Collective Bargaining Agreement Rejected in the Third Circuit

Retiree health care, pensions and employee obligations can consume a surprisingly large share of a company’s cashflow. Not surprisingly, in the case of union represented employees and retirees, the intersection of two federal laws has been a constantly developing area of restructuring and reorganization of companies. Since 1984 and the U.S. Supreme Court’s decision in Bildisco,¹ Congress, by enacting and later updating §1113 of the Bankruptcy Code, has limited the circumstances and raised the bar for an employer to reject its collective bargaining agreement. As a practical matter for union employees the CBAs also address pension and health care, including retiree health care. The treatment of collective bargaining agreements in bankruptcy has given rise to many cases, including splits in the circuits. Notably, the circuits are split on what level of evidence is required for a company to demonstrate that rejection of its CBA is “necessary for its reorganization.”² In addition, the treatment of CBAs in bankruptcy also has been a feature of labor negotiations. Dating back to the first wave of airline cases, there have been letters in which employers waived the right to seek rejection of their collective bargaining agreements in any future bankruptcy case, underscoring that the labor concessions embodied in the CBA were the contribution of the workforce to the company’s turnaround, and employers should not be able to use Chapter 11 to gain even greater concessions.³ More recently, since at least one court has ruled that expired CBAs cannot be rejected,⁴ labor negotiators have used expiration of the CBA as part of its negotiations, or more accurately, lack of meaningful negotiations, with a troubled company. Under controlling labor law precedent, certain obligations of a collective bargaining agreement live on after its expiration. Hence, a troubled company could find itself having labor arrangements continuing under an expired CBA that need to be addressed to restore the company’s financial health (such arrangements having the force of a CBA), and yet due to its financial distress being unable to negotiate a new or replacement CBA with its union (who believed an expired CBA was insulated from rejection). Recently, the U.S. Court of Appeals for the Third Circuit resolved this stalemate in favor of reorganization, in In re Trump Entertainment Resorts Unite Here Local 54, the Third Circuit approving rejection of an expired collective bargaining agreement.⁵

In response to Bildisco, Congress added §1113 to the Bankruptcy Code in 1984 to establish the procedure by which a debtor could reject an unfavorable CBA.⁶ Section 1113 is the exclusive mechanism by which a CBA can be rejected or accepted in bankruptcy other than a railroad reorganization under subchapter IV of Chapter 11. The Third Circuit summarized §1113 concisely as follows: