A district judge in Delaware reversed the bankruptcy court and held that a sale “free and clear” cannot insulate the buyer from its obligations under the National Labor Relations Act (NLRA) to bargain with the debtor’s union once the buyer hires most of the debtor’s employees.
The case before District Judge Gregory B. Williams had a sale order explicitly saying that the buyer would not be deemed a successor under labor law. He found no “bankruptcy loophole” allowing bankruptcy buyers to avoid union obligations after sales close.
The Watertight Sale Order
The debtor was a specialty steel manufacturer reorganizing under Subchapter V of chapter 11. The debtor sold substantially all of its assets to the buyer under Section 363(f) and an order conveying the property “free and clear of all liens, claims, rights, encumbrances and other interests of any kind or nature . . . and any rights and clams based on . . . successor or transferee liability.” The labor union did not object to the sale.
That wasn’t all; the sale order went on to say that the buyer “shall not be deemed” a successor under any theory of labor law liability. The sale order enjoined anyone from making claims for successor liability.
Alongside the sale of the assets, the union stipulated to the rejection of the existing union contract. However, the stipulation only resolved disputes between the union and the debtor.
The buyer hired substantially all of the debtor’s employees but altered some of the terms of employment unilaterally. Immediately after the sale closed, the union requested that the buyer recognize the union as the employees’ collective bargaining representative.
When the buyer refused, the union turned to the National Labor Relations Board (NLRB). The NLRB issued a complaint alleging that the buyer had failed to recognize and bargain with the union and had made unilateral changes in the terms of employment. Neither the NLRB nor the union alleged that the buyer was bound by the rejected union contract.
The buyer responded with a motion in bankruptcy court to enforce the sale order and enjoin the union from pursuing any claim based on an obligation that the buyer was obliged to recognize or bargain with the union.
The union objected to the motion, but the bankruptcy court granted the injunction, barring the union, directly or indirectly, from alleging that the buyer was bound by the rejected union contract or from circumventing the sale order. The union appealed the enforcement order.
In his September 18 opinion, Judge Williams said that neither the sale order nor the enforcement order prevented employees from electing a bargaining agent. So, the union petitioned the NLRB to hold an election. At the election, a majority cast votes in favor of the union, which was then certified as the workers’ collective bargaining agent.
Judge Williams said that the buyer subsequently negotiated with the union.
Mootness
Alleging there was no longer a live controversy, the buyer contended that the appeal from the enforcement order was constitutionally moot because it was actively negotiating with the union.
However, Judge Williams pointed out that the buyer argued that the union was engaged in an ongoing violation of the bankruptcy court’s enforcement order. He ruled that the enforcement order was “sufficiently ‘alive’” if the order barred the union from alleging unfair labor practices based on actions after the sale but before the union election.
The buyer also argued that the appeal was statutorily moot under Section 363(m). Absent a stay pending appeal, the subsection says that the reversal or modification of a sale order on appeal “does not affect the validity of a sale or lease . . . .”
Judge Williams began by saying that the Third Circuit had rejected the idea that Section 363(m) “applies to every challenge of a sale order.” He said that the union only seeks to vacate the enforcement order to “the extent that it enjoins the Union from seeking relief under the NLRA based on [the buyer’s] post-sale conduct” and “does not implicate the terms of the sale itself.”
The buyer retorted by saying it would not have purchased the business if the bankruptcy court had not extinguished its successor bargaining obligations. Judge Williams responded by saying that the buyer “misinterprets how federal labor law applies to the instant case.”
Judge Williams explained that neither the sale order nor the purchase agreement required the buyer to hire the debtor’s employees, thereby kicking in successor obligations under the NLRA. He held that Section 363(m) was not applicable, because “the Union is not seeking to reverse or modify the sale itself, only to assert its rights based on [the buyer’s] post-sale conduct.”
NLRB’s Jurisdiction over Post-Sale Conduct
The union argued that the NLRB had exclusive jurisdiction over the buyer’s post-closing activities.
Indeed, “Federal courts have held that determinations of successorship obligations under federal labor law are committed to the NLRB,” Judge Williams said. He cited the Second Circuit for holding “that the bankruptcy court lacked jurisdiction to resolve the question of successorship under the NLRA” and the Fifth Circuit for saying “that discharge could not shield the debtor from liability for his post-petition conduct rendering him a successor.”
The Enforcement Order Improperly Enjoined the Union
The bankruptcy court had reasoned that the sale conveyed the business free and clear of any interests in the property, including the union contract. Further, the bankruptcy court believed that the union had consented to the sale free and clear of the union’s interest under the union contract.
Judge Williams said that the bankruptcy court
failed to appreciate that [the buyer’s] status as a successor is not dictated by the [union contract] but rather determined under federal labor law based on its post-sale conduct, and that any statutory obligation to bargain with the Union before altering terms and conditions of employment was not an “interest in [] property” that could be extinguished.
Judge Williams cited copious authorities for the notion that the obligation to bargain exists independently of the union contract and that the bargaining obligations are not an interest in property. He also explained that the buyer’s successorship obligations did not arise from the sale but from “a successor’s conduct in hiring a majority of its workforce from the predecessor and maintaining substantial continuity in business operations.”
Judge Williams said that he had not found, nor had the buyer cited, “any decision in any jurisdiction holding or suggesting that a sale under § 363(f) may preclude statutory obligations arising under the NLRA for post-sale conduct by a purchaser.” He went on to say that there is “no decision holding that a § 363 sale order may insulate an entity from NLRA obligations arising post-sale, or violations of the NLRA resulting from post-sale conduct.”
Judge Williams countered the buyer’s contention that the union’s consent to the sale free and clear obviated enforcement of successorship obligations. He said that “the Union could not have consented to the Sale Order’s alleged extinguishment of [the buyer’s] successor bargaining obligation as such obligations under federal labor law only arise after specific post-sale conduct by a purchaser.”
Citing the Collier treatise, Judge Williams said that the union’s consent to rejection of the union contract “cannot shield the purchaser from successor liability arising out of its post-sale conduct.”
Judge Williams reversed the bankruptcy court’s order “to the extent that it enjoins the Union from seeking relief under the NLRA based on [the buyer’s] post-sale conduct.”
A district judge in Delaware reversed the bankruptcy court and held that a sale “free and clear” cannot insulate the buyer from its obligations under the National Labor Relations Act (NLRA) to bargain with the debtor’s union once the buyer hires most of the debtor’s employees.
The case before District Judge Gregory B. Williams had a sale order explicitly saying that the buyer would not be deemed a successor under labor law. He found no “bankruptcy loophole” allowing bankruptcy buyers to avoid union obligations after sales close.