Collective Bargaining Aftermath

But the flight attendants, who had had the same wage and benefits cuts imposed upon them as the other union groups, were left with no claim and no ability to immediately exercise their best leverage against the company ' i.e., a strike. Further, the bankruptcy court made it clear that the only way for the flight attendants to obtain a claim and to cash into the very active Northwest Airlines claims trading market was to obtain Northwest Airlines' agreement to a claim. Not surprisingly, shortly after this ruling, the flight attendants union reached an agreement with Northwest Airlines that provided the flight attendants with a claim. See In re Northwest Airlines Corp., Case No. 05-17930, Doc. No. 6767 (May 14, 2007).

If the Second Circuit's ruling is applied by lower courts in the same manner as the Northwest Airlines bankruptcy court applied it, debtors will enjoy even greater leverage in Section 1113 negotiations because the debtor will control whether a claim should be allowed and what its amount will be. The negotiating process set forth in Section 1113 already favors the debtor because it allows the debtor to force a hearing within 14 days after the filing of a motion for relief and sooner if an emergency can be shown. 11 U.S.C. ' 1113(d)(1), (e). Now, if union leadership believes that allowance of a claim may allow employees to make up their losses, then they will have no choice but to agree to the debtor's demands for immediate sacrifices from the union in order to ensure that the union obtains a claim. Simply put, the decision to contest a Section 1113 motion now may carry an additional penalty beyond the risk of losing the motion. A union that fights and loses also may lose the possibility of any claim against the estate.

The Second Circuit's Ruling

Is such a result justified? Even the Second Circuit panel that issued the ruling did not agree on the rationale used to reach the ultimate holding. The narrow issue before the court was whether, notwithstanding the Norris-LaGuardia Act's general prohibition on the jurisdictional ability of federal courts to enjoin a strike, 29 U.S.C. ' 101, an injunction was appropriate under the narrow exception to the NLGA that allows federal courts jurisdiction to issue injunctions to enforce the mandates of the RLA. See Burlington N. R.R. v. Bhd. of Maint. of Way Employees, 481 U.S. 429, 445 (1987).

The RLA is premised on the notion that management and labor must engage in what has been described as 'almost interminable' negotiation process, Detroit & Toledo Shore Line R.R. Co. v. United Transp. Union, 396 U.S. 142, 149 (1969), during which they are obligated to 'maintain the status quo.' Consol. Rail Corp. v. Ry. Labor Executives' Ass'n, 491 U.S. 299, 302 (1989); 45 U.S.C. ” 156, 157, 160. CBAs governed by the RLA do not expire even if the term of the CBA has concluded; at that point, the CBA becomes 'amendable' and the parties to the CBA are bound to 'exert every reasonable effort to make [an agreement] ' and to settle all disputes ' ' 45 U.S.C. ' 152 (First). While these negotiations are ongoing, the company may not alter the terms of the CBA and instead all parties to the CBA are obligated to maintain the status quo. Detroit & Toledo, 396 U.S. at 149. But, if either party 'unilaterally' changes the status quo, the other party is free to do so as well, including exercising the right to strike. Id. at 155; see also Bhd. of R.R. Trainmen v. Jacksonville Terminal Co., 394 U.S. 369, 381, 392-93 (1969).

Thus, the majority viewed the question before the Second Circuit as how rejection of a CBA under Section 1113 impacts the duty to maintain the status quo. The bankruptcy court had concluded that by imposing new terms of employment following the rejection of the CBA, the debtor altered the status quo and the union was free to respond with a strike. In re Northwest Airlines Corp., 346 B.R. 333, 343-44 (Bankr. S.D.N.Y. 2006). The bankruptcy court found it important that the union did not threaten a strike until after the terms of employment were altered, concluding that Northwest Airlines could avoid a strike by continuing with the old terms of employment until the parties could reach a new agreement modifying the rejected CBA. Id.

The Second Circuit disagreed. The majority focused on what happened to the CBA when it was rejected, concluding that rejection under Section 1113 'abrogates' a CBA without breaching it, and after rejection the CBA 'ceased to exist.' Northwest Airlines, 483 F.3d at 174. Under the majority's rationale, Northwest Airlines and the flight attendant's union were both freed of their duties under the RLA to maintain the status quo because no status quo existed following rejection of the CBA. Id. at 170-75. Instead, the majority concluded that because no CBA existed, the union and Northwest Airlines were subject to a separate and distinct obligation to employ 'every reasonable effort' under Section 2 (First) of the RLA to make a brand new agreement. The majority determined that the union had not, at least at that point, fulfilled this duty, and therefore concluded that the district court, which had reversed the bankruptcy court's ruling, was correct to enjoin the union from striking. Id. at 175-77.

Chief Judge Jacobs agreed with majority that the district court's injunction should be affirmed, but disagreed with the rationale used to affirm. He found it unnecessary to reach the question of 'whether the CBA was abrogated, breached, modified, partially assumed and partially rejected, or rejected altogether,' stating that answering these questions 'misse[d] the point.' Id. at 183. Instead, Judge Jacobs concluded that the status quo obligations continued to remain in effect, but that Northwest Airlines had not unilaterally breached its obligation to maintain the status quo because it acted pursuant to a court order authorizing rejection of the CBA. Id. Thus, the union was not free to strike. Id.

Judge Jacobs' rationale would not disturb black letter law holding that rejection of a contract constitues a breach of that contract. See, e.g., NLRB v. Bildisco & Bildisco, 465 U.S. 513, 530 (1984); In re Continental Airlines, Inc., 981 F.2d 1450, 1459 (5th Cir. 1993). Similarly, it would not affect long-standing precedent acknowledging the rights of employees to file a claim upon rejection of CBA, at least for damages for so long as debtor would be able to remain in business. See, e.g., Bildisco, 465 U.S. at 530 n.12; In re Continental Airlines Corp., 901 F.2d 1259, 1263-66 (5th Cir. 1990). But his rationale did not command a majority, creating the possibility that future courts will conclude, as the Second Circuit did, that rejection of a CBA pursuant to Section 1113 does not breach the CBA.

Can a Union Still Enforce the Right to a Claim?

Does the Second Circuit's decision mean that employees will never be able to assert a claim absent the agreement of the company? There are two possible arguments available to labor to obtain a claim following an adverse ruling on a Section 1113 motion.

The first is to argue that the debtor should be bound, following the rejection of the CBA, to impose the last and best offer ' including any offer to allow a claim ' it made to the union before the bankruptcy court ruled on the Section 1113 motion. Because a debtor may only reject a CBA under Section 1113 if it can show that the union rejected the debtor's last and best offer without good cause, it makes sense that the debtor ought to be bound, following the entry of a rejection order, to the terms of the offer it argued the union refused to accept without good cause. 11 U.S.C. ' 1113(c)(2). Any other result would mean that, after receiving authorization to reject a CBA, the debtor might impose employment terms upon its employees that the union may have rejected with good cause. In fact, this is exactly what the bankruptcy court held in Northwest Airlines, when it expressly directed the debtor to impose the terms and conditions of employment from the debtor's last and best offer that the union had rejected without good cause. In re Northwest Airlines Corp., 346 B.R. 307, 331-32 (Bankr. S.D.N.Y. 2006).

Although the Northwest Airlines court did not require the debtor to also agree to the allowance of a claim for its flight attendants, there is no principled reason why the allowance of a claim could not have been included in the terms of post-rejection employment directed by the court. Thus, one way for labor to increase the likelihood that it will be allowed a claim is to interject the allowance of a claim into the negotiating process so that if an agreement cannot be reached, the last and best offer considered by the court will include the allowance of a claim.

Second, insisting upon the allowance of a claim during negotiations also is consistent with the requirement that the debtor meet with union leadership 'to confer in good faith in attempting to reach mutually satisfactory modifications of [the CBA].' 11 U.S.C. ' 1113(b)(1)(B). The requirement that the debtor negotiate in good faith has been interpreted to mean that the debtor at least consider proposals which would allow employees to earn back the wages and benefits that they are being asked to forgo. See Association of Flight Attendants – CWA, AFL-CIO v. Mesaba Aviation, Inc., 350 B.R. 435, 459 (D. Minn. 2006). One way to earn back wages and benefits is through the allowance of a claim ' particularly in cases where the claims will be paid with the reorganized debtor's stock. As the Northwest Airlines case illustrates, those employees that held claims earned back a substantial amount of the wages and benefits they had lost when the value of their claims escalated during the case. Labor, therefore, also should argue that allowance of a claim is necessary for any proposal to be considered to be made in good faith.

Conclusion

The Second Circuit's Northwest Airlines decision may have a significant impact on how labor negotiations proceed under Section 1113. Management will surely argue that this decision means that a union may only hold a claim if the debtor agrees to the allowance of a claim and that refusing to settle will eliminate the possibility of a claim. Labor may be able to undermine that position by insisting that negotiations include the allowance of a claim and arguing that if they do not, the debtors failed to negotiate in good faith.

Catherine L. Steege is a partner in Jenner & Block's Chicago office and a member of the firm's Bankruptcy, Workout and Corporate Reorganization Practice. She concentrates in bankruptcy and creditors' rights and frequently represents debtors, creditors, creditors' committees, trustees, and other parties before the bankruptcy courts. David H. Hixson is an associate at the firm. The authors can be reached at [email protected] and [email protected] respectively.

At first blush, the recent decision, In re Northwest Airlines Corp., 483 F.3d 160 (2d Cir. 2007), in which the United States Court of Appeals for the Second Circuit held that a federal court may enjoin a strike by employees covered under the Railway Labor Act (the 'RLA') following rejection of their collective bargaining agreement ('CBA'), would appear to be of limited applicability outside of airline bankruptcies. But the Second Circuit's underlying rationale ' that rejection of a CBA under Section 1113 'abrogates' the contract, 'effectively shielding [the debtor] from a charge of breach' ' has broader application to the rights of all employees, even those working in industries not covered by the RLA. Id. at 174. Courts adopting this rationale will likely conclude that rejecting a CBA under Section 1113 does not give rise to employee claims for rejection damages against the debtor.

Indeed, within 15 days of the Second Circuit's ruling, the bankruptcy court presiding over Northwest Airlines' Chapter 11 case concluded that it had no choice but to disallow the proof of claim filed by the flight attendants' union on behalf of approximately 7500 flight attendants, holding that if the CBA had not been breached when it was rejected, then the flight attendants could not have any claims. In re Northwest Airlines Corp., 366 B.R. 270, 274-75 (Bankr. S.D.N.Y. 2007). The bankruptcy court left open the possibility that if the flight attendants union ratified a new agreement with the debtor that provided for a claim, the court might reconsider and allow a claim for the flight attendants. Id. at 277.

The bankruptcy court's decision had a severe and immediate impact on the flight attendants, the only employee group that had not reached an agreement with Northwest Airlines. At the time this decision was rendered, unsecured claims against Northwest Airlines were trading for between 80% and 95%, with trading fueled by speculation about a possible Northwest Airlines merger with another airline. See Northwest Airlines Form 8-K dated Feb. 6, 2007 at pg. 4. The other Northwest Airlines unions had already cashed in on substantial portions of their claims and made lump sum payments to their members ' in some cases almost as high as one year's wages ' to compensate the employees for lost wages and benefits.

But the flight attendants, who had had the same wage and benefits cuts imposed upon them as the other union groups, were left with no claim and no ability to immediately exercise their best leverage against the company ' i.e., a strike. Further, the bankruptcy court made it clear that the only way for the flight attendants to obtain a claim and to cash into the very active Northwest Airlines claims trading market was to obtain Northwest Airlines' agreement to a claim. Not surprisingly, shortly after this ruling, the flight attendants union reached an agreement with Northwest Airlines that provided the flight attendants with a claim. See In re Northwest Airlines Corp., Case No. 05-17930, Doc. No. 6767 (May 14, 2007).

If the Second Circuit's ruling is applied by lower courts in the same manner as the Northwest Airlines bankruptcy court applied it, debtors will enjoy even greater leverage in Section 1113 negotiations because the debtor will control whether a claim should be allowed and what its amount will be. The negotiating process set forth in Section 1113 already favors the debtor because it allows the debtor to force a hearing within 14 days after the filing of a motion for relief and sooner if an emergency can be shown. 11 U.S.C. ' 1113(d)(1), (e). Now, if union leadership believes that allowance of a claim may allow employees to make up their losses, then they will have no choice but to agree to the debtor's demands for immediate sacrifices from the union in order to ensure that the union obtains a claim. Simply put, the decision to contest a Section 1113 motion now may carry an additional penalty beyond the risk of losing the motion. A union that fights and loses also may lose the possibility of any claim against the estate.

The Second Circuit's Ruling

Is such a result justified? Even the Second Circuit panel that issued the ruling did not agree on the rationale used to reach the ultimate holding. The narrow issue before the court was whether, notwithstanding the Norris-LaGuardia Act's general prohibition on the jurisdictional ability of federal courts to enjoin a strike, 29 U.S.C. ' 101, an injunction was appropriate under the narrow exception to the NLGA that allows federal courts jurisdiction to issue injunctions to enforce the mandates of the RLA. See Burlington N. R.R. v. Bhd. of Maint. of Way Employees , 481 U.S. 429, 445 (1987).

The RLA is premised on the notion that management and labor must engage in what has been described as 'almost interminable' negotiation process, Detroit & Toledo Shore Line R.R. Co. v. United Transp. Union , 396 U.S. 142, 149 (1969), during which they are obligated to 'maintain the status quo.' Consol. Rail Corp. v. Ry. Labor Executives' Ass'n , 491 U.S. 299, 302 (1989); 45 U.S.C. ” 156, 157, 160. CBAs governed by the RLA do not expire even if the term of the CBA has concluded; at that point, the CBA becomes 'amendable' and the parties to the CBA are bound to 'exert every reasonable effort to make [an agreement] ' and to settle all disputes ' ' 45 U.S.C. ' 152 (First). While these negotiations are ongoing, the company may not alter the terms of the CBA and instead all parties to the CBA are obligated to maintain the status quo. Detroit & Toledo, 396 U.S. at 149. But, if either party 'unilaterally' changes the status quo, the other party is free to do so as well, including exercising the right to strike. Id. at 155; see also Bhd. of R.R. Trainmen v. Jacksonville Terminal Co. , 394 U.S. 369, 381, 392-93 (1969).

Thus, the majority viewed the question before the Second Circuit as how rejection of a CBA under Section 1113 impacts the duty to maintain the status quo. The bankruptcy court had concluded that by imposing new terms of employment following the rejection of the CBA, the debtor altered the status quo and the union was free to respond with a strike. In re Northwest Airlines Corp., 346 B.R. 333, 343-44 (Bankr. S.D.N.Y. 2006). The bankruptcy court found it important that the union did not threaten a strike until after the terms of employment were altered, concluding that Northwest Airlines could avoid a strike by continuing with the old terms of employment until the parties could reach a new agreement modifying the rejected CBA. Id.

The Second Circuit disagreed. The majority focused on what happened to the CBA when it was rejected, concluding that rejection under Section 1113 'abrogates' a CBA without breaching it, and after rejection the CBA 'ceased to exist.' Northwest Airlines, 483 F.3d at 174. Under the majority's rationale, Northwest Airlines and the flight attendant's union were both freed of their duties under the RLA to maintain the status quo because no status quo existed following rejection of the CBA. Id. at 170-75. Instead, the majority concluded that because no CBA existed, the union and Northwest Airlines were subject to a separate and distinct obligation to employ 'every reasonable effort' under Section 2 (First) of the RLA to make a brand new agreement. The majority determined that the union had not, at least at that point, fulfilled this duty, and therefore concluded that the district court, which had reversed the bankruptcy court's ruling, was correct to enjoin the union from striking. Id. at 175-77.

Chief Judge Jacobs agreed with majority that the district court's injunction should be affirmed, but disagreed with the rationale used to affirm. He found it unnecessary to reach the question of 'whether the CBA was abrogated, breached, modified, partially assumed and partially rejected, or rejected altogether,' stating that answering these questions 'misse[d] the point.' Id. at 183. Instead, Judge Jacobs concluded that the status quo obligations continued to remain in effect, but that Northwest Airlines had not unilaterally breached its obligation to maintain the status quo because it acted pursuant to a court order authorizing rejection of the CBA. Id. Thus, the union was not free to strike. Id.

Judge Jacobs' rationale would not disturb black letter law holding that rejection of a contract constitues a breach of that contract. See, e.g. , NLRB v. Bildisco & Bildisco , 465 U.S. 513, 530 (1984); In re Continental Airlines, Inc., 981 F.2d 1450, 1459 (5th Cir. 1993). Similarly, it would not affect long-standing precedent acknowledging the rights of employees to file a claim upon rejection of CBA, at least for damages for so long as debtor would be able to remain in business. See, e.g., Bildisco, 465 U.S. at 530 n.12; In re Continental Airlines Corp., 901 F.2d 1259, 1263-66 (5th Cir. 1990). But his rationale did not command a majority, creating the possibility that future courts will conclude, as the Second Circuit did, that rejection of a CBA pursuant to Section 1113 does not breach the CBA.

Can a Union Still Enforce the Right to a Claim?

Does the Second Circuit's decision mean that employees will never be able to assert a claim absent the agreement of the company? There are two possible arguments available to labor to obtain a claim following an adverse ruling on a Section 1113 motion.

The first is to argue that the debtor should be bound, following the rejection of the CBA, to impose the last and best offer ' including any offer to allow a claim ' it made to the union before the bankruptcy court ruled on the Section 1113 motion. Because a debtor may only reject a CBA under Section 1113 if it can show that the union rejected the debtor's last and best offer without good cause, it makes sense that the debtor ought to be bound, following the entry of a rejection order, to the terms of the offer it argued the union refused to accept without good cause. 11 U.S.C. ' 1113(c)(2). Any other result would mean that, after receiving authorization to reject a CBA, the debtor might impose employment terms upon its employees that the union may have rejected with good cause. In fact, this is exactly what the bankruptcy court held in Northwest Airlines, when it expressly directed the debtor to impose the terms and conditions of employment from the debtor's last and best offer that the union had rejected without good cause. In re Northwest Airlines Corp., 346 B.R. 307, 331-32 (Bankr. S.D.N.Y. 2006).

Although the Northwest Airlines court did not require the debtor to also agree to the allowance of a claim for its flight attendants, there is no principled reason why the allowance of a claim could not have been included in the terms of post-rejection employment directed by the court. Thus, one way for labor to increase the likelihood that it will be allowed a claim is to interject the allowance of a claim into the negotiating process so that if an agreement cannot be reached, the last and best offer considered by the court will include the allowance of a claim.

Second, insisting upon the allowance of a claim during negotiations also is consistent with the requirement that the debtor meet with union leadership 'to confer in good faith in attempting to reach mutually satisfactory modifications of [the CBA].' 11 U.S.C. ' 1113(b)(1)(B). The requirement that the debtor negotiate in good faith has been interpreted to mean that the debtor at least consider proposals which would allow employees to earn back the wages and benefits that they are being asked to forgo. See Association of Flight Attendants – CWA, AFL-CIO v. Mesaba Aviation, Inc. , 350 B.R. 435, 459 (D. Minn. 2006). One way to earn back wages and benefits is through the allowance of a claim ' particularly in cases where the claims will be paid with the reorganized debtor's stock. As the Northwest Airlines case illustrates, those employees that held claims earned back a substantial amount of the wages and benefits they had lost when the value of their claims escalated during the case. Labor, therefore, also should argue that allowance of a claim is necessary for any proposal to be considered to be made in good faith.

Conclusion

The Second Circuit's Northwest Airlines decision may have a significant impact on how labor negotiations proceed under Section 1113. Management will surely argue that this decision means that a union may only hold a claim if the debtor agrees to the allowance of a claim and that refusing to settle will eliminate the possibility of a claim. Labor may be able to undermine that position by insisting that negotiations include the allowance of a claim and arguing that if they do not, the debtors failed to negotiate in good faith.

Catherine L. Steege is a partner in Jenner & Block's Chicago office and a member of the firm's Bankruptcy, Workout and Corporate Reorganization Practice. She concentrates in bankruptcy and creditors' rights and frequently represents debtors, creditors, creditors' committees, trustees, and other parties before the bankruptcy courts. David H. Hixson is an associate at the firm. The authors can be reached at [email protected] and [email protected] respectively.