Chapter 11 Debtors Must Make Decision to Assume or Reject Collective Bargaining Agreements Before Plan Confirmation, Ohio Bankruptcy Court Rules

By Peter D. DeChiara

pdechiara@cwsny.com

September 2019

Last October, this blog reported on a well-reasoned decision in the FirstEnergy Solutions Corp. bankruptcy, a decision in which U.S. bankruptcy judge Alan Koschik struck down an ill-conceived bonus plan.  Last month, in the same case, Judge Koschik issued another good decision, this time concerning when a debtor must decide to assume or reject a collective bargaining agreement.  The judge ruled that the corporate debtors in that case were required to decide to assume or reject their collective bargaining agreements prior to confirmation of their plan of reorganization.  See In re FirstEnergy Solutions Corp., Case No. 18-50757 (Bankr. N.D. Ohio Aug. 26, 2019)

In a Chapter 11 bankruptcy, a corporate debtor may “assume” a collective bargaining agreement, thereby agreeing to accept the contract’s terms and to pay in full all amounts due under the contract.  Or, the debtor may try to “reject” the agreement, by filing a motion seeking permission to reject it under Section 1113 of the Bankruptcy Code, 11 U.S.C. §1113.  In FirstEnergy, the debtors, which operated nuclear power plants, had done neither when they sought confirmation of their plan of reorganization.  The plan said the debtors would negotiate modifications to their collective bargaining agreements after the court confirmed the plan.

Union locals from the Utility Workers and the International Brotherhood of Electrical Workers objected to confirmation of the plan, arguing that a debtor’s decision to assume or reject a collective bargaining agreement must precede plan confirmation.  Their objection pointed out that Section 1113 only allows rejection of a collective bargaining agreement when “necessary to permit the reorganization of the debtor.”  11 U.S.C. §1113(b)(1)(A).  Allowing contract rejection after the debtor has already reorganized would run afoul of the statute’s intent.  The objection also argued that by not assuming or seeking to reject the contracts, the debtors impermissibly sought to have their cake and eat it too:  avoiding the burdens of the contracts’ obligations while also evading the risk of labor unrest that comes with contract rejection.

Judge Koschik sustained the unions’ objection.  In a brief decision, he cited Bankruptcy Code Section 365(d)(2), which states that executory contracts (meaning contracts not yet fully performed) may be assumed or rejected “at any time before the confirmation of a plan.”  11 U.S.C. §365(d)(2) (emphasis added).  He also cited Supreme Court precedent holding that the debtor has until plan confirmation to decide whether to assume or reject.  See Fla. Dep’t of Rev. v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 46 (2008).  The judge wrote further that, even if a court had discretion to allow a debtor to make an assume-or-reject decision post-confirmation, he would not allow it in this case.  Doing so would be “unwise,” he explained, since it would “leave the CBAs in limbo.”

Once again, as it did last year, the FirstEnergy case has produced a sensible ruling on a question of bankruptcy and labor law.