Chapter 11 Debtor Can Reject Expired CBA's Status Quo Obligations: Third Circuit | Practical Law

Chapter 11 Debtor Can Reject Expired CBA's Status Quo Obligations: Third Circuit | Practical Law

In In Re: Trump Entertainment Resorts, the US Court of Appeals for the Third Circuit held, as a matter of first impression, that a bankruptcy court may grant a bankruptcy debtor's motion to reject an expired collective bargaining agreement (CBA), and that Section 1113 of the US bankruptcy code trumped the National Labor Relations Act's (NLRA) prohibition on an employer unilaterally changing an expired CBA's terms and conditions.

Chapter 11 Debtor Can Reject Expired CBA's Status Quo Obligations: Third Circuit

Practical Law Legal Update w-001-3617 (Approx. 7 pages)

Chapter 11 Debtor Can Reject Expired CBA's Status Quo Obligations: Third Circuit

by Practical Law Bankruptcy and Practical Law Labor & Employment
Published on 26 Jan 2016 • USA (National/Federal)
In In Re: Trump Entertainment Resorts, the US Court of Appeals for the Third Circuit held, as a matter of first impression, that a bankruptcy court may grant a bankruptcy debtor's motion to reject an expired collective bargaining agreement (CBA), and that Section 1113 of the US bankruptcy code trumped the National Labor Relations Act's (NLRA) prohibition on an employer unilaterally changing an expired CBA's terms and conditions.
On January 15, 2016, in In Re: Trump Entertainment Resorts, the US Court of Appeals for the Third Circuit held that a bankruptcy debtor employer may reject an expired collective bargaining agreement (CBA), and that Section 1113 of the US bankruptcy code addressing CBA rejection trumped the NLRA's requirement that an employer maintain the status quo when a CBA expires. The Third Circuit found that the bankruptcy code provision applied to expired CBAs and was intended to permit bankruptcy reorganization amid labor obligations that would otherwise prevent reorganization and lead to liquidation and job elimination.

Background

The owners of the Trump Taj Mahal Casino (Trump Entertainment) had a CBA with its unionized employees that was due to expire on September 14, 2014. In early 2014, with the casino in financial difficulty, Trump Entertainment tried to negotiate a new CBA. The union did not meet with Trump Entertainment until August 2014 and no agreement was reached on Trump Entertainment's proposed changes to the CBA.
On September 9, five days before the CBA expired, Trump Entertainment filed for Chapter 11 bankruptcy protection. On September 26, after making a proposal and requesting further meetings with the union in the wake of the CBA's expiration on September 14th, Trump Entertainment filed a motion under Section 1113 of the US Bankruptcy Code seeking to reject the existing CBA and implement its latest proposal to the union, claiming that this was necessary to its reorganization. The Bankruptcy Court granted debtor Trump Entertainment's motion, finding that it:
  • Had authority under Section 1113 to reject an expired CBA.
  • Could not identify a reason for distinguishing between expired and unexpired CBAs. Courts have not questioned a debtor's right to reject an unexpired CBA if Section 1113's factors were satisfied.
The union appealed to the Third Circuit.

Outcome

The Third Circuit affirmed the Bankruptcy Court's grant of Trump Entertainment's motion to reject the CBA and implement Trump Entertainment's latest proposal, holding that Section 1113 of the US Bankruptcy Code:
  • Does not distinguish between an unexpired CBA's terms and conditions and the terms and conditions that continue to govern after a CBA expires.
  • Permits Chapter 11 debtors to reject expired CBAs.
  • Overrides the NLRA's prohibition on an employer unilaterally changing an expired CBA's terms and conditions.
The Third Circuit noted that:
  • Section 1113 of the US Bankruptcy Code allows Chapter 11 debtors to reject their CBAs if the bankruptcy court finds that:
    • the debtor employer had conferred in good faith and made a proposal to employees containing modifications that permit reorganization and treat all affected parties (employees, creditors) fairly and equitably;
    • the employees' representative has refused to accept the debtor employer's proposal without good cause;
    • balancing debtors' concerns about avoiding liquidation against unions' concerns with preserving labor agreements clearly favor the CBA's rejection; and
    • rejecting the debtors' ongoing labor organizations is necessary, if not essential, to permitting the debtors' reorganization.
    (11 U.S.C. § 1113).
  • Bankruptcy courts have determined differently whether Section 1113 permits Chapter 11 debtors to reject expired CBAs (Compare In re 710 Long Ridge Rd. Operating Co., II, 518 B.R. 810, 830 (Bankr. D.N.J. 2014) with In re Hostess Brands, Inc., 477 B.R. 378, 382-83 (Bankr. S.D.N.Y. 2012)).
  • The NLRA prohibits employers from unilaterally changing an expired CBA's terms and conditions. Those terms and conditions remain in effect as the status quo that must be maintained until the employer and the union reach a new CBA or bargain to impasse. (29 U.S.C. § 158(a)(5).)
  • Bankruptcy Code Section 1113 does not expressly address or mention employers' obligations and restrictions under the NLRA, but was enacted after the Supreme Court interpreted rejection of a CBA through bankruptcy in light of the NLRA. It was drafted to prohibit unilateral changes in debtors' CBAs unless there was bankruptcy approval (see NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984)).
The Third Circuit found that:
  • Congress enacted Section 1113 to ensure that "the NLRA yields to the Bankruptcy Code" only so that the debtor can stay in business and avoid liquidation.
  • The underlying policy reason for Section 1113 (providing a debtor relief from a CBA only when necessary to permit the debtor to reorganize) shows that it was intended to include expired CBAs.
  • Trump Entertainment's obligations under the NLRA to maintain the status quo will prevent it from reorganizing and staying in business. Trump Entertainment moved to reject the CBA to avoid liquidation and the organization's successful reorganization depends on it being able to reject the CBA. Trump Entertainment:
    • sustained heavy financial losses and reached a dire financial position;
    • has significant pension contributions to make under the CBA; and
    • made a proposal that included substantial pension savings and other cost-saving changes.
  • The union stalled negotiations on a new CBA and engaged in other actions intended to harm Trump Entertainment's business.
  • The Bankruptcy Court, not the NLRB, should determine Trump Entertainment's rights to implement necessary modifications to its relationship with its unionized workforce.
  • From a bankruptcy law standpoint, it is better to preserve workers' jobs through rejection of a CBA than to have those jobs eliminated by requiring the debtor to meet onerous obligations under the CBA.

Practical Implications

The Third Circuit's In re Trump Entertainment Resorts is the first circuit court opinion addressing the apparent conflict between Bankruptcy Code Section 1113, allowing debtors to reject a CBA, and the NLRA's requirement that employers maintain the status quo and do not make unilateral changes to a CBA after its expiration. As pointed out by the court, bankruptcy and federal district courts have been split on the issue. The decision is controlling precedent for courts in the states covered by the Third Circuit (Delaware, New Jersey and Pennsylvania), within which a good number of unionized employers operate or are incorporated. The analysis may be persuasive to other circuit courts whenever they first interpret whether Section 1113 applies to permit debtor employers to reject status quo obligations from expired CBAs.