United States: Section 1113 Applies To Expired Collective Bargaining Agreements

Recently, in the case of In re Trump Entertainment Resorts, Bankruptcy No. 14-12103 (Bankr. D. Del. 2014), 2014 Bankr. LEXIS 4439 (Bankr. D. Del. October 20, 2014), the U.S. Bankruptcy Court for the District of Delaware addressed the issue of whether a debtor has the authority to reject an expired collective bargaining agreement pursuant to Section 1113 of the Bankruptcy Code. In Trump, prior to the petition date, a collective bargaining agreement (CBA) had been entered into by and between Trump Taj Mahal Associates LLC, a debtor-in-possession (TTMA or the debtor, and together with the rest of the debtors that had filed, the "debtors"), and Unite Here Local 54. By its own terms, the CBA expired five days after the Chapter 11 cases were filed.

As a preliminary matter, the Trump court had to determine whether it had jurisdiction to address whether the debtor could reject the CBA since it had expired by its own terms. Before addressing this issue, however, the court noted that under the National Labor Relations Act (NLRA), an employer is required to maintain the status quo following the expiration of a collective bargaining agreement so as to permit the employer and the union time to negotiate terms of a new collective bargaining agreement. Typically, the status quo is measured by the terms of the expired collective bargaining agreement and an employer can commit an unfair labor practice if, "without bargaining to impasse," it effects a unilateral change of an existing term or condition of employment, the opinion said, citing Litton Financial Printing Division v. National Labor Relations Board, 501 U.S. 190, 198 (1991).

In Trump, the union argued that the debtors could not reject the CBA since TTMA's obligations thereunder were statutory in nature, as opposed to contractual, because they arose only by virtue of the debtors' status quo obligations under the NLRA. The union contended that because Section 1113 of the Bankruptcy Code governs the rejection of an executory contract (i.e., contractual obligations), the court did not have jurisdiction to authorize the debtors to reject the CBA since the parties' status quo obligations were statutory in nature. Instead, the union argued the National Labor Relations Board had exclusive jurisdiction.

In addressing this issue, the court noted that there was a split of authority as to whether Section 1113 applies when a collective bargaining agreement has expired but the terms of the agreement remain in effect by virtue of the employer's status quo obligations. For example, in In re Hostess Brands, 477 B.R. 378 (Bankr. S.D.N.Y. 2012), U.S. Bankruptcy Judge Robert D. Drain of the Southern District of New York found that Section 1113 does not apply to expired collective bargaining agreements. Conversely, in In re 710 Long Ridge Road Operating II LLC, (Bankr. D.N.J. 2014), the U.S. Bankruptcy Court for the District of New Jersey found that Section 1113 does apply to expired collective bargaining agreements.

Ultimately, the Trump court was "more persuaded by the reasoning found in the cases the debtors cite[d]." In particular, the court found that the "language and legislative purpose of Section 1113 establishes that the court has jurisdiction to enter an order approving the rejection of obligations that continue in effect under the NLRA in the wake of an expired collective bargaining agreement."

In support of this decision, the court noted that "Section 1113(e) allows for the modification, on an interim basis, of a collective bargaining agreement 'during a period when [it] continues in effect' so long as the debtor shows that the modification is essential to the continuation of the debtor's business or to avoid irreparable damage to the estate." According to the court, the phrase "continues in effect" is "a term of art regularly used in labor law to refer to the employer's post-petition status quo obligations." Consequently, the court determined that this language gives "debtors the authority to modify the continuing effects of an expired collective bargaining agreement." As a result, the court found that a post-expiration rejection is implied by Section 1113(c) since there "is 'no logic to support congressional intent allowing interim modifications to an expired CBA if essential to a debtor's business or to avoid irreparable harm to the estate as permitted by [Section] 1113(e) but not allowing the rejection of the expired CBA terms if necessary to further the purpose of the reorganization provided conditions of Section 1113(c) are satisfied," the court said, citing 710 Long Ridge.

In further support of its decision, the Trump court also noted that interpreting Section 1113(c) to permit the rejection of an expired collective bargaining agreement "also comports with the legislative policies underlying Section 1113 and the Bankruptcy Code generally." In particular, the court noted that Section 1113 was enacted in response to the U.S. Supreme Court's decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 525-26 (1984), wherein the Supreme Court held that a collective bargaining agreement could be rejected pursuant to Section 365(a) of the Bankruptcy Code, as long as the debtor could "'show that the collective bargaining agreement burdens the estate, and that after careful scrutiny, the equities balance in favor of rejecting the labor contract.'" The court also noted that in enacting Section 1113, "Congress struck a balance between affording debtors the flexibility to restructure their labor costs on a comparatively expedited basis while interposing a certain level of court oversight and requirements for good-faith bargaining." Finally, the court observed that Section 1113 does not require a debtor to bargain to an impasse, which it is required to do under the NLRA. Accordingly, the Trump court found that Congress intended a debtor's rejection of a collective bargaining agreement under Section 1113 to be a much more expedited process than collective bargaining under the NLRA.

In addition to all of these factors, the Trump court also noted that the Bankruptcy Code gives a debtor extremely broad powers to restructure its affairs and "preserve value as a going concern," and that "subjecting the debtors to a complex and time-consuming process overseen by another administrative body [i.e., the NLRB] in the midst of their restructuring efforts would surely thwart this overriding policy." Accordingly, the court observed that the union's interpretation (i.e., that the court does not have jurisdiction over the CBA because it expired just a few weeks prior to its decision even though the terms of the CBA continue to impose the exact same burden on the debtors) made "little sense" because if the CBA expired the day after the court's decision there would be no question that the court has jurisdiction to authorize the debtors to reject the CBA.

After it determined that it had jurisdiction pursuant to Section 1113(c) to decide whether the debtors could reject the CBA, the Trump court examined the factors that it must utilize in order to approve the rejection. In particular, before being able to reject a collective bargaining agreement, "a debtor must (1) make a proposal 'based on the most complete and reliable information available,' (2) have provided a union with relevant information which is necessary for the union to evaluate the proposal, and (3) make certain the proposal treats all parties 'fairly and equitably,'" the court said. "The proposal must also be 'necessary to permit the reorganization of the debtor.'" Once a debtor has made such a proposal, Section 1113(c) then requires a determination that the union "refused to accept such proposal without good cause" and a "balanc[ing] of the equities." Assuming the balance of the equities favors rejection of a collective bargaining agreement, a bankruptcy court can then authorize the rejection of the agreement.

In Trump, the debtors presented very convincing evidence that absent some significant concessions by the union, the debtors would no longer be able to operate. Indeed, the court noted, "It is absolutely clear to the court that the debtors have sufficient cash to fend off the losses for less than two months."

Next, the court considered whether the debtors' proposal complied with Section 1113(b)(1)(A), which requires the proposal to provide the "most complete and reliable information available at the time of the proposal." The court noted that this provision "need not be a perfect compilation but a good-faith, best-efforts one." The court found that not only did the debtors satisfy this requirement, they also satisfied the requirement of Section 1113(b)(1)(B), which requires a debtor to provide "'such relevant information as is necessary to evaluate the proposal.'" In addition, the court examined the impact its decision would have and found it was "clear from the evidence presented that all constituencies will suffer greatly" in the event that the CBA was not rejected. The court also found that the evidence presented clearly established that the "union refused to negotiate, delayed negotiations or did not negotiate earnestly" and "was in essence intransigent in its position." Accordingly, the court permitted the rejection under Section 1113(c) on the ground the union rejected the debtors' proposal without good cause.

In Trump, the parties also disagreed as to what effect, if any, the rejection of the CBA would have. According to the debtors, the court could enter an order that not only modified the CBA, but also implemented the terms of the debtors' most recent proposal to the union. The union disagreed and asserted that Section 1113 did not grant the bankruptcy court authority to implement the terms of the debtors' most recent proposal. Noting that there was nothing in either the statute or the case law to provide guidance on the issue, the court cited "Collier on Bankruptcy," which provides that, "following rejection, a [debtor-in-possession] remains subject to its labor law duty to bargain in good faith, but is permitted to implement changes to the terms and conditions of employment that were included in the Section 1113 proposals approved by the bankruptcy court."

Although the union may have lost this round, the battle continues. Shortly after the issuance of this decision, the union appealed the matter directly to the U.S. Court of Appeals for the Third Circuit, and it will be interesting to see how the Third Circuit addresses this issue, particularly in light of the split of authority noted by the Trump court.

Lawrence J. Kotler is a partner at Duane Morris who practices in the area of reorganization and finance, representing Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors' committees, secured creditors and large institutional unsecured creditors in all facets of bankruptcy.

Originally published by Delaware Business Court Insider.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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