An Introduction to Collective Bargaining Agreements in Chapter 11
by Brian L. Shaw
Shaw, Gussis, Fishman, Glantz, Wolfson & Towbin, LLC; Chicago
With the rash of recent airline bankruptcy filings, the treatment of unions, and in particular, unions’ Collective Bargaining Agreements (CBAs) with the debtor airline, have received much attention lately. The attention arises out of the conflict between the protections meant to be afforded employees under the CBA and the Bankruptcy Code, a federal, statutory mechanism that protects both debtors and creditors from the inequities that occur when a debtor is scavenged to death by its creditors on a first-come, first-served basis. The protections afforded debtors and creditors by the Code and employees by CBAs are regarded by most as necessary. However, in the context of a bankruptcy case, the protections afforded employees by a CBA can be used to leverage creditor-employees’ positions ahead of the interests of other unsecured creditors. Therefore, within a bankruptcy case, there is often conflict between the CBA’s constituents and the debtor and/or other creditors of the debtor’s bankruptcy estate. It is a conflict with potentially disastrous consequences to any debtor-in-possession (DIP) operating under chapter 11 of the Code.
Organized Labor and the DIP
For starters, it is important to note how the imposition of the automatic stay affects a labor union that is party to a CBA with a DIP. At the onset of any chapter 11 proceeding, a DIP inevitably owes some pre-petition wages or benefits to its employees. Bankruptcy law generally prohibits a DIP from paying its outstanding pre-petition obligations to employees, except pursuant to a confirmed reorganization plan. However, the existence of this statutory prohibition does not prevent this non payment from constituting a violation of the CBA, which violation can be acted on by a union, such as by a strike. Ironically, however, while the automatic stay prevents organized labor from attempting to collect these pre-petition employee obligations, federal labor law prohibits bankruptcy courts (as well as other courts) from enjoining organized labor from striking against a DIP as a result of the CBA breach, unless the strike is an unfair labor practice. Therefore, an unusual situation can arise where organized labor can strike and even be held to be in violation of the automatic stay, but cannot be stopped from taking the action that clearly is being done in response to the DIP’s failure or inability to pay a pre-petition debt.
This unusual situation results in organized labor often wielding leverage in a chapter 11 case that other creditors do not have, primarily because a DIP often will find an employee strike fatal to its reorganization efforts. On the other hand, as the recent airline cases have shown, in an entire depressed industry, the union’s leverage may be not as great, thus leading it to agree to concessions rather than kill the debtor and their jobs. However, when a compromise is not an option, a DIP may be “forced” to obtain authority to pay its pre-petition CBA and employee obligations either (a) under one of several legal theories that provide an extraordinary exception to the general prohibition on paying pre-petition debts outside the context of a reorganization plan or (b) by assuming the CBA, often prematurely and to the detriment of other creditors, which requires the DIP to cure its pre-petition defaults thereunder. In both instances, the leverage utilized by labor results in preferential treatment when compared to that of the DIP’s other unsecured creditors, as it enables certain employees’ claims to be paid in full and much earlier than those of other creditors. However, often neither avenue above is an option as many obstacles may exist, including legal ones raised by the court, creditors’ committees, secured lenders or the financial practicalities of the DIP’s business operations. At that juncture, an impasse exists, and the union, DIP and possibly certain other creditors find themselves at a juncture from which the DIP may very well be destroyed.
Section 1113 of the Bankruptcy Code
Section 1113 of the Code governs treatment of a CBA in chapter 11 cases, providing a process through which a CBA may be assumed, rejected or even modified. Section 1113 was enacted by Congress in response to a 1984 Supreme Court case that held that CBAs, then solely treated as executory contracts under 365, could be unilaterally rejected by a DIP, and that such rejection was not an unfair labor practice. Section 1113's legislative history makes it clear that 1113 was enacted to prevent reorganizing DIPs from (a) using chapter 11 to rid themselves of burdensome CBAs and (b) forcing union employees to bear more than their fair share of the financial pain of a chapter 11 case.
Section 1113 requires that a DIP take certain acts before it can move to, or be authorized to modify or reject, a CBA. Generally, before a DIP can move to receive court approval of a modification or rejection of a CBA, it must (a) submit a proposal to the applicable union, based on the most complete and reliable information available to it, which proposes only those modifications necessary to permit the DIP to reorganize and assures fair and equitable treatment of the DIP, affected employees and other creditors and (b) provide the union with the information necessary to evaluate its proposal. In addition, before it can approve the rejection or modification of a CBA, the court must find that the union rejected the DIP’s proposal without good cause and that the equities favor the proposed rejection or modification of the CBA.
This process set out in 1113 is subject to a very strict statutory time frame. The DIP must provide affected parties with 10-days notice of its application to reject or modify (application) the CBA, and a hearing must be commenced within 14 days of the application’s filing. This deadline can be extended by the court for seven more days, or even longer with the DIP’s and union’s consent; however, the court must rule on the application within 30 days of the hearing’s commencement (unless also extended by the parties’ consent). If a decision on the application is not handled within the prescribed time period, then the DIP may alter or terminate provisions of the CBA pending the court’s ruling. Finally, 1113 also provides the DIP with an emergency mechanism to have interim modifications made to a CBA without the need of a formal rejection or modification, and without prejudice as to the DIP’s ability to apply to reject or modify the CBA at a later date.
Don’t Take These Issues Lightly
The treatment of a CBA in a chapter 11 case can often mean the life or death of a DIP. In addition, the CBA is also seen as a protector of the livelihoods of union employees. Not surprisingly, the conflicts that arise under 1113, like many employer/union conflicts, are often hard-fought and extremely emotional. And the situation is further exacerbated by the fact that while the DIP may need union employees to survive, the union employees’ only readily available employment may be from the DIP— a situation, as noted earlier, that to some extent exists in today’s airline cases. To add to the seriousness of the conflict, the premature assumption of a CBA that is too economically burdensome may doom a DIP’s reorganization efforts and subject its estate to a massive administrative claim in favor of the union and its members. On the other hand, disenfranchising the union and CBA may leave a DIP with a fatally reduced workforce, or one that is truly apathetic about the DIP’s reorganization efforts.
ABOUT THE AUTHOR:
Brian Shaw is serving a three-year term on the ABI's Board of Directors and is also a co-chair of the Young and New Members Committee. Brian is a member at the law firm of Shaw Gussis Fishman Glantz Wolfson & Towbin LLC in Chicago.