Contributed by Yvanna Custodio
Determining how to increase or preserve a debtor’s liquidity is crucial to analyzing its deleveraging options. Companies with significant labor liabilities need to explore whether attaining cost savings through rejection of their collective bargaining agreements (CBAs) is a viable alternative. The decision from the United States Court of Appeals for the Third Circuit in In re Trump Entertainment Resorts, affirming the bankruptcy court decision approving the rejection of a CBA between a debtor and a union, notwithstanding that the CBA expired postpetition, should inform companies considering CBA rejection pursuant to section 1113 of the Bankruptcy Code as part of their deleveraging strategy.
Union Ups the Ante
The debtors, owners and operators of two casino hotels located in Atlantic City, New Jersey, moved to reject the CBA between the debtor that owns the Trump Taj Mahal Casino Hotel and the union and implement the debtors’ proposal modifying certain terms of the CBA. The union opposed the 1113 motion, arguing, among other things, that the debtors did not have the authority to reject the CBA, given that the agreement had expired after the debtors had filed for bankruptcy but before the debtors had filed the rejection motion. The bankruptcy court ruled in favor of rejection, finding no reason to distinguish between expired and unexpired CBAs because granting the union the power to delay the bankruptcy process would subvert the “policy and bargaining power balances Congress struck in Section 1113 . . . .” You can read our entry, When the Stakes are High, Union Can’t Gamble with Gambling Debtors – Bankruptcy Court Approves Casino’s Rejection of CBA, on the bankruptcy court decision here.
The union upped the ante and appealed the bankruptcy court’s order, arguing that the bankruptcy court lacked subject matter jurisdiction to approve the motion because the CBA had expired. The union also argued that because its CBA with the debtor had expired, there was no “contract” that could be rejected under section 1113.
Third Circuit Calls
Illustrating the high stakes, the Third Circuit observed it was being asked to resolve “two potentially conflicting” statutory schemes on “a question of first impression among the courts of appeals: is a Chapter 11 debtor-employer able to reject the continuing terms and conditions of a CBA under § 1113 after the CBA has expired?” Notably, while debtors are permitted to reject CBAs if they comply with section 1113, the National Labor Relations Act “prohibits an employer from unilaterally changing the terms and conditions of a CBA even after its expiration.”
In resolving the issue in favor of the debtors, the Third Circuit employed principles of statutory construction and examined section 1113 within the context of the entire Bankruptcy Code. The Third Circuit observed that the section was the product of a Congressional response to the decision of the United States Supreme Court in Bildisco, which codified the first part of the Supreme Court’s holding that CBAs were executory contracts under section 365 of the Bankruptcy Code and therefore could be rejected, while abandoning the second part of the holding that an employer could unilaterally change the terms of a CBA postpetition but before the court approved the rejection. According to the Third Circuit, “[i]n crafting the stringent requirements of § 1113, Congress was focused on preventing employers from terminating negotiated labor contracts and avoiding burdensome obligations to employees merely by entering bankruptcy.”
The Third Circuit also highlighted the delicate balancing act inherent in section 1113—the interests of debtors seeking to avoid liquidation are set against those of unions seeking to preserve their CBAs and maintain influence in the reorganization process. Finding that the Trump case exemplified exactly what Congress intended, the Third Circuit noted that rejecting the CBA was “essential to the Debtors’ survival,” and pointed to the record in the bankruptcy court, which, among other things, established the desperation of the debtors’ financial condition, their large losses, inability to obtain debtor in possession financing, and lack of liquidity beyond two months, as well as the fact that the debtors’ plan of reorganization was hinged on the CBA rejection (absent which the debtors would be forced to liquidate).
In concluding that section 1113 applies to a CBA despite its expiration, the Third Circuit explained that if the effect of maintaining the status quo under the terms of the expired CBA undermines the debtor’s prospect of reorganization, then the bankruptcy court, rather than the National Labor Relations Board, must decide whether the CBA may be rejected. According to the Third Circuit, the policies of bankruptcy law dictate “it is preferable to preserve jobs through a 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.”
Cashing Out (Redux)
What are the potential implications of the Third Circuit Trump decision? One could argue that companies in bankruptcy could employ Trump as a trump card when seeking to reject burdensome CBAs despite their expiration (expanding the reach of the decision beyond the Third Circuit). More significantly, the decision reaffirms the importance of presenting credible and convincing evidence in support of an 1113 motion at trial, particularly in light of the Third Circuit’s discussion of the bankruptcy court’s findings that without the 1113 rejection, the Trump debtors would be forced into liquidation.
Yvanna Custodio is an Associate at Weil Gotshal & Manges, LLP in New York.
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