Employer Can Reject Expired Collective Bargaining Agreement, Delaware Bankruptcy Court Holds

By Peter DeChiara

pdechiara@cwsny.com

Posted November 2014

Can a Chapter 11 debtor reject a collective bargaining agreement that has already expired? Some bankruptcy courts have said yes, others no. The bankruptcy court for the District of Delaware weighed in on that question in an October 2014 decision, concluding that an employer may use Section 1113(c) of the Bankruptcy Code to avoid having to comply with the terms of an expired labor contract.  See In re Trump Entertainment Resorts, Inc., No. 14-12103 (Bankr. D.Del. Oct. 20, 2014).

In Trump Entertainment, the operator of an Atlantic City casino – driven into bankruptcy by competition from online gaming and legalized gambling in surrounding states – sought relief from its obligations to make pension and health contributions for its unionized workforce. The casino’s collective bargaining agreement with UNITE HERE Local 54 expired several days after the casino filed its Chapter 11 petition, but the National Labor Relations Act (NLRA) required that the casino maintain the status quo established by the expired agreement, including the pensions and health contributions. Claiming that these contributions would drive it into liquidation, Trump filed a motion under Section 1113(c), which provides that a debtor, upon making certain requisite showings, may reject a “collective bargaining agreement.”  The motion was filed after the contract had expired.

The union argued that while Section 1113(c) authorizes a bankruptcy court in certain circumstances to relieve an employer’s contractual obligations, it gives a bankruptcy court no right to override a debtor’s statutory obligation under the NLRA to maintain the status quo after a labor contract expires. For support, the union cited a number of bankruptcy court decisions, including the 2012 decision of the bankruptcy court for the Southern District of New York in Hostess Brands, Inc. 477 B.R. 378.  There, Bankruptcy Judge Robert Drain concluded that use of Section 1113(c) to relieve a debtor of its status quo obligations under the NLRA would “stretch” the language of Section 1113(c) “too far.”

In Trump Entertainment, by contrast, the Delaware bankruptcy court reasoned that Section 1113(c) serves the policy of facilitating the reorganization of ailing employers, and that it would be “illogical” to allow the expiration of the labor contract to stand in the way of providing an employer the relief that the court believed the employer needed to survive.

Although Section 1113(c) only allows rejection of a “collective bargaining agreement,” Section 1113(e) permits interim changes in emergency circumstances during a period when “the collective bargaining agreement continues in effect.” Bankruptcy Judge Kevin Gross reasoned that the “continues in effect” language in Section 1113(e) includes the post-expiration status quo.  He reasoned further that, even though Section 1113(c) does not have the “continues in effect” language, application to the post-expiration status quo is “implicit” in Section 1113(c).  Concluding otherwise, the court reasoned, would yield the “absurd result” that a debtor could use Section 1113(e), but not Section 1113(c), to escape its NLRA status quo obligation.

Trump Entertainment is an unfortunate decision that strays too far from the plain language of the statute. Section 1113(e) never mentions post-expiration relief.  And even if the “continues in effect” language in Section 1113(e) could be construed as allowing for post-expiration relief under emergency circumstances, the absence of such language in Section 1113(c) must mean that Congress intended a different result in Section 1113(c) cases.