Feature By Adam H. Isenberg and Monique Bair DiSabatino 3d Circuit Weighs In on Rejection of Expired CBAs W Adam H. Isenberg Saul Ewing LLP Philadelphia Associate Editor Monique Bair DiSabatino Saul Ewing LLP Wilmington, Del. Adam Isenberg is a partner in Saul Ewing’s Bankruptcy and Restructuring Practice in Philadelphia. Monique DiSabatino is an associate in the firm’s Bankruptcy and Restructuring Practice in Wilmington, Del. 18 May 2016 hen a contract has expired, the parties to the contract are typically relieved of their obligations to perform, and the contract is no longer considered an “executory” contract that is subject to assumption or rejection under § 365 of the Bankruptcy Code. Collective-bargaining agreements (CBAs), however, are not “typical” contracts under the Bankruptcy Code because their key terms continue to bind debtors even after the agreements expire. Because an employer remains bound by the continuing terms of an expired CBA until the parties have bargained, but reach an impasse, (i.e., when good-faith negotiations have exhausted the prospect of reaching an agreement) the question arises as to whether a debtor/employer can reject such continuing terms under § 1113 of the Bankruptcy Code if the terms are burdensome to the debtor’s continued operations.

Section 1113 permits a debtor to reject a CBA if the debtor meets certain stringent requirements, including that the debtor engage in a meaningful bargaining process with union representatives, demonstrate that its proposed modifications are necessary to permit its reorganization, and ensure that all affected parties are treated fairly and equitably.1 While it is clear that § 1113 applies to unexpired CBAs, courts are divided as to whether § 1113 also extends to the continuing terms of an expired CBA.2 Recently, the Third Circuit became the first court of appeals to weigh in on this question in Trump Entertainment Resorts,3 in which the court determined that § 1113 does not distinguish between the terms of an unexpired CBA and the terms that continue to govern after a CBA expires. As such, the court held that bankruptcy courts may reject the continuing terms of an expired CBA under § 1113.4 1 See 11 U.S.C. § 1113(b) and (c). 2 Compare In re Hostess Brands Inc., 477 B.R.

378, 383 (Bankr. S.D.N.Y. 2012) (finding that expiration of CBA left parties under fall-back provisions of otherwise applicable law, including NLRA); San Rafael Baking Co.

v. N. Cal.

Bakery Drivers Sec. Fund (In re San Rafael Baking Co.), 219 B.R. 860, 866 (B.A.P.

9th Cir. 1998) (holding that § 1113 does not allow courts to impose obligations of expired CBAs on debtors); and In re Sullivan Motor Delivery Inc., 56 B.R. 28, 29 (Bankr.

E.D. Wis. 1985) (holding that § 1113 does not apply to expired CBAs); with In re 710 Long Ridge Road Operating Co.

II LLC, 518 B.R. 810, 831 (Bankr. D.N.J. 2014) (finding that § 1113(c) provides authority to reject and modify continuing terms of expired CBA; for a detailed discussion, see Adam H.

Isenberg and Monique Bair DiSabatino, “Expiration Dates May Not Matter: 710 Long Ridge and the Rejection of Expired CBAs,” XXXIII ABI Journal 5, 56-57, 96, May 2014, available at abi.‌org/abi-journal); In re Karykeion Inc., 435 B.R. 663, 674 (Bankr. C.D.

Cal. 2010) (granting motion to reject provision in expired CBAs); United Steelworkers of Am. AFLCIO-CLC v.

Ormet Corp. (In re Ormet Corp.), No. 2:04-CV-1151, 2005 WL 2000704, at *1 (S.D.

Ohio Aug. 19, 2005) (upholding court order granting motion to reject and modify expired CBA); United Food & Commercial Workers Union, Local 770 v. Official Unsecured Creditors Comm.

(In re Hoffman Bros. Packing Co.), 173 B.R. 177, 184 (B.A.P.

9th Cir. 1994) (concluding that § 1113 extends to continuing CBA obligations). 3 In re Trump Entm’t Resorts, 810 F.3d 161 (3d Cir. 2016). 4 Id. at 164. The Alternative to Rejection Reaching a New Agreement or Bargaining to Impasse Before examining the details of the Trump case, in order to better understand the implications of the court’s decision, it is useful to describe what would typically be required, under labor law principles, for an employer to modify or terminate continuing CBA terms (if such terms could not be rejected under § 1113).

In the absence of rejection under § 1113, an employer seeking to terminate or modify the terms of an expired CBA would be required to comply with the National Labor Relations Act (NLRA). The NLRA requires employers to comply with the key terms and conditions of a CBA, even after it expires, until a new CBA is reached or the parties bargain, but reach an impasse.5 Under the NLRA, once a collective-bargaining relationship has been established, an employer “may not make a change affecting [the] mandatory bargaining subjects without affording the Union the opportunity to bargain the change.”6 The employer must instead maintain the status quo and continue to make any required payments until the new agreement, or a bargaining impasse, is reached. Determining whether a bargaining impasse has been reached is heavily fact-specific and can be contested. In fact, case law contains many examples of disputes concerning whether an impasse has occurred even where the parties have engaged in prolonged bargaining efforts, sometimes over a period of years.7 An employer’s failure to bargain collectively and in good faith with union representatives constitutes an “unfair labor practice” under the NLRA, which could expose a debtor to significant repercussions.8 The Trump Case In Trump, the debtors owned and operated the Trump Taj Mahal Casino in Atlantic City, N.J. Nearly half of the debtors’ 3,000 employees were 5 See 29 U.S.C. § 158(d). 6 See Trump, 810 F.3d at 168; see also 29 U.S.C.

§ 158(a)(5) and (d). 7 See 710 Long Ridge, 518 B.R. at 817 (noting that debtors believed that they had reached impasse after holding 36 bargaining sessions over 16-month period, but NLRB disagreed and litigation ensued); In re Trump Entm’t Resorts Inc., 519 B.R. 76, 86 n.3 (Bankr.

Del. 2014) (referring to NLRB report in which NLRB’s stated goal in resolving unfair labor practice cases was one year, which timing did not reflect time needed to bargain to impasse); Saunders House v. NLRB, 719 F.2d 683, 684-85, 686 (3d Cir.

1983) (determining disputed issue of whether impasse had been reached over one year after bargaining discussions began and after 15 meetings had taken place between employer and NLRB); see also Laborers Health & Welfare Trust Fund for N. Cal. v.

Advanced Lightweight Concrete Co., 484 U.S. 539, 552 (1988) (stating that “question [of] whether and when an impasse has been reached is often a matter of judgment based on an evaluation of the parties’ bargaining history against standards that are imprecise at best”). 8 See 29 U.S.C. § 160. ABI Journal .

unionized, and the union with the largest number of employees working at the casino was Unite Here Local 54 (the “union”).9 The CBA between the debtors and the union provided that the agreement would remain in effect until Sept. 14, 2014, but would continue in full force and effect on an annual basis thereafter, unless either party provided notice of an intent to terminate, modify or amend the agreement. In early 2014, due to deteriorating financial conditions, the debtors attempted to negotiate a new agreement with the union and, in accordance with the CBA, provided the union with a formal notice of its intent to terminate, modify or amend the CBA.10 The union was generally not receptive to negotiations, and no agreement was reached.11 On Sept. 9, 2014, the debtors filed for chapter 11 protection in the U.S.

Bankruptcy Court for the District of Delaware. Shortly thereafter, on Sept. 14, 2014, the CBA expired.

Following expiration, the debtors sent a proposal to the union to modify the CBA and requested that the parties meet in person to negotiate.12 The debtors’ proposal contemplated, inter alia, significant reductions in pension, health and welfare contributions. Specifically, the debtors’ proposal was premised on cutting approximately $3.7 million per year in pension contributions, $5.1 million per year in health and welfare contributions, and $5.8 million in work-rule changes.13 The union responded to the debtors’ proposal by agreeing to participate in a meeting and requesting additional information concerning the proposal. Following the meeting, the union sent the debtors a counter-proposal, which consisted largely of additional information requests.14 Ultimately, with no new CBA in place and the risk of liquidation growing, the debtors filed a motion to reject the CBA under § 1113 of the Bankruptcy Code and implement the terms of the debtors’ most recent proposal to the union. The bankruptcy court granted the motion,15 after which the union appealed directly to the Third Circuit to challenge the issue of whether § 1113 authorizes a chapter 11 debtor to reject the continuing terms and conditions of an expired CBA. Trump: The Court’s Reasoning Central to the Third Circuit’s determination in Trump that § 1113 extends to the continuing terms of an expired CBA was the court’s analysis of the context in which § 1113 was enacted.

The court explained that § 1113 was enacted as part of Congress’s effort to overturn the U.S. Supreme Court’s decision in Bildisco,16 in which the Supreme Court held that CBAs were “executory contracts” subject to rejection under § 365 of the Bankruptcy Code and determined that an employer’s unilateral changes to the terms of a CBA post-petition and pre-rejection did not constitute an “unfair labor practice” under the NLRA. The Trump court explained that § 1113 counteracts the effects of Bildisco by prescribing strict procedural and sub9 Trump, 810 F.3d at 164. 10 Id. 11 Id. at 165. 12 Id. 13 Id.

at 172. 14 Id. at 165. 15 Trump, 519 B.R. at 92. 16 NLRB v.

Bildisco & Bildisco, 465 U.S. 513, 528-29 (1984). ABI Journal stantive requirements that must be met before a CBA can be rejected and prohibiting unilateral changes to CBAs postpetition and pre-rejection. In imposing these requirements, the Trump court emphasized that § 1113 balances the concerns of economically stressed debtors in avoiding liquidation against the union goals of preserving labor agreements and maintaining influence in the reorganization process.17 With this context in mind, the court determined that extending § 1113 to continuing CBA terms was consistent with Congress’s intent in enacting § 1113, and that the instant case “exemplifie‌ d] the process that Congress intended.”18 [ The court further emphasized that the rejection of the debtors’ continuing obligations under the expired CBA was necessary to permit the debtors’ reorganization.19 Evidence showed that the debtors’ cash would run out in two months if they were required to continue to comply with the continuing CBA terms, and the casino would be forced to close.

In addition, a key component of the debtors’ proposed plan was a conversion of the first-lien lender’s debt to equity, which the lender was only willing to do if, among other things, the debtors’ proposed modifications to the CBA were achieved. The court also reasoned that extending § 1113 to the continuing terms of an expired CBA is consistent with the purpose of the Bankruptcy Code in giving debtors flexibility to restructure their affairs and avoiding burdening the estate in a manner that precludes successful reorganization.20 Finally, the court distinguished case law cited by the union in support of the contention that § 1113 was intended to apply to unexpired CBAs only. In Laborers Health, the Supreme Court held that a federal district court lacked jurisdiction to determine whether an employer’s failure to make post-expiration contributions to a multi-employer pension fund violated federal law, and that the National Labor Relations Board (NLRB) instead maintained exclusive jurisdiction over such issues.21 The union relied on this rationale in arguing that the federal statute at issue in Trump (i.e., § 1113) was intended to extend only to unexpired CBAs and that the NLRB should likewise maintain exclusive jurisdiction over the modification of the CBA in the present case.22 The court rejected this reasoning, finding that while in Laborers Health Congress’s intent was clear in limiting the application of the federal law to unexpired CBAs, in the present case, Congress’s intent is clear in extending § 1113 to the continuing terms of an expired CBA.23 The court explained that “[i]‌ this context, when the employer’s statutory obligation to n maintain the status quo under the terms of an expired CBA will undermine the debtor’s ability to reorganize and remain in business, it is the expertise of the Bankruptcy Court [that] is needed rather than that of the NLRB.”24 Thus, regardless of whether the CBA is in effect or has expired, the court held that bankruptcy courts are the proper forum to review and decide on the modification or rejection of a CBA in accordance with § 1113. 17 Trump, 810 F.3d at 171. 18 Id. 19 Id. at 172. 20 Id.

at 172, 173. 21 See Laborers Health, 484 U.S. at 545. 22 See Trump, 810 F.3d at 172-73. 23 Id. at 173. 24 Id. continued on page 73 May 2016 19 .

3d Circuit Weighs In on Rejection of Expired CBAs from page 19 Implications of Trump The Trump decision represents a significant benefit to debtor/employers regarding expired-but-unfavorable CBAs. Without Trump, debtor/employers would be forced to bargain to an impasse. As previously noted, whether parties have reached an impasse is a fact-specific inquiry that might be difficult to determine, and might be contested. Moreover, it is difficult to bargain to an impasse in circumstances where one party is reluctant to bargain at all. In Trump, the bankruptcy court expressed concern that “while [the] Debtors were imploring the Union to engage with them in discussions, offering to meet ‘24/7’ ...

the Union was engaging in picketing, a program of misinformation ... and most egregiously, communication with customers who had scheduled conferences at the Casino to urge them to take their business elsewhere.”25 The bankruptcy court further noted that, as evidenced by these actions, the “Union was not focusing its efforts on negotiating to reach agreement with the Debtors.”26 Therefore, Trump provides a meaningful alternative for debtors in proceeding with efforts to modify continuing CBA terms in instances where unions appear to be “dragging their feet” or are otherwise reluctant to 25 See Trump, 519 B.R. at 82. 26 Id. negotiate.

Even in other types of circumstances, Trump may be valuable to debtors whose financial conditions require immediate changes. For example, in Trump, the court recognized that a § 1113 rejection is a “much quicker” process than the process contemplated by the NLRA. Of course, the rejection of an expired CBA does not end the debtor/employer’s relationship with its union or its employees. The union remains in existence, and the employees are still employed.

Yet, rejection permits the debtor/ employer to unilaterally impose changes in the terms and conditions of the employment of the union’s members in a manner that permits debtors to reduce significant and unsustainable costs that could otherwise inhibit reorganization efforts and lead to a liquidation. Conclusion As previously noted, the Trump decision reflects the first time that a court of appeals has ruled on the question of whether § 1113 extends to the continuing terms of expired CBAs. Going forward, it will be interesting to see how the Trump ruling will shape future bargaining negotiations, and whether other circuit courts will take a position on this divisive issue in the future. abi Copyright 2016 American Bankruptcy Institute. Please contact ABI at (703) 739-0800 for reprint permission. ABI Journal May 2016 73 .