In In re Karykeion, currently pending in the U.S. Bankruptcy Court for the Central District of California, the court recently reviewed the application of § 1113 of the Bankruptcy Code in the context of the liquidation of a chapter 11 debtor that had been operating two acute care hospitals. Keeping in mind that many hospitals are unionized, the Karykeion case presents interesting issues as it evaluates what a debtor must do when liquidating to satisfy § 1113 when a buyer is seeking to acquire a hospital without its collective bargaining agreement (CBA).
Section 1113
Section 1113 proscribes unilateral termination or alteration of a CBA. It requires debtors, prior to seeking rejection of a CBA, to make a proposal to the union, accompanied by sufficient information to permit a proper evaluation of the proposal.[1] A court may approve the rejection of the CBA if it finds that (1) the debtor made a proposal that meets the statutory requirements of § 1113(b), (2) the union rejected the proposal without good cause and (3) the balance of equities clearly favors rejection of the CBA.[2]
Bankruptcy courts generally divide the analysis of whether rejecting a CBA is authorized under § 1113 into a nine-part test, asking the following questions: (1) Has the debtor made a proposal to the union to modify the CBA; (2) Is the debtor’s proposal based on the most complete and reliable information available; (3) Are the proposed modifications necessary to permit the debtor’s reorganization;[3] (4) Do the proposed modifications ensure that the debtor and all affected parties are treated fairly and equitably; (5) Has the debtor provided the union with such relevant information that is necessary to evaluate the proposal; (6) After making the proposal, has the debtor met at reasonable times with the union; (7) Has the debtor conferred in good faith at such meetings in attempting to reach mutually satisfactory modifications of the CBA; (8) Did the union refuse to accept the proposal without good cause; and (9) Does a balance of the equities clearly favor rejection?[4] The debtor bears the burden of proof on these prerequisites for rejecting a CBA.[5]
Notably, § 1113 governs only modification or rejection of a CBA. Therefore, § 365(a) of the Bankruptcy Code—which deals with assumption of unexpired executory contracts—applies to the assumption of CBAs, and the heightened standards and tests under § 1113 are not required for assumption.[6]
The Karykeion Ruling
At the time of filing its chapter 11 case, Karykeion operated a hospital and was a party to CBAs with the Service Employees International Union (SEIU) and California Nurses Association (CNA). Article 20 of both CBAs (the “successorship provision”) required Karykeion to ensure that a new employer would retain the bargaining-unit employees, recognize the union and assume the CBAs. By the time the motion to reject the CBAs was filed, Karykeion’s CBA with SEIU had expired by its own terms, but its CBA with CNA was still extant.
On Jan. 12, 2010, Karykeion signed a memorandum of understanding (MOU) to sell the hospital to Avanti Health System, which required Karykeion to reject both CBAs. After signing the MOU, Karykeion provided a copy of the MOU to the unions’ attorneys.
During the 30 days following the MOU and before the filing of Karykeion’s motion to reject the CBAs, SEIU sent a request for 43 items to the debtor for specific information and documents relating to Karykeion’s negotiations with all potential buyers. Karykeion responded and proposed to the unions that the successorship provision be eliminated and severance reduced. In response, the unions asked for severance provisions and SEIU requested details of exactly which workers would be hired by the buyer and under what terms.
At the three meetings between Karykeion and the unions, Karykeion’s chief reconstructing officer (CRO) explained that he had tried to make the buyer assume the CBAs, but the buyer refused. He explained that he could not dictate to the buyer whom it should hire. SEIU made a counter-proposal to Karykeion, eliminating the requirement that the buyer assume the CBAs but requiring the buyer to hire employees and recognize SEIU as the bargaining unit. Karykeion’s CRO passed on SEIU’s counter-proposal and the buyer rejected it. Both unions requested further meetings with Karykeion and, at various times, said that they interpreted Karykeion’s refusal to have further meetings as a refusal to bargain under § 1113.
During the same time frame, there were numerous court hearings concerning Karykeion’s use of cash collateral. Karykeion’s CRO testified on many occasions that Karykeion’s cash reserves might not be sufficient to close down the hospital with no risk to patients. In fact, the buyer had made a bridge loan to Karykeion to enable it to carry on until the purchase of the hospital could be closed.
On March 11, 2010, Karykeion’s motion to reject the CBAs came on for what turned out to be a seven-hour evidentiary hearing. Reversing what had been her earlier tentative ruling, on March 15, 2010, Bankruptcy Judge Maureen A. Tighe issued her memorandum of decision approving the proposed rejection.
First, the court disagreed with SEIU’s contention that the court lacked jurisdiction to modify an expired CBA because jurisdiction rested exclusively with the National Labor Relations Board. In reviewing conflicting case law from other jurisdictions and finding that decisions by the Ninth Circuit Bankruptcy Appellate Panel (BAP) were non-binding dicta, the court looked to the language of § 1113, the legislative history surrounding § 1113 and the BAP’s dicta, and concluded that the purpose of § 1113 was to allow a debtor “to terminate or modify its ongoing obligations to its organized workforce, whether those obligations arise as a result of a current or expired CBA.”[7]
Next, the court noted that, although the Ninth Circuit had never specifically adopted the nine-step analysis, it was appropriate.[8] The court went through each step finding that (1) a proposal was made; (2) the proposal was based on as complete and reliable information as could be obtained in a severely distressed situation with changing information; (3) the modification was necessary because the buyer would not purchase the hospital without rejection of the CBAs; (4) despite the shared “pain,” the modification would treat all parties fairly and equitably; (5) the unions had the relevant information necessary to evaluate the proposal, which was “sufficient in light of when things were definite and how fast things were moving”; (6) Karykeion had, in fact, met with workers at reasonable times;[9] (7) Karykeion had conferred in good faith;[10] (8) CNA did not show adequate cause for refusing Karykeion’s proposal, having made no counter-proposal on the successorship provision;[11] and (9) the balance of the equities clearly favored rejection because if the buyer walked away, Karykeion would liquidate and only secured creditors would see any recovery, all employees would lose their jobs and the hospital would close.
Although the Karykeion case applied the nine-step analysis, it remains unclear whether such analysis is required for a hospital in a liquidating bankruptcy to reject its CBAs with unions.
Please click here to read the Court's decision.
1. In re Maxwell Newspapers, Inc., 146 B.R. 920 (Bankr. S.D.N.Y.), aff’d in part and rev’d in part, 149 B.R. 334 (S.D.N.Y.), rev’d, 981 F.2d 85 (2d Cir. 1992).
2. 11 U.S.C. §1113(c); see Maxwell Newspapers, Inc., supra note 1.
3. See Int’l Union, UAW v. Gatke Corp., 151 B.R. 211 (N.D. Ind. 1991) (discussing circuit split on meaning of “necessary” modifications to CBA allowable under § 1113(b)(1)(A)).
4. See, e.g., In re National Forge Co., 289 B.R. 803 (Bankr. W.D. Pa. 2003); In re Alabama Symphony Ass’n, 155 B.R. 556, 573 (Bankr. N.D. Ala. 1993); In re Bowen Enterprise, Inc., 196 B.R. 734 (Bankr. W.D. Pa. 1996); In re American Provision Co., 44 B.R. 907, 909 (Bankr. D. Minn. 1984) (discussing in detail this widely accepted nine-part test).
5. Bowen Enterprises, 196 B.R. at 741.
6. See Adventure Resources Inc. v. Holland, 137 F.3d 786, 797 (4th Cir. 1998).
7. Memorandum of Decision, Case No. 1:08-bk-17254-MT, Docket Entry No. 957, page 14 (emphasis added).
8. See, e.g., In re Family Snacks Inc., 257 B.R. 884, 892 (8th Cir. B.A.P. 2001).
9. To the argument that the workers should have been afforded more reasonable time to negotiate with Avanti, the court noted that § 1113 “does not require the debtor to engage in futile acts—Avanti would not meet with the unions and [CRO] was clearly making no progress with getting [Avanti] to accept any of either his or the unions’ ideas on how to get any part of the CBAs accepted by Avanti… [Thus,] the decision of a CRO not to spend hours in fruitless negotiations was not unreasonable.” Supra note 7, at 26.
10. The court addressed the debtor’s good faith as follows: “The Unions are correct that beginning negotiations when one party is already locked into a position does not constitute good faith… This the [sic] debtor was, however, not locked in. This situation differs from Lady H Coal both because the debtor passed the unions [sic] offers along to Avanti, tried to negotiate further with Avanti on behalf of the unions, and the debtor only signed a MOU with Avanti before negotiating under [§] 1113, not an asset purchase agreement. The MOU states on page 2, paragraph 5, that except for 3 sections inapplicable here, the MOU did not create ‘any binding legal obligations between the Parties, and each Party reserves the right to approve the definitive Agreement and to address the results of any diligence in connection with developing a definitive Agreement.’ Significantly, the creditor’s [sic] committee was still providing information to ‘Rose Avenue,’ as unlikely as that potential bid appeared to be. No break up fee to [Avanti] was ever approved, nor was pre-approval sought by the debtor.” Supra note 7, at 27.
11. The court held that, “[w]hile the unions cannot be expected to accept a proposal which rejects their entire CBA, the debtor did offer a reasonable accommodation that was above what employees would receive had it just closed down. The proposal the debtor made was the best it could do under circumstances where Avanti would not agree to more, and any rejection of that proposal means that a chance to keep the hospital open to benefit could fail.” Supra note 7, at 30.