Section 365 of the Bankruptcy Code authorizes a debtor to assume or reject an executory contract.[1] An executory contract that has expired in accordance with its terms is generally not subject to assumption or rejection under the Code. However, a collective-bargaining agreement (CBA) presents a unique exception to that general rule because upon expiration of the CBA, employers are required to maintain the status quo while the employer and the union negotiates the terms of a new CBA under the National Labor Relations Act (NLRA). In other words, the parties’ relationship continues to be governed by most, if not all, of the terms of the recently expired CBA. Thus, the question arises as to whether an expired CBA, or the continuing effect of its terms, might be assumed or rejected under the Bankruptcy Code.
In In re 710 Long Ridge Road Operating Co. II LLC,[2] the U.S. Bankruptcy Court for the District of New Jersey held that a debtor can reject an expired CBA under 11 U.S.C. § 1113. Although there is arguably a conflict of authority outside of the Third Circuit on whether a bankruptcy court may order interim and/or permanent changes under § 1113 to expired CBAs, the 710 Long Ridge court reasoned that a CBA’s expired status does not disavow a debtor’s need to reject its continuing terms to ensure survival.[3] The court distinguished the cases that refuse to apply § 1113 to the rejection of expired CBAs, such as In re Hostess Brands Inc.,[4] noting that the Hostess court’s conclusion that the inclusion of the “continues in effect” language in § 1113(e) is an exception to the other provisions of § 1113 as a whole was dicta and not essential to the court’s holding.[5]
Next, relying on In re Karykeion,[6] the court held that its decision was proper given the statutory language of § 1113, the legislative history and the policy underlying the Bankruptcy Code, which seeks to allow debtors to reduce labor costs if it is necessary for a successful reorganization.[7] The court explained that § 1113 was enacted in response to the U.S. Supreme Court’s decision in NLRB v. Bildisco & Bildisco,[8] wherein the Court authorized the rejection of a CBA under 11 U.S.C. § 365(a) and held that a CBA is not enforceable under the NLRA until it is assumed by the debtor. Therefore, compliance with the NLRA was not a prerequisite for rejection of an unassumed CBA. Since compliance with the NLRA was only required with respect to an assumed CBA under Bildisco, the court found that compliance with the NLRA was not required for the rejection of an unassumed and expired CBA; such an expired CBA could be subject to rejection under § 1113.[9] Lastly, the 710 Long Ridge court reasoned that its exercise of jurisdiction over the rejection of continuing terms “avoids an absurd result,” since adherence to the union’s interpretation of the statute would cause the debtors’ closure, liquidation and the loss of employment for hundreds of workers.[10]
Most recently, in In re Trump Entm’t Resorts Inc., et al.,[11] the U.S. Bankruptcy Court for the District of Delaware agreed with the 710 Long Ridge court and held that a debtor can reject an expired CBA under § 1113(c). In Trump, the bankruptcy 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 [CBA].”[12] In so finding, the court first noted that § 1113(e) allows for the modification, on an interim basis, of a CBA “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.[13] The Trump court relied on Karykeion, which noted that “continues in effect” is a phrase that is regularly used in labor law to refer to the employer’s post-expiration status quo obligations.[14] The Trump court was persuaded that Congress selected the phrase “continues in effect” in § 1113(e) with the intention of giving debtors the authority to modify the continuing effects of an expired CBA.[15] The court found that the concept that a post‑expiration CBA that “continues in effect” might be rejected is implicit in § 1113(c) because 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 reorganization provided the conditions of Section 1113(c) are satisfied.”[16]
Further, the court found that interpreting § 1113(c) to allow for the rejection of a post-expiration CBA is consistent with the legislative policies underlying § 1113 and the Bankruptcy Code.[17] In response to Bildisco, Congress enacted § 1113 and struck a balance between affording debtors the flexibility to restructure their labor costs on a comparatively expedited basis,[18] while interposing a certain level of court oversight and requirements for good faith bargaining.[19] However, § 1113 does not require debtors to bargain to an impasse, as is required under the NLRA.[20] The court found that Congress intended for rejection under § 1113 to be a far more expedited process than collective bargaining under the NLRA,[21] a concern that is equally as applicable in a situation where a debtor is bound by the terms of an expired CBA pursuant to its status quo obligations under the NLRA.[22]
Applying the law to the facts in Trump, the court noted that the uncontroverted evidence demonstrates that the debtors had weeks to come to an agreement with the union in order to avoid liquidation.[23] If the CBA was set to expire the day after the issuance of the court’s decision, there is no doubt that the court would have jurisdiction to enter an order approving rejection.[24] However, if the union’s argument is correct, because the CBA expired only a few weeks prior to the issuance of the decision, the court has no such authority, even though the terms of the expired CBA continued to impose the exact burden on the debtors’ restructuring efforts.[25] The court found that result makes little sense.[26] Lastly, the court noted the union’s position, if adopted, would give labor unions the power to delay a debtor’s bankruptcy case until the union’s demands were met, but only in cases where there is an expired, yet still controlling, CBA,[27] a hold-up power that wholly ignores the policy and bargaining power balances that Congress struck in § 1113.[28] Accordingly, the Trump court found that it had jurisdiction pursuant to § 1113(c) to approve an application for the rejection of a CBA where the agreement had expired by its terms, but the provisions of the agreement remain in effect due to the employer’s status quo obligations under the NLRA.
710 Long Ridge and Trump reflect a trend toward authorizing debtors to reject the continuing economic effect of the terms of an expired CBA under § 1113. Both decisions will have a profound impact on whether certain debtors seek to utilize chapter 11 to alleviate unworkably high labor costs and reorganize.
[1] 11 U.S.C. § 365.
[2] Case No. 13-13653 (DHS), 2014 WL 407528 (Bankr. D.N.J. Feb. 3, 2014).
[3] Id. at *10-11.
[4] 477 B.R. 378 (Bankr. S.D.N.Y. 2012).
[5] Id. at *11.
[6] 435 B.R. 663 (Bankr. C.D. Cal. 2010).
[7] Id. at *12, 14.
[8] 465 U.S. 513, 525-26 (1984).
[9] Id. at *12.
[10] Id. at *13-14.
[11] Case No. 14-12103 (KG), 2014 WL 5343818 (Bankr. D. Del. Oct. 20, 2014).
[12] Id. at *5.
[13] Id. at *5‑6.
[14] 435 B.R. at 674.
[15] 2014 WL 5343818, *6.
[16] Id. at *6 (citing 710 Long Ridge, 2014 WL 407528, at *13).
[17] 2014 WL 5343818, *6.
[18] See Bildisco, 465 U.S. at 532 (referencing Code’s “overall effort to give a debtor-in-possession some flexibility and breathing space”).
[19] See Section 1113(f) (“No provision of this title shall be construed to permit a trustee to unilaterally terminate or alter any provisions of a collective bargaining agreement prior to compliance with the provisions of this section.”). Id.
[20] Id.
[21] Id.
[22] Id.
[23] 2014 WL 5343818, *7.
[24] Id.
[25] Id.
[26] Id. (citing Karykeion, 435 B.R. at 675-76, and 710 Long Ridge, 2014 WL 407528, at *13-14).
[27] Id. at *7.
[28] Id.