Section 1113 of the Bankruptcy Code permits a company in Chapter 11 bankruptcy to reject its collective bargaining agreements if it can prove, among other things, that it needs relief from the agreements to successfully reorganize its business. So should an employer in Chapter 11 that is already out of business be permitted to reject its collective bargaining agreements? In a May 2014 decision, the bankruptcy court for the Northern District of Illinois said yes, even a liquidating Chapter 11 debtor may reject its collective bargaining agreements under Section 1113. See In re In re Chicago Construction Specialities, Inc., Case No. 13-31265 (Bankr. N.D. Ill. May 8, 2014).
The employer, Chicago Construction Specialities, Inc., had ceased all business operations and auctioned off substantially all of its assets before filing for Chapter 11 bankruptcy. Once in bankruptcy, it filed a motion to reject its collective bargaining agreements with the Laborers’ Union. Bankruptcy judge Timothy Barnes granted the motion, over the objection of the union and its affiliated pension and welfare funds.
The judge acknowledged that Section 1113 only permits relief from collective bargaining agreements when needed for the “reorganization” of the debtor. But Judge Barnes – stretching the common understanding of the word – reasoned that liquidation is a type of Chapter 11 “reorganization.”
The practical effect of contract rejection after a company is out of business is to reduce the priority of labor claims. For example, claims for unpaid benefits to the union’s pension or health plan, which might have enjoyed high-priority administrative status if the union contract were in place, would arguably be reduced to general unsecured claims after contract rejection.
The Illinois court’s decision that Section 1113 applies to debtors no longer in business is not the first of its type. In 2001, the Eighth Circuit’s bankruptcy panel held that a Chapter 11 debtor could reject its collective bargaining agreement even after it had sold virtually all its assets. See In re Family Snacks, Inc., 257 B.R. 884 (B.A.P. 8th Cir. 2001).
Nonetheless, the court’s holding that a debtor can seek Section 1113 relief even after it has closed its doors is unfortunate: when it enacted Section 1113, Congress clearly intended it to apply narrowly to those situations in which a company in Chapter 11 needs relief from its labor contracts in order to continue in business.