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By Lawrence E. Dubé
Jan. 15 — In the first appellate court ruling on an important issue in business reorganizations, the U.S. Court of Appeals for the Third Circuit Jan. 15 ruled that the federal bankruptcy code permits a Chapter 11 debtor-employer to reject or modify labor obligations established in a collective bargaining agreement even after the agreement has expired.
The ruling will give Chapter 11 debtors more leeway to seek court relief from post-contract labor obligations that unions refuse to compromise over. It may also make bankruptcy filings more attractive to distressed companies that are seeking to reduce the costs of employing union-represented workers.
The appeals court affirmed a bankruptcy court's order under Section 1113 of the bankruptcy code, 11 U.S.C. § 1113, that permitted casino owner Trump Entertainment Resorts Inc. to reject an expired contract with UNITE HERE Local 54, which represents about a third of the casino's 3,000-employee workforce.
The union and the National Labor Relations Board argued that the court couldn't authorize the debtor to reject or modify employment terms that the employer was bound to maintain under the National Labor Relations Act until it reached a new agreement with the union or bargained to an impasse.
However, Judges Jane R. Roth, Patty Shwartz and Anthony J. Scirica said Section 1113 “does not distinguish between the terms of an unexpired CBA and the terms and conditions that continue to govern after the CBA expires.”
Local 54 President Bob McDevitt said in a statement e-mailed to Bloomberg BNA: “We have learned in Atlantic City over the years not to rely on the courts for justice, and we have been proven right again.”
McDevitt said the union will meet next week to “evaluate all our options and next steps, including legal ones.”
Trump Entertainment Resorts said in a press release: “The Third Circuit's decision is an important milestone in Trump Entertainment's reorganization and satisfies a central condition to the Company's emergence from bankruptcy under its chapter 11 plan of reorganization.”
According to court records, Trump Entertainment Resorts and affiliated companies, including Trump Taj Mahal Associates LLC, filed for bankruptcy protection under Chapter 11 of the bankruptcy code in September 2014.
The debtors also filed a motion asking the U.S. Bankruptcy Court for the District of Delaware to allow them to make changes in pensions, health and welfare benefits, and work rules affecting employees that Local 54 represented at Trump's Atlantic City, N.J., casino.
The debtors relied on Section 1113 of the bankruptcy code, which provides that a debtor may “reject a collective bargaining agreement” if it has made a proposal providing necessary modifications, an employee representative “has refused to accept such proposal without good cause,” and “the balance of the equities clearly favors rejection of such agreement.”
However, Roth wrote for the court, Section 1113 explicitly forbids a Chapter 11 debtor from terminating or altering any provision of a labor contract before it has complied with Section 1113.
The collective bargaining agreement between Trump and Local 54 expired by its terms just a few days after the filing of the bankruptcy proceeding, and shortly before the debtor's motion for Section 1113 relief. However, the bankruptcy court permitted Trump to make extensive changes that had been presented to Local 54 but never accepted by the union (In re Trump Entertainment Resorts, Inc., 2014 BL 294275 (Bankr. D. Del. 2014); 204 DLR A-14, 10/22/14).
Local 54 requested permission to appeal the ruling directly to the Third Circuit, which said the case presented “a question of first impression among the courts of appeals: is a Chapter 11 debtor-employer able to reject the continuing terms and conditions of a CBA after the CBA has expired?”
Local 54 argued that because Section 1113 explicitly refers to rejection of a collective bargaining agreement, the statute was not intended to apply to the post-contract obligation of an employer to maintain existing employment terms until it bargains to an agreement or an impasse with a union. That obligation, the union argued, is based on the employer's duty to bargain under the NLRA, not the expired contract.
In an amicus brief supporting Local 54's appeal, the NLRB argued that in limiting the authority granted under Section 1113 to a “collective bargaining agreement,” Congress used language that was a “longstanding term of art” referring only to an unexpired contract, not to a post-contract obligation (22 DLR A-1, 2/3/15).
Section 1113's authorization for rejection of labor contracts didn't extend to relieving the employer of its bargaining obligations under federal law, the board said.
“[N]othing in the language or legislative history of § 1113 suggests that it was intended to intrude on statutory legal obligations arising solely under the NLRA and not by contract,” the NLRB argued.
Roth acknowledged Section 1113 does not mention the continuing obligation imposed on employers by the NLRA. “However,” she wrote, “neither does it restrict its prescription to ‘executory' or ‘unexpired' CBAs.”
The appeals court said “we will not embark, as the parties do, on a hypertechnical parsing of the words and phrases that comprise § 1113, or focus on a meaning that may seem plain when considered in isolation.”
Section 1113 “balances the concerns of economically-stressed debtors in avoiding liquidation and the unions' goals of preserving labor agreements and maintaining influence in the reorganization process,” the court said.
Roth said the Taj Mahal bankruptcy “exemplifies the process that Congress intended.” The debtors gave the union proposals that included millions of dollars in pension contributions, health and welfare contributions, and work rule changes, the court said, but “[i]nstead of negotiating with the Debtors, the Union stalled the bargaining sessions, engaged in picketing, and attempted to harm the Debtors' business.”
The purpose of the bankruptcy code is to give debtors “latitude to restructure their affairs,” court said.
“[W]hen the employer's statutory obligations to 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 which is needed rather than that of the NLRB,” the court said.
“For that reason,” Roth wrote, “whether the CBA is in effect or is expired, it is the Bankruptcy Court which should make the review and decide on the necessity of the modification.”
“Under the policies of bankruptcy law, it is preferable to preserve jobs through a rejection of a CBA, as opposed to losing the positions permanently by requiring the debtor to comply with the continuing obligations set out by the CBA,” Roth wrote.
Citing “Chapter 11's overarching purposes and the exigencies that the Debtors face,” the court affirmed the bankruptcy court's decision to grant relief under Section 1113.
Kathy L. Krieger of James & Hoffman argued the appeal for UNITE HERE Local 54. Roy T. Englert of Robbins, Russell, Englert, Orseck, Untereiner & Sauber argued for Trump Entertainment Resorts. Both attorneys practice in Washington.
To contact the reporter on this story: Lawrence E. Dubé in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Susan J. McGolrick at email@example.com
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