Under the bankruptcy code, a debtor my reject certain “executory contracts” as they can be considered liabilities to the estate. What this means is that a debtor may choose to assume, or reject, certain contracts depending on whether assumption or rejection would be helpful to the estate in the future. These contracts could generally be any contract the business has entered into, including vehicle leases, real estate leases, contracts to purchase personal or real property, licenses to intellectual property, and franchising agreements.
For businesses in a chapter 7 case, these contracts will likely be rejected, as the estate will be liquified and there is no reason for these contracts to continue. However, under a chapter 11 case, where the plan is to reorganize, the assumption, or rejection, of these contracts, may be crucial to whether the debtor survives the case. A debtor in a chapter 11 case may need to continue to pay its electric bill to literally keep the lights on, but may be able to do away with having an extra company vehicle. These types of contracts are solely left to the discretion of the debtor as to whether it will accept or reject them. However, a collective bargaining agreement, or CBA, is an agreement with a union for employee wages, benefits, and provides specific guidelines on how an employer may interact with its union employees. These contracts may only be rejected or modified by the employer declaring bankruptcy after attempts to negotiate with the union.
Requirements Under Bankruptcy Code 11 U.S.C. § 1113
The bankruptcy code specifically outlines the exact requirements to reject a CBA. 11 U.S.C. § 1113 requires that a debtor (1) make a proposal to the authorized representative of the union, (2) based on the most complete and reliable information available at the time of such proposals, (3) based on the most complete and reliable information available at the time of such proposal, (4) which provides for the necessary modifications in the employees benefits and protections that are necessary to permit the reorganization of the debtor, and (5) assures that all creditors, the debtor, and all of the affected parties are treated fairly and equitably.
Put simply, this rule requires that the employer make a proposal of a new CBA, or at least proposed amendments to the currently in place CBA, that would allow the employer to reorganize. Whether this calls for a change to wages for employees, contributions to healthcare coverage or retirement accounts, the debtor must bring these amendments to the union, along with any information as to why the employer cannot afford the CBA as it is currently written. These include monthly operating reports, previous profit and loss statements, and any other financial disclosures the debtor may have. Any financial information to support the debtor’s position is useful, as it will show that debtor is not simply trying to lower its employees’ wages, but trying to reorganize and thrive after bankruptcy.
In addition, courts will generally disfavor any proposals that are brought in bad faith. For example, in the Third Circuit case, Wheeling-Pittsburgh Steel Corp. v. United Steelworkers of Am., AFL-CIO-CLC, the court found that meeting at reasonable times to confer in good faith was another element of 11 U.S.C § 1113. The union, in turn, must present “good cause” for rejection of the proposed amendments. Good cause, however, cannot solely be based on the union’s desire for its employees to be paid more. The union must show that the debtor is intentionally proposing less than what it requires to reorganize. The union may make a counteroffer or reject the proposals entirely.
Requirements Under Bankruptcy Code 11 U.S.C. § 1114
Wages are not the only part an employer may have to pay under a CBA. Retired employees are also entitled to certain reimbursement and payment of medical bills. Generally, under a CBA, an employer may be liable to pay into a general retirement fund for all employees belonging to the union. Additionally, employers may be liable to pay into a healthcare fund for retired union employees.
Under § 1114, an employer who declares bankruptcy must go through similar steps as § 1113 to reject the retirement and health benefits portion of a CBA. The employer must make a proposal to the union or the retirement fund, if they are separate entities, the union must reject that proposal, and the employer must show the proposal is necessary for reorganization of the debtor.
What Changes are Necessary to Reorganize?
This question must be answered in a typical lawyer fashion. It depends. Debtors tend to have different needs and require different outcomes to reorganize. But generally, debtors in a chapter 11 that are subject to a CBA require just one thing: to be paying less money to the union and the union employees. While this cannot always be achieved, a debtor going through chapter 11 may be able to negotiate the amount of money being paid down to an affordable amount, or may be able to escape the CBA altogether if the union refuses to budge.
Additionally, courts tend to favor those proposals that include what are called “snap back provisions.” What this means is, as in the name, the amendments will “snap back” to the original provisions in the CBA, usually once the plan of reorganization is complete. The courts want to see that the debtor is not declaring bankruptcy solely for the purpose of modifying or rejecting its collective bargaining agreements, and snap back provisions are generally favored among the courts, as they show that the debtor will continue with the CBA once it has reorganized.
What Happens Next?
After the proposed amendments are made to the union and, if applicable, employee trust handling the retirement funds, and the proposed amendments are rejected, without good cause, the debtor may apply with the court for an order either fully rejecting the CBA as an executory contract, or amending it as necessary for the reorganization of the debtor.
Conclusion
If your business is operating at a loss and the collective bargaining agreement your business is subject to will prevent your reorganization, the experienced attorneys at Scura Wigfield Heyer Stevens & Cammarota LLP can help you decide what is the best option for you. Contact our offices to schedule a free consultation.
