U.S. Court of Appeals for the Third Circuit Rules that Debtor May Reject Expired Collective Bargaining Agreement

By Joshua J. Ellison

jellison@cwsny.com

Posted February 2016

Chapter 11 debtors often ask the bankruptcy court to permit them to reject their collective bargaining agreements with the unions that represent their employees.  Section 1113 of the Bankruptcy Code permits a debtor to reject a collective bargaining agreement only if the debtor can meet certain requirements, including demonstrating that rejection of the agreement is necessary for it to reorganize.  Bankruptcy courts have split, however, as to whether a debtor may utilize Section 1113 to reject a collective bargaining agreement that has already expired.  Outside of bankruptcy, the National Labor Relations Act (NLRA) requires an employer to maintain the status quo established by the terms and conditions of employment in an expired collective bargaining agreement until it and the union have bargained to impasse.  Debtors in bankruptcy have sought to reject expired agreements to avoid this obligation.  In a decision at odds with the plain language of the Bankruptcy Code, the Third Circuit Court of Appeals, the first federal court of appeals to decide whether an expired contract may be rejected, has now answered “yes” in In re Trump Entertainment Resorts, No. 14-4807 (January 15, 2016).

In Trump Entertainment, the owner and operator of the Trump Taj Mahal casino in Atlantic City sought to reject its collective bargaining agreement with UNITE HERE Local 54 so that it could terminate its obligations to contribute to the pension and health care plans of its union-represented employees.  That agreement expired a few days after the casino filed for bankruptcy.  After the casino moved to reject the agreement, the bankruptcy court (in a decision discussed on this blog in November 2014) held that even though Section 1113(c) permits rejection of “a collective bargaining agreement” and makes no mention of status quo obligations under the NLRA, it nonetheless authorized the debtor to reject the collective bargaining agreement after it had expired.  In findings cited by the Third Circuit, the bankruptcy court found the evidence “alarming in showing the Debtors were literally begging the Union to meet while the Union was stiff-arming the Debtors.”

On appeal, the Third Circuit agreed with the bankruptcy court.  While the Court held that the language of Section 1113 was not limited to agreements still in force, the Court’s opinion focused on the overall language and goals of the Code and policy considerations.  The appeals court reasoned that there might be situations where avoiding a debtor’s continuing obligation to maintain the statutory status quo would be necessary for the debtor to reorganize successfully, and that bankruptcy courts have the expertise required to make that necessity determination.  The court also emphasized that Congress intended the Bankruptcy Code to grant debtors “flexibility and breathing space” in restructuring their obligations to creditors, and that permitting rejection of the terms of an expired collective bargaining agreement was consistent with that intention.  What the court described as its “broad, contextual view” of Section 1113 led it to conclude that a debtor can reject an expired agreement, even though nothing in Section    1113(c) refers to rejection of agreements that have expired or the NLRA status quo.

The court rejected the union’s argument that since Section 365 of the Bankruptcy Code does not allow a debtor to reject an expired contract or lease, a debtor should not be allowed to reject an expired collective bargaining agreement.  The court noted that the terms and conditions of a non-labor contract do not continue to apply post-expiration while those of a collective bargaining agreement do.  The union also argued that because Section 1113(e) allows a debtor, under emergency circumstances, temporarily to reject a collective bargaining agreement that “continues in effect,” while Section 1113(c), by contrast, makes no mention of collectively-bargained obligations that “continue[] in effect,” Congress must have intended Section 1113(e), but not 1113(c), to apply to the NLRA’s post-expiration status quo obligation.  The court, however, dismissed this argument as “hyper-technical parsing” of the statutory language.

It is unfortunate that the first decision from a court of appeals addressing this question takes a results-oriented approach and expands a debtor’s power to avoid its obligations to its workers beyond what is authorized by the plain language of the Code.  The decision is particularly unfortunate because the Third Circuit has jurisdiction over bankruptcy courts in Delaware, the site of a large number of major corporate bankruptcies.  The decision is also surprising since the Third Circuit in the Wheeling-Pittsburgh case, 791 F.2d 1074 (3d Cir. 1986), issued one of the most pro-employee rulings on Section 1113, holding that a debtor must meet a very high burden to satisfy Section 1113’s necessity requirement.  The ruling also shows that no matter how strong a union’s apparent position on a legal issue in bankruptcy, there are often significant negative consequences if a court, as here, views the union as failing to wholeheartedly commit to bargaining.