was not receptive to negotiations. No agreement was reached. Bargaining sessions. On September 9, 2014, the debtors filed for Chapter 11 bankruptcy protection. On September 11, they asked the union to extend the term of the CBA, but the union refused, unless the debtors agreed to terminate the extension upon the filing of a Section 1113 motion. The existing CBA expired with no new agreement in place. Thereafter, the parties did meet in bargaining sessions. They submitted counter-proposals, but ultimately, the debtors filed a motion pursuant to Section 1113 seeking to reject the CBA and implement the terms of its last proposal to the union. Following evidentiary hearings, the bankruptcy court granted the debtors’ motion to reject the expired CBA and authorized the debtors to implement their last proposal. On appeal, the union challenged whether a bankruptcy court may grant a motion to reject an expired CBA under Section 1113. The question before the Third Circuit was whether Section 1113 authorizes a Chapter 11 debtor to reject the continuing terms and conditions of a CBA after its expiration. At issue were two statutory schemes: Section 1113 of the Bankruptcy Code, which allows a Chapter 11 debtor to “reject” its CBAs under certain circumstances, and the NLRA, which prohibits an employer from unilaterally changing the terms and conditions of a CBA even after its expiration. Judicial evaluation. Section 1113 establishes an expedited negotiation process for modifying a CBA and allows for judicial evaluation of a petition to reject a CBA if negotiations are unsuccessful. While Section 1113 prescribes a process for rejection of a “collective bargaining agreement,” it does not mention the continuing obligations imposed by the NLRA. For its part, the union argued that the plain meaning of a “collective bargaining agreement” is a “contract between an employer and a labor union.” Therefore, because the CBA had expired, there was no “contract” to be rejected under Section 1113. Examining the situation in which Section 1113 was enacted, the court noted that its passage was a product of organized labor’s push to overturn the Supreme Court’s decision in National Labor Relations Board v. Bildisco & Bildisco. In response, Congress swiftly passed Section 1113 to overturn the second part of Bildisco’s holding and prohibit unilateral changes in debtors’ CBAs without bankruptcy court approval. As enacted, Section 1113 balances the concerns of economically-stressed debtors in avoiding liquidation and the unions’ goals of preserving labor agreements and maintaining influence in the reorganization process. Section 1113 requirements. Section 1113 prescribes strict procedural and substantive requirements before a CBA can be rejected. Specifically, before the bankruptcy court will consider an application to reject, the debtor must make a proposal, provide relevant information, meet at reasonable times, and confer in good faith. The debtor’s modifications must be “necessary” to permit reorganization and must treat all creditors, the debtor, and all affected parties “fairly and equitably.” The balance of equities must “clearly favor” rejection of the CBA. Rejection of CBA necessary for reorganization. The Third Circuit observed that this case exemplifies the process that Congress intended. Rejection of the debtors’ continuing labor obligations, as defined by the expired CBA, was necessary to permit the debtors’ reorganization. The debtors’ financial situation was “desperate,” and it was unable to obtain debtor in possession financing. Moreover, its cash would run out in two months. To avoid liquidation, the debtors moved to reject the CBA. In this instance, the appeals court found the intent of Congress to be clear, and that intent was to incorporate expired CBAs in the language of Section 1113. Under Section 1113, approval will be granted only if the debtor’s modifications are necessary to permit reorganization. When the employer’s statutory obligations to maintain the status quo under the terms of an expired CBA will undermine the debtor’s ability to reorganize and remain in business, it is the expertise of the bankruptcy court which is needed rather than that of the NLRB. For that reason, whether the CBA is in effect or is expired, it is the bankruptcy court that should make the review and decide on the necessity of the modification. Therefore, the Third Circuit concluded that Section 1113 applies to a CBA after it has expired.

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