Bankruptcy Code Section 1113 Trumps NLRA

Thereafter, the debtors filed a motion pursuant to Section 1113 of the U.S. Bankruptcy Code to reject the CBA and implement the terms of the debtors' last proposal to the union. Section 1113 governs the procedures by which a debtor may assume, reject or modify a CBA, providing that a debtor may reject a CBA if the bankruptcy court determines that: 1) the debtor has made a proposal that provides for modifications necessary to permit the reorganization; 2) the employees' authorized representative has refused to accept the proposal without good cause; and 3) the balance of the equities clearly favors rejection of the agreement.

The bankruptcy court granted the debtors' motion to reject and implement, finding that the debtors satisfied the requirements of Section 1113. The court noted the uncontroverted evidence that the debtors would have to liquidate if the relief was not granted, and concluded that the union was clearly not focused on reaching agreement. Most importantly, the bankruptcy court held that while Section 1113's text does not explicitly grant the court authority to implement the terms of the debtors' last proposal to the union, a debtor-in-possession is authorized to implement changes to the terms and conditions of employment that are included in the Section 1113 proposal approved by the bankruptcy court.

The Appeal

On direct appeal to the Third Circuit, the union challenged whether a bankruptcy court may permit rejection of an expired CBA under Section 1113. The Third Circuit recognized that the statutory schemes of both the Bankruptcy Code and the NLRA were implicated. Turning first to the plain language of Section 1113, the court observed that it does not mention the continuing obligations imposed by the NLRA, nor does it restrict its prescription to executory or unexpired CBAs. The court rejected the union's argument that the plain meaning of the term “collective bargaining agreement” as used in Section 1113 is a contract between an employer and a labor union, and because the CBA had expired, there was no “contract” to be rejected. The court declined to engage in what it called “a hyper-technical parsing of the words and phrases that comprise Section 1113.”

The Third Circuit then turned to the context in which Section 1113 was enacted. The court noted that it was enacted in response to the U.S. Supreme Court's decision in National Labor Relations Board v. Bildisco & Bildisco, 465 U.S. 513 (1984), in which it was held that it was not an unfair labor practice for an employer to unilaterally change the terms of a CBA after filing for bankruptcy but before the court approved the rejection of the CBA. According to the Third Circuit, Congress passed Section 1113 in response to Bildisco to prohibit unilateral changes in debtors' CBAs without bankruptcy court approval. Section 1113, the court stated, “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.” Unlike Section 365 of the Bankruptcy Code, which does not constrain a debtor's rejection of burdensome executory contracts, Section 1113 prescribes strict procedural and substantive requirements before a CBA can be rejected. The section was designed to foreclose all but the essential modifications integral to a successful reorganization, and in requiring compliance, its strict requirements, the court reasoned, “Congress sought to ensure that, when the NLRA yields to the Bankruptcy Code, it does so only for reasons that will permit the debtor to stay in business.”

Addressing the facts of the debtors' case, the court concluded that rejection of the debtors' continuing labor obligations under the expired CBA was necessary to permit reorganization. To avoid liquidation, the debtors moved to reject the CBA, and their proposed modification of the CBA included over $14.5 million in annual savings. In response, the court noted, “instead of negotiating with the debtors, the union stalled the bargaining session, engaged in picketing, and attempted to harm the debtors' business.” The court also observed that the debtors' plan of reorganization was contingent on rejection of the CBA.

The court concluded that the intent of Congress was to incorporate expired CBAs in the language of Section 1113, and when the debtor'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, the bankruptcy court must review and decide on the necessity of a proposed modification. The court rejected the union's argument that because a debtor cannot assume or reject an expired contract under Section 365 of the Bankruptcy Code, it cannot reject an expired CBA under Section 1113. The court concluded that there is an important distinction between a CBA and any other executory contract: the key terms and conditions of a CBA continue to burden the debtor after the agreement's expiration.

The court reasoned that allowing a debtor to reject its continuing obligations under an expired CBA is consistent with the Bankruptcy Code's purpose of giving debtors latitude to restructure their affairs. According to the court, Section 1113 furthers the Code's rehabilitative policies by permitting debtors to restructure their labor obligations, and to hold that expired CBAs cannot be rejected under it would impede the Code's overriding goal. Under the policies of bankruptcy law, the court further noted that it is preferable to preserve jobs through the rejection of a CBA, as opposed to losing the positions permanently by requiring the debtor to comply with the continuing obligations set out by the CBA. The court found that in light of Chapter 11's overarching purposes and the exigencies the debtors faced, the bankruptcy court did not err in granting the debtors' motion to reject the CBA.

Conclusion

The Third Circuit's decision in Trump is certain to have an impact on negotiations between debtors and labor unions where their CBA is likely to expire post-petition. With the Third Circuit's determination that such expiration does not preclude a debtor's ability to reject the agreement's continuing obligations under a CBA, and impose the terms of its last offer, debtor-employers appear to have gained some additional leverage in seeking modification of a CBA's terms from labor unions.

Francis J. Lawall is a partner in the Philadelphia office of Pepper Hamilton. Henry J. Jaffe is a partner in the Wilmington, DE, office of the firm, and Michael J. Custer is an associate in the firm's Wilmington office. This article also appeared in The Legal Intelligencer, an ALM sibling publication of this newsletter.