Based upon search engine traffic on this site and the importance of the upcoming decision in Allied Holdings, I thought it may be helpful to post a quick note or two on the rejection or modification of collective bargaining agreements in Chapter 11 cases.
This post summarizes the rejection of such contracts. The starting point is the statute, which states in relevant part —
§ 1113. Rejection of collective bargaining agreements
(b) (1) Subsequent to filing a petition and prior to filing an application seeking rejection of a collective bargaining agreement, the debtor in possession or trustee (hereinafter in this section "trustee" shall include a debtor in possession), shall—
(A) make a proposal to the authorized representative of the employees covered by such agreement, based on the most complete and reliable information available at the time of such proposal, which provides for those necessary modifications in the employees benefits and protections that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably; and
(B) provide, subject to subsection (d)(3), the representative of the employees with such relevant information as is necessary to evaluate the proposal.
(2) During the period beginning on the date of the making of a proposal provided for in paragraph (1) and ending on the date of the hearing provided for in subsection (d)(1), the trustee shall meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications of such agreement.
(c) The court shall approve an application for rejection of a collective bargaining agreement only if the court finds that–
(1) the trustee has, prior to the hearing, made a proposal that fulfills the requirements of subsection (b)(1);
(2) the authorized representative of the employees has refused to accept such proposal without good cause; and
(3) the balance of the equities clearly favors rejection of such agreement.
(d) (2) The court shall rule on such application for rejection within thirty days after the date of the commencement of the hearing. In the interests of justice, the court may extend such time for ruling for such additional period as the trustee and the employees’ representative may agree to. If the court does not rule on such application within thirty days after the date of the commencement of the hearing, or within such additional time as the trustee and the employees’ representative may agree to, the trustee may terminate or alter any provisions of the collective bargaining agreement pending the ruling of the court on such application.
Note that this section does not speak to the assumption of such agreements, or cover individual employment agreements. It may cover retirees as to benefits that arise from collective bargaining agreements.
Generally, courts have identified several elements the debtor must satisfy in order to reject a collective bargaining agreement –
1. Debtor in possession must submit proposal to union to modify collective bargaining agreement;
2. Proposal must be based upon most complete and reliable information available at time of proposal;
3. Proposed modifications must be necessary to permit reorganization of debtor;
4. Proposed modifications must assure that all creditors, debtor, and all affected parties are treated fairly and equitably;
5. Debtor must provide to union such relevant information as is necessary to evaluate proposal;
6. Between time of making proposal and time of hearing on approval or rejection of existing collective bargaining agreement, debtor must meet at reasonable times with union;
7. At meetings with union debtor must confer in good faith in attempting to reach mutually satisfactory modifications of collective bargaining agreement;
8. Union must have refused to accept proposal without good cause; and
9. Balance of equities must clearly favor rejection of collective bargaining agreement.
One court has characterized the debtor’s burden as more strict that the "business judgment rule." "11 USCS § 1113 requires unions to face changed circumstances that occur when company becomes insolvent, and it requires all affected parties to compromise in face of financial hardship; at same time, § 1113 also imposes requirements on debtor to prevent it from using bankruptcy as judicial hammer to break union; rejection of collective bargaining agreement is permitted only if debtor fulfills requirements of § 1113(b)(1), union fails to reject debtor’s proposal with good cause, and balance of equities clearly favors rejection."
In the next post, I’ll summarize emergency temporary relief from the CBA pursuant to the statute.