Labor unions lost a major battle when the Third Circuit held that the bankruptcy court retains power to reject a labor contract even after it expired by its own terms.
The Third Circuit was the first appeals court to decide the issue. Lower courts are split. The debtor-friendly opinion on Jan. 15 is yet another reason for companies to file for reorganization in Delaware because the Philadelphia-based Third Circuit makes law for that district.
Rather than a tortured parsing of the statutory language to arrive at a result, the Third Circuit’s opinion is a refreshing exercise in finding the best answer by focusing on the purpose of the law, since Congress may not have had the precise facts in mind when adopting the statute.
The appeal arose from the reorganization of two casinos in Atlantic City, New Jersey, owned by Trump Entertainment Resorts Inc. Unite Here Local 54 wanted the Third Circuit to reverse an October 2014 decision by Bankruptcy Judge Kevin Gross in Delaware, who sided with the casino operator and held there was power to reduce wages or benefits in expired contracts. Judge Gross allowed a direct appeal to the circuit.
In the Hostess Brands Inc. reorganization, Bankruptcy Judge Robert Drain from White Plains, New York, held in 2012 that power to terminate a collective bargaining agreement ends when the contract expires. Bankruptcy Judge Donald H. Steckroth from Newark, New Jersey, reached the same result as Judge Gross in a case called 710 Long Ridge Road.
In her opinion deciding the Trump appeal in favor of the debtor, Circuit Judge Jane R. Roth said she would “not embark, as the parties do, on a hyper-technical parsing of the words and phrases that comprise Section 1113,” the provisions in the Bankruptcy Code that govern rejection of labor contracts. Instead, she focused on the objectives of chapter 11 and the intent of Congress in adopting Section 1113 to overrule the Supreme Court’s Bildisco decision.
The union argued that the expiration of a collective bargaining agreement meant there was no longer any contract in existence and thus nothing to reject. Were the union correct, the National Labor Relations Act would kick in, compelling the company to continue operating under the expired contract until the NLRB declared an impasse in negotiations on a new contract.
Judge Roth noted that Section 1113 does not restrict its application to an executory contract. She went on to find that Congress intended “to incorporate expired collective bargaining agreements into the language of Section 1113.”
She also held that allowing rejection of an expired contract is “consistent with the purpose of the Bankruptcy Code.” Not allowing rejection, she said, “would impede that overriding goal” and “undercut the rehabilitative function of chapter 11.”
Where bankruptcy courts can move quickly to modify union contracts when a company’s survival is at stake, the NLRB can be slow to declare an impasse and thus allow an employer to impose new terms of employment. Judge Roth’s opinion therefore gives a corporate debtor an important weapon for use against a labor union reluctant to grant concessions.
If expired contracts were beyond the reach of the bankruptcy court, some insolvent companies might be unable to survive the additional time required for NLRB proceedings and thus could be pressured into giving workers more than they might get under Section 1113.
Despite the Third Circuit’s decisions, workers are not bereft of all power, because they can still determine whether a bankrupt company survives. Except for airline and railroad employees who cannot strike even if their wages are reduced, workers in other industries are at liberty to shut a company down if they dislike the wages imposed by the bankruptcy court.
Trump Entertainment filed for chapter 11 protection in Sept. 2014, seeking immediate relief from the labor contract at the 2,000-room Trump Taj Mahal. Its 906-room Trump Plaza had already closed. Carl Icahn, the dominant holder of $285.6 million in first-lien notes, aimed to buy the properties in exchange for debt, although only if labor and benefit costs were reduced.
The company confirmed a chapter 11 plan in March 2015. Consummation of the plan will not occur until rejection of the union contract is final.