Collective Bargaining Agreements in Bankruptcy Reorganizations

By Kyriaki Christodoulou

Collective bargaining agreements (“CBA”) play an important role in the operation of many companies. They provide predictable labor costs over the term of the agreement. However, many companies have CBAs in place that lock-in above-market wages, impeding the competitiveness of the company and contributing to its financial distress. Section 1113 of the Bankruptcy Code allows a company experiencing such distress to reject a collective bargaining agreement. Under the Code, a bankruptcy court can approve the rejection of a collective bargaining agreement only if the debtor-company can prove that (i) such rejection is necessary for reorganization, and (ii) only after proposing a modified CBA to the representative of its employees, typically a union, that contains only those modifications necessary to the reorganization. If the representative refuses to accept the modifications without good cause, the court may approve the rejection.

A debtor’s decision to reject a CBA has consequences for the company’s rights. If a Chapter 11 debtor rejects a CBA, its employees cannot enforce the CBA’s provisions. However, section 1113 and the National Labor Relations Act (“NLRA”), work cooperatively to ensure that employee rights are not discarded. The NLRA yields to the Bankruptcy Code only for reasons that will enable the debtor to stay in business.

Unlike section 365 of the Bankruptcy Code, which provides for assumption or rejection of executory contracts, section 1113 prescribes strict procedural and substantive requirements before a court can approve the modifications or rejection of the CBA. Three broad substantive conditions must be satisfied, including that:

1. the debtor’s proposal contains only those modifications necessary for reorganization,
2. the union’s refusal to accept the proposed modifications was without good cause, and
3. the balance of equities clearly favors rejection of the CBA.

Bankruptcy courts have adopted a multi-factor test to determine whether the debtor has satisfied these conditions.

Moreover, section 1113 requires the debtor to provide the union with relevant information necessary to evaluate the proposal before filing a motion to reject the CBA. Relevant information includes the most meaningful financial and statistical information available, including cost analyses for proposed modifications, and financial statements and business plans for the debtor’s business, including balance sheets, profit and loss statements, and projection of income and expenses.

Debtors should be aware that their obligations under a CBA continue after filing for relief under the Bankruptcy Code, while their motion to reject is pending. Specifically, a debtor may not terminate or alter a CBA by not paying benefits or reducing benefits, but rather must comply with the terms of the CBA unless and until they are rejected. Moreover, debtors should be aware of certain provisions that survive rejection of a CBA – such as a debtor’s obligation to provide retiree benefits survives rejection under section 1113.

Overall, the process of assuming or rejecting a collective bargaining agreement in a reorganization case is complicated and requires expertise and strategic planning. KI Legal’s Bankruptcy and Restructuring attorneys are here to help guide you through this process. Contact KI Legal today by calling (646) 766-8308 for more information.

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