Dispelling 10 Myths About Bankruptcy

Suppliers and vendors are often willing to provide credit to a company in a Chapter 11 because credit extended by a supplier or vendor to a debtor for post-petition goods or services entitles the supplier or vendor to an “administrative expense” priority for repayment of that new credit, which is senior to general unsecured claims and is required to be paid in full as part of any Chapter 11 plan. Creditors that continue to supply necessary post-petition goods and services to debtors will typically receive payment on an ongoing basis and in a timely manner. In addition, suppliers with existing contracts cannot refuse to supply goods to the debtor as a result of the bankruptcy filing.

Myth 2. In Bankruptcy, a Secured Creditor Can Automatically Enforce Its
Security Interest and Can Successfully Demand the 'Keys to the Company'

The automatic stay imposed under Section 362 of the Bankruptcy Code precludes any enforcement action by a creditor against a debtor without first obtaining relief from the bankruptcy court. The stay applies to all creditors, including secured creditors.

Although in certain circumstances, a secured creditor may indeed obtain the “keys to the company” through the bankruptcy process, the Bankruptcy Code provides a debtor with tools to prevent a secured creditor from seizing control of the company. Two tools that can be employed by a debtor seeking to confirm a Chapter 11 plan without the consent of its secured creditors are “cramdown” and “reinstatement.”

Cramdown: If a secured creditor does not support a debtor's proposed Chapter 11 plan, the debtor may seek nevertheless to confirm the plan by “cramdown” in accordance with Section 1129(b)(2)(A) of the Bankruptcy Code. Under Section 1129, a dissenting class of secured claims can be forced to accept a Chapter 11 plan that is “fair and equitable” with respect to that class. In practical terms, this means that secured and unsecured debt must be paid before equity. Payment in full, however, does not require senior classes to be paid in full on exit.

Reinstatement: Although employed less frequently than cramdown, a debtor also may confirm its proposed plan of reorganization without the consent of its secured creditors through reinstatement under Section 1124(2) of the Bankruptcy Code. Section 1124(2) permits a debtor to reinstate secured claims and retain the benefit of pre-default/pre-petition contractual terms under certain circumstances, including the cure of all defaults existing under the contract. A debtor may pursue reinstatement where the secured creditor is particularly difficult, where cramdown is not possible or where the pre-petition contractual terms are favorable.

Myth 3. Equity Will Be Reinstated/Wiped Out in Chapter 11

The decision whether to confirm a plan of reorganization lies not with existing equity, but rather with the bankruptcy court which will consider whether the plan complies with the confirmation provisions of the Bankruptcy Code and whether it is in the best interests of the company and its creditors. Existing ownership often views bankruptcy as an opportunity to erase significant debt in exchange for a small infusion of capital that will enable the equity-holders to emerge from bankruptcy with their interests intact at the expense of other constituencies. That, however, is typically not the case and the process is almost never that simple. The plan process and its requirements are structured to achieve results that are fair and that provide creditors and other parties in interest with ample opportunity to be heard and object to unfavorable treatment.

If a class of creditors votes to reject a Chapter 11 plan, it can be confirmed only if the plan satisfies the “cramdown” requirements of Section 1129(b) of the Bankruptcy Code. In general terms, this requires that if a class of unsecured creditors rejects a debtor's reorganization plan and is not paid in full, junior creditors and equity holders may not receive or retain any property under the plan. The requirement that no junior creditor receive a distribution or retain property ahead of a more senior creditor is referred to as the “absolute priority rule.”

Courts have created a limited exception to the absolute priority rule where existing equity contributes “new value” to the debtor. Proposed new value contributions by existing equity are typically the subject of intense scrutiny by courts and creditors alike. The Supreme Court has held that the new value exception can be invoked only if the debtor relinquishes its exclusive right to propose a plan or if other parties are afforded the opportunity to bid on the equity interests. The Supreme Court's decision prevents existing ownership from using a plan of reorganization to guarantee their continued ownership of the debtor unless they: 1) have the consent of general unsecured creditors; 2) agree to pay unsecured creditors in full under a plan; or 3) expose the plan to some form of market testing.

While the debtor has, at least at the outset of a case, the exclusive right to propose a plan of reorganization, that plan will be subject to scrutiny by the court and all creditors and only will be confirmed if it complies with the mandates of the Bankruptcy Code and is determined by the court to be in the best interests of the company and its creditors.

Myth 4. A Company's D&O Insurance Policies Are Immediately Canceled

A D&O insurance policy under which the debtor is the insured generally does not get cancelled upon the debtor's bankruptcy filing, but unlike the myth, the bankruptcy process does not necessarily protect executive management from personal liability to the corporation, its creditors or its shareholders.

While most D&O policies include a “change in control” provision that triggers termination of the policy, the filing of a Chapter 11 proceeding alone typically does not amount to a “change in control” warranting termination. In addition, a provision in a D&O insurance policy that expressly provides for termination of the policy upon an insured's bankruptcy filing may be deemed an unenforceable ipso facto provision.

If the bankrupt company's D&O policy insures not only directors and officers but the company as well, the policy may be deemed an asset of the company's bankruptcy estate. As a result, the proceeds of that D&O policy may be subject to the automatic stay and the bankruptcy court may need to first approve any payment or advance by the insurer. In contrast, a “Side A” policy insures only the directors and officers and will not be deemed property of the estate subject to the automatic stay. As a result, the insurer can make payments and advances on the “Side A” policy, including payment of defense costs, without the need to seek bankruptcy court approval. It is, therefore, critical for directors and officers to ensure that the company has “Side A” coverage immediately available for D&O litigation in the event that the company enters bankruptcy.

The debtor's surviving D&O insurance policy may protect executive management from personal liability to the corporation, its creditors or its shareholders, but the bankruptcy of the company itself does not. The duties of care and loyalty that directors and officers owe to a corporation and its shareholders are not cleansed by a company's filing for bankruptcy. While the actions of directors and officers are typically protected in or outside of bankruptcy by the business judgment rule, the company's bankruptcy will not shield the directors and officers from potential personal liability for acts and omissions that fall outside the purview of that rule.

Myth 5. When a Company Files For Bankruptcy, Its Material Contracts Will Automatically Terminate

Many commercial contracts include a provision that makes the bankruptcy or insolvency of one contracting party an event of default that permits the other party to terminate the contract. These provisions are referred to as ipso facto clauses and are generally not enforceable against a bankruptcy debtor.

Two provisions of the Bankruptcy Code that lead to the unenforceability of ipso facto clauses are Sections 541(c) and 365(e)(1). Section 541(c) provides that a clause in an agreement that terminates a contract because of the “insolvency” or “financial condition” of the debtor, or due to the filing of a bankruptcy case, will be unenforceable in bankruptcy. Section 365(e)(1) expressly makes ipso facto provisions in executory contracts and leases unenforceable.

Section 365 of the Bankruptcy Code empowers a debtor to assume, assume and assign, or reject a debtor's executory contracts as a matter of the debtor's business judgment, all conditioned upon approval of the bankruptcy court after notice to the counterparty and parties in interest in the case. In order to assume the agreement, however, the debtor must, among other things, cure all defaults under the agreement and provide the counterparty with adequate assurance of future performance. It should be noted, however, that credit agreements are not executory contracts and, therefore, ipso facto acceleration clauses are not, per se, unenforceable.

While a lender's ability to proceed against a borrower may be stymied by the bankruptcy filing, the automatic stay does not extend to guarantors (to the extent they are not themselves debtors in bankruptcy) and the lender may, thus, demand payment and take legal action against any guarantors.

Myth 6. A Company Has No Obligation to Return Goods It Receives Shortly Before It Files For Bankruptcy

Not quite. In fact, not only do suppliers have a right to the return of goods supplied to a customer immediately before the customer's bankruptcy filing, but amendments to the Bankruptcy Code in 2005 expanded those rights. In accordance with Section 546(c) of the Bankruptcy Code, a vendor of goods may reclaim goods sold (and not paid for) during the 45 days before the bankruptcy filing date so long as the goods were sold in the ordinary course of business and received by the debtor while insolvent. In order to take advantage of their reclamation rights, vendors must make a written demand for reclamation within 45 days of the debtor receiving the goods, or 20 days post-petition if the 45-day period expires after the debtor files its bankruptcy petition.

In addition to the reclamation rights set forth in Section 546(c) and under applicable state law, Section 503(b)(9) of the Bankruptcy Code grants administrative priority to vendors for the “value of any goods [sold to a debtor in the ordinary course of business] received by the debtor within 20 days before commencement of the case.” This administrative expense claim, however, is not automatic and a vendor will only be afforded administrative expense priority on its claim after notice and a hearing.

Myth 7. A landlord Has Sole Discretion to Determine Whether Its Tenant Can Be Evicted Upon The Tenant's Filing for Bankruptcy

In bankruptcy, unexpired leases, like executory contracts, are subject to assumption or rejection by a debtor. A debtor has 120 days to decide whether to assume or reject non-residential leases of real property. That 120-day period may be extended one time for an additional 90 days, but no further extensions are permitted absent consent of the landlord. If the debtor fails to seek assumption of the lease within the statutory timeframe, then the lease is deemed rejected and the debtor is required to immediately surrender the property to the landlord.

After the bankruptcy filing, but before the debtor assumes or rejects the lease, the debtor is required to timely perform all obligations arising under the lease. If the debtor fails to comply with the terms of the lease, the landlord may seek: 1) to shorten the debtor's time for assumption or rejection of the lease; 2) the debtor's immediate surrender of the premises; or 3) relief from the automatic stay to pursue eviction proceedings against the debtor.

Where the space is critical to the debtor's ongoing operations or where the lease itself has value to the debtor, the debtor may seek to assume the lease. If the debtor desires to assume the lease, the debtor is required to cure or provide adequate assurance that it will promptly cure all existing defaults under the lease and also provide adequate assurance of future performance under the lease. If, however, the leased premises are located in a shopping center, the landlord has special protections with respect to assignability in order to preserve tenant mix and character of the center.

Myth 8. The Automatic Stay Prohibits a Creditor from Drawing Down on a Letter of Credit

Despite a debtor's bankruptcy filing and the imposition of the automatic stay, a creditor may typically draw down on a letter of credit issued by a bank at the request of the debtor and for the benefit of a creditor. The creditor's drawing down on the letter of credit does not violate the debtor's automatic stay due to the “independence principle” ' that the obligation of the issuing bank to pay the beneficiary upon presentment of the letter of credit is independent from the debtor's obligation to the creditor. As a result, courts have held that the letter of credit ' despite having been issued at the request of the debtor ' is not property of the debtor's bankruptcy estate and, therefore, the automatic stay does not prevent the beneficiary/creditor from presenting and drawing on the letter of credit after the debtor files for bankruptcy.

Myth 9. When a Company Enters Bankruptcy, Management Can Terminate All Existing Labor Agreements

The Bankruptcy Code places limits on management's ability to terminate labor agreements after a company enters Chapter 11. These limits are set forth in Section 1113 of the Bankruptcy Code and were imposed by Congress in 1984 in response to the United States Supreme Court's decision in N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984), which held that a collective bargaining agreement is an executory contract that can be rejected in bankruptcy under Section 365 without committing an unfair labor practice.

A debtor must satisfy certain specific legal requirements in order to gain court approval to modify or reject a labor agreement in bankruptcy. One of those mandates is that a debtor must first bargain with the union over any proposed changes before it can ask the court to approve rejection or modification of the agreement. In its application to the court for relief from the labor agreement, the debtor will need to establish that it made a proposal to the union that was rejected by the union without good cause. The debtor will further need to prove that its proposal is necessary to the debtor's reorganization, such that if the proposal is not approved the debtor may not be able to confirm a plan of reorganization and emerge from bankruptcy. The debtor has a duty to negotiate in good faith with the labor union and must provide the union with necessary relevant information. The labor union also has a reciprocal obligation to bargain in good faith with the debtor.

Myth 10. In a Bankruptcy Proceeding, a Company Cannot Avoid Any
Environmental Obligations

The bankruptcy process can offer benefits to both debtors with environmental liabilities as well as prospective purchasers of such companies because the Bankruptcy Code permits the settlement, discharge or resolution of many environmental liabilities created by environmental statutes and common law.

While a bankruptcy filing will generally not release a debtor from its obligations under any governmental cleanup orders and injunctions, a debtor will typically be able to discharge all monetary claims for past or future cleanup costs resulting from pre-bankruptcy contamination regardless of whether they are governmental or private claims.

To the extent a governmental agency incurs cleanup costs post-petition that benefit the bankruptcy estate, the government may be entitled to an administrative expense claim. Other claims, such as a contingent contribution claim of a co-liable non-governmental potentially responsible party (PRP) are typically disallowed in bankruptcy, whereas direct claims by PRPs under Section 107(a) of CERCLA are more likely to survive a debtor's claim objection. Courts are continuing to explore and interpret which environmental obligations survive bankruptcy and which may be discharged.

Mark Manski, Nancy Mitchell and Ari Newman are members of Greenberg Traurig's Business Reorganization & Financial Restructuring Practice. Manski, a shareholder, can be reached at [email protected]. Mitchell, an operating shareholder, can be reached at [email protected]. Newman, an associate, can be reached at [email protected].

Corporate bankruptcy is an area that is often feared and misunderstood by those who believe that bankruptcy will be the end of their business. In reality, most businesses operate with limited difficulty in Chapter 11. Moreover, a well-planned corporate bankruptcy can solve a number of problems for companies or their subsidiaries facing distress, and is preferable to an uncontrolled liquidity or other business crisis. Labor issues, landlord/tenant disputes and vendor relationship questions can all be satisfactorily addressed within the context of a Chapter 11 filing. Bankruptcy can also be used as an effective tool by companies seeking to acquire businesses. This article dispels various misconceptions about corporate bankruptcy that can impact a company's rights and interests during a bankruptcy proceeding.

Myth 1. A Company in Bankruptcy Can No Longer Obtain Credit and Will Be Placed On COD By All of Its Suppliers

In Chapter 11, a debtor is authorized to operate its business and is permitted to obtain unsecured credit and incur unsecured debt in the ordinary course of business without the need to obtain court approval. In turn, suppliers and other vendors often extend credit to corporate debtors and do not necessarily require debtors to pay cash on delivery.

Suppliers and vendors are often willing to provide credit to a company in a Chapter 11 because credit extended by a supplier or vendor to a debtor for post-petition goods or services entitles the supplier or vendor to an “administrative expense” priority for repayment of that new credit, which is senior to general unsecured claims and is required to be paid in full as part of any Chapter 11 plan. Creditors that continue to supply necessary post-petition goods and services to debtors will typically receive payment on an ongoing basis and in a timely manner. In addition, suppliers with existing contracts cannot refuse to supply goods to the debtor as a result of the bankruptcy filing.

Myth 2. In Bankruptcy, a Secured Creditor Can Automatically Enforce Its
Security Interest and Can Successfully Demand the 'Keys to the Company'

The automatic stay imposed under Section 362 of the Bankruptcy Code precludes any enforcement action by a creditor against a debtor without first obtaining relief from the bankruptcy court. The stay applies to all creditors, including secured creditors.

Although in certain circumstances, a secured creditor may indeed obtain the “keys to the company” through the bankruptcy process, the Bankruptcy Code provides a debtor with tools to prevent a secured creditor from seizing control of the company. Two tools that can be employed by a debtor seeking to confirm a Chapter 11 plan without the consent of its secured creditors are “cramdown” and “reinstatement.”

Cramdown: If a secured creditor does not support a debtor's proposed Chapter 11 plan, the debtor may seek nevertheless to confirm the plan by “cramdown” in accordance with Section 1129(b)(2)(A) of the Bankruptcy Code. Under Section 1129, a dissenting class of secured claims can be forced to accept a Chapter 11 plan that is “fair and equitable” with respect to that class. In practical terms, this means that secured and unsecured debt must be paid before equity. Payment in full, however, does not require senior classes to be paid in full on exit.

Reinstatement: Although employed less frequently than cramdown, a debtor also may confirm its proposed plan of reorganization without the consent of its secured creditors through reinstatement under Section 1124(2) of the Bankruptcy Code. Section 1124(2) permits a debtor to reinstate secured claims and retain the benefit of pre-default/pre-petition contractual terms under certain circumstances, including the cure of all defaults existing under the contract. A debtor may pursue reinstatement where the secured creditor is particularly difficult, where cramdown is not possible or where the pre-petition contractual terms are favorable.

Myth 3. Equity Will Be Reinstated/Wiped Out in Chapter 11

The decision whether to confirm a plan of reorganization lies not with existing equity, but rather with the bankruptcy court which will consider whether the plan complies with the confirmation provisions of the Bankruptcy Code and whether it is in the best interests of the company and its creditors. Existing ownership often views bankruptcy as an opportunity to erase significant debt in exchange for a small infusion of capital that will enable the equity-holders to emerge from bankruptcy with their interests intact at the expense of other constituencies. That, however, is typically not the case and the process is almost never that simple. The plan process and its requirements are structured to achieve results that are fair and that provide creditors and other parties in interest with ample opportunity to be heard and object to unfavorable treatment.

If a class of creditors votes to reject a Chapter 11 plan, it can be confirmed only if the plan satisfies the “cramdown” requirements of Section 1129(b) of the Bankruptcy Code. In general terms, this requires that if a class of unsecured creditors rejects a debtor's reorganization plan and is not paid in full, junior creditors and equity holders may not receive or retain any property under the plan. The requirement that no junior creditor receive a distribution or retain property ahead of a more senior creditor is referred to as the “absolute priority rule.”

Courts have created a limited exception to the absolute priority rule where existing equity contributes “new value” to the debtor. Proposed new value contributions by existing equity are typically the subject of intense scrutiny by courts and creditors alike. The Supreme Court has held that the new value exception can be invoked only if the debtor relinquishes its exclusive right to propose a plan or if other parties are afforded the opportunity to bid on the equity interests. The Supreme Court's decision prevents existing ownership from using a plan of reorganization to guarantee their continued ownership of the debtor unless they: 1) have the consent of general unsecured creditors; 2) agree to pay unsecured creditors in full under a plan; or 3) expose the plan to some form of market testing.

While the debtor has, at least at the outset of a case, the exclusive right to propose a plan of reorganization, that plan will be subject to scrutiny by the court and all creditors and only will be confirmed if it complies with the mandates of the Bankruptcy Code and is determined by the court to be in the best interests of the company and its creditors.

Myth 4. A Company's D&O Insurance Policies Are Immediately Canceled

A D&O insurance policy under which the debtor is the insured generally does not get cancelled upon the debtor's bankruptcy filing, but unlike the myth, the bankruptcy process does not necessarily protect executive management from personal liability to the corporation, its creditors or its shareholders.

While most D&O policies include a “change in control” provision that triggers termination of the policy, the filing of a Chapter 11 proceeding alone typically does not amount to a “change in control” warranting termination. In addition, a provision in a D&O insurance policy that expressly provides for termination of the policy upon an insured's bankruptcy filing may be deemed an unenforceable ipso facto provision.

If the bankrupt company's D&O policy insures not only directors and officers but the company as well, the policy may be deemed an asset of the company's bankruptcy estate. As a result, the proceeds of that D&O policy may be subject to the automatic stay and the bankruptcy court may need to first approve any payment or advance by the insurer. In contrast, a “Side A” policy insures only the directors and officers and will not be deemed property of the estate subject to the automatic stay. As a result, the insurer can make payments and advances on the “Side A” policy, including payment of defense costs, without the need to seek bankruptcy court approval. It is, therefore, critical for directors and officers to ensure that the company has “Side A” coverage immediately available for D&O litigation in the event that the company enters bankruptcy.

The debtor's surviving D&O insurance policy may protect executive management from personal liability to the corporation, its creditors or its shareholders, but the bankruptcy of the company itself does not. The duties of care and loyalty that directors and officers owe to a corporation and its shareholders are not cleansed by a company's filing for bankruptcy. While the actions of directors and officers are typically protected in or outside of bankruptcy by the business judgment rule, the company's bankruptcy will not shield the directors and officers from potential personal liability for acts and omissions that fall outside the purview of that rule.

Myth 5. When a Company Files For Bankruptcy, Its Material Contracts Will Automatically Terminate

Many commercial contracts include a provision that makes the bankruptcy or insolvency of one contracting party an event of default that permits the other party to terminate the contract. These provisions are referred to as ipso facto clauses and are generally not enforceable against a bankruptcy debtor.

Two provisions of the Bankruptcy Code that lead to the unenforceability of ipso facto clauses are Sections 541(c) and 365(e)(1). Section 541(c) provides that a clause in an agreement that terminates a contract because of the “insolvency” or “financial condition” of the debtor, or due to the filing of a bankruptcy case, will be unenforceable in bankruptcy. Section 365(e)(1) expressly makes ipso facto provisions in executory contracts and leases unenforceable.

Section 365 of the Bankruptcy Code empowers a debtor to assume, assume and assign, or reject a debtor's executory contracts as a matter of the debtor's business judgment, all conditioned upon approval of the bankruptcy court after notice to the counterparty and parties in interest in the case. In order to assume the agreement, however, the debtor must, among other things, cure all defaults under the agreement and provide the counterparty with adequate assurance of future performance. It should be noted, however, that credit agreements are not executory contracts and, therefore, ipso facto acceleration clauses are not, per se, unenforceable.

While a lender's ability to proceed against a borrower may be stymied by the bankruptcy filing, the automatic stay does not extend to guarantors (to the extent they are not themselves debtors in bankruptcy) and the lender may, thus, demand payment and take legal action against any guarantors.

Myth 6. A Company Has No Obligation to Return Goods It Receives Shortly Before It Files For Bankruptcy

Not quite. In fact, not only do suppliers have a right to the return of goods supplied to a customer immediately before the customer's bankruptcy filing, but amendments to the Bankruptcy Code in 2005 expanded those rights. In accordance with Section 546(c) of the Bankruptcy Code, a vendor of goods may reclaim goods sold (and not paid for) during the 45 days before the bankruptcy filing date so long as the goods were sold in the ordinary course of business and received by the debtor while insolvent. In order to take advantage of their reclamation rights, vendors must make a written demand for reclamation within 45 days of the debtor receiving the goods, or 20 days post-petition if the 45-day period expires after the debtor files its bankruptcy petition.

In addition to the reclamation rights set forth in Section 546(c) and under applicable state law, Section 503(b)(9) of the Bankruptcy Code grants administrative priority to vendors for the “value of any goods [sold to a debtor in the ordinary course of business] received by the debtor within 20 days before commencement of the case.” This administrative expense claim, however, is not automatic and a vendor will only be afforded administrative expense priority on its claim after notice and a hearing.

Myth 7. A landlord Has Sole Discretion to Determine Whether Its Tenant Can Be Evicted Upon The Tenant's Filing for Bankruptcy

In bankruptcy, unexpired leases, like executory contracts, are subject to assumption or rejection by a debtor. A debtor has 120 days to decide whether to assume or reject non-residential leases of real property. That 120-day period may be extended one time for an additional 90 days, but no further extensions are permitted absent consent of the landlord. If the debtor fails to seek assumption of the lease within the statutory timeframe, then the lease is deemed rejected and the debtor is required to immediately surrender the property to the landlord.

After the bankruptcy filing, but before the debtor assumes or rejects the lease, the debtor is required to timely perform all obligations arising under the lease. If the debtor fails to comply with the terms of the lease, the landlord may seek: 1) to shorten the debtor's time for assumption or rejection of the lease; 2) the debtor's immediate surrender of the premises; or 3) relief from the automatic stay to pursue eviction proceedings against the debtor.

Where the space is critical to the debtor's ongoing operations or where the lease itself has value to the debtor, the debtor may seek to assume the lease. If the debtor desires to assume the lease, the debtor is required to cure or provide adequate assurance that it will promptly cure all existing defaults under the lease and also provide adequate assurance of future performance under the lease. If, however, the leased premises are located in a shopping center, the landlord has special protections with respect to assignability in order to preserve tenant mix and character of the center.

Myth 8. The Automatic Stay Prohibits a Creditor from Drawing Down on a Letter of Credit

Despite a debtor's bankruptcy filing and the imposition of the automatic stay, a creditor may typically draw down on a letter of credit issued by a bank at the request of the debtor and for the benefit of a creditor. The creditor's drawing down on the letter of credit does not violate the debtor's automatic stay due to the “independence principle” ' that the obligation of the issuing bank to pay the beneficiary upon presentment of the letter of credit is independent from the debtor's obligation to the creditor. As a result, courts have held that the letter of credit ' despite having been issued at the request of the debtor ' is not property of the debtor's bankruptcy estate and, therefore, the automatic stay does not prevent the beneficiary/creditor from presenting and drawing on the letter of credit after the debtor files for bankruptcy.

Myth 9. When a Company Enters Bankruptcy, Management Can Terminate All Existing Labor Agreements

The Bankruptcy Code places limits on management's ability to terminate labor agreements after a company enters Chapter 11. These limits are set forth in Section 1113 of the Bankruptcy Code and were imposed by Congress in 1984 in response to the United States Supreme Court's decision in N.L.R.B. v. Bildisco & Bildisco , 465 U.S. 513 (1984), which held that a collective bargaining agreement is an executory contract that can be rejected in bankruptcy under Section 365 without committing an unfair labor practice.

A debtor must satisfy certain specific legal requirements in order to gain court approval to modify or reject a labor agreement in bankruptcy. One of those mandates is that a debtor must first bargain with the union over any proposed changes before it can ask the court to approve rejection or modification of the agreement. In its application to the court for relief from the labor agreement, the debtor will need to establish that it made a proposal to the union that was rejected by the union without good cause. The debtor will further need to prove that its proposal is necessary to the debtor's reorganization, such that if the proposal is not approved the debtor may not be able to confirm a plan of reorganization and emerge from bankruptcy. The debtor has a duty to negotiate in good faith with the labor union and must provide the union with necessary relevant information. The labor union also has a reciprocal obligation to bargain in good faith with the debtor.

Myth 10. In a Bankruptcy Proceeding, a Company Cannot Avoid Any
Environmental Obligations

The bankruptcy process can offer benefits to both debtors with environmental liabilities as well as prospective purchasers of such companies because the Bankruptcy Code permits the settlement, discharge or resolution of many environmental liabilities created by environmental statutes and common law.

While a bankruptcy filing will generally not release a debtor from its obligations under any governmental cleanup orders and injunctions, a debtor will typically be able to discharge all monetary claims for past or future cleanup costs resulting from pre-bankruptcy contamination regardless of whether they are governmental or private claims.

To the extent a governmental agency incurs cleanup costs post-petition that benefit the bankruptcy estate, the government may be entitled to an administrative expense claim. Other claims, such as a contingent contribution claim of a co-liable non-governmental potentially responsible party (PRP) are typically disallowed in bankruptcy, whereas direct claims by PRPs under Section 107(a) of CERCLA are more likely to survive a debtor's claim objection. Courts are continuing to explore and interpret which environmental obligations survive bankruptcy and which may be discharged.

Mark Manski, Nancy Mitchell and Ari Newman are members of Greenberg Traurig's Business Reorganization & Financial Restructuring Practice. Manski, a shareholder, can be reached at [email protected]. Mitchell, an operating shareholder, can be reached at [email protected]. Newman, an associate, can be reached at [email protected].