New York Federal Court Holds That Only The Union, Not A Separate Group Of Employees, May Object To Employer’s Contract Rejection Motion

By Peter DeChiara

pdechiara@cwsny.com

Posted October 2014

The Bankruptcy Code provides, in Section 1113(d)(1), that “[a]ll interested parties” may appear and be heard when a Chapter 11 debtor files a motion to reject its collective bargaining agreement with a union.  Does that mean one or more employees interested in the outcome may object to the employer’s motion, separately from any objection raised by the union?  The answer is a clear no, according to an October 2014 decision of the federal district court for the Southern District of New York.  See In re AMR Corp., No. 11-15463 (S.D.N.Y. Oct. 17, 2014).

AMR concerned the motion of American Airlines to reject its collective bargaining agreement with the Allied Pilots Association, which represents the airline’s pilots.  One provision of that agreement purported to guarantee no changes to the retirement program offered to pilots hired before a certain date in 1983.  The bankruptcy court granted American’s rejection motion, as well as a subsequent motion modifying American’s pilot pension plan to eliminate the option of lump-sum payments.  The bankruptcy court also approved a new collective bargaining agreement between American and the pilots’ union that resolved all pending grievances, including those of pilots nearing retirement who grieved the change in the pension program.  A group of these pilots appealed the bankruptcy court’s rejection of the old collective bargaining agreement and its approval of the new one, arguing that their pension-related rights were not subject to change.

Before reaching the merits of the appeal, the district court considered whether the group of pilots that was challenging the bankruptcy court’s contract rejection ruling were “interested parties” entitled to object under Section 1113(d)(1).  The Bankruptcy Code contains no definition of “interested parties” that limits the reach of that phrase.  And the pilots approaching retirement who were denied a lump-sum option clearly had an interest in the outcome of the rejection motion.

Nonetheless, Judge Colleen McMahon, in a sensible decision, held that the pilots were not eligible to participate in the Section 1113 contract rejection proceedings.  Section 1113, she explained, “establishes a central role for a union and the debtor, but not for disaffected groups within the union.”

According to Judge McMahon, allowing groups of employees to participate in Section 1113 proceedings would run contrary to federal labor policy: Section 1113 proceedings require negotiations over the employer’s proposed contract modifications and federal labor law vests in the union the exclusive right to negotiate with the employer.  The judge further explained that a broad reading of “interested parties” would “throw a wrench” into the Section 1113 proceedings, by permitting every employee or group of employees to have their say.

With the AMR decision, the New York federal court now joins the Seventh Circuit U.S. Court of Appeals in construing “interested parties” under Section 1113(d)(1) to refer to only the debtor and the union.  See UAL Corp., 408 F.3d 847, 851 (7th Cir. 2005) (pension fund fiduciary not eligible to participate in Section 1113 proceedings).