Impact of a Bankruptcy Petition on Employers, Employees and Unions
| Publication year | 1984 |
| Pages | 1208 |
1984, July, Pg. 1208. Impact of a Bankruptcy Petition on Employers, Employees and Unions
A new set of rights and obligations arise when an employer files a petition for relief under the Bankruptcy Code ("Code").(fn1) Likewise a bankruptcy petition by an employee imposes certain restraints upon the employer. This article surveys a bankruptcy petition's effect on the employment relationship.
In order to give the debtor a "fresh start," the Code provides that the debtor-in-possession (in the typical Chapter 11 reorganization) or the trustee (in a Chapter 7 liquidation) "may assume or reject any executory contract... of the debtor."(fn2)
Resolving some dispute in the courts and enormous controversy among commentators, the U.S. Supreme Court recently ruled unanimously in NLRB v. Bildisco & Bildisco,(fn3) that the decision of a debtor-in-possession to reject a collective bargaining agreement is to be reviewed under a "somewhat stricter standard" than the "business judgment" test applied to rejection of ordinary commercial contracts. The appropriate standard is a balance of the interests of the debtor, creditors and all employees.
The Court also held that the debtor-in-possession may set aside the collective bargaining agreement without prior court approval, and that failure to bargain with the union before rejecting the agreement is not an unfair labor practice (although failure to bargain is a factor weighing against court approval of rejection of the agreement).
After formal rejection of the collective bargaining agreement, the debtor-in-possession may implement new terms and conditions of employment, but the employer will still have to bargain with the union in good faith toward agreement on a new contract.(fn4) The union may challenge rejection of the pre-petition agreement, and the employer will then have to justify to the Bankruptcy Court the decision to reject the collective bargaining agreement.
As part of a last-ditch attempt by Congress to resolve jurisdictional issues facing the Bankruptcy Courts, the House of Representatives passed a bill on March 30, 1984, that would have overruled Bildisco and allowed rejection of a collective bargaining agreement only when the employer can show that rejection is essential to a reorganization. However, the Senate rejected this provision and, as a compromise, Congress extended the life of the Bankruptcy Courts every month since then without resolving the legislative attack on Bildisco.(fn5)
The Bildisco decision mentions some of the criteria that could appropriately be considered when a Bankruptcy Court decides whether to affirm a debtor-in-possession's rejection of a labor contract. The Supreme Court's balancing test, as noted above, is not a significant change from the tests applied by most courts considering this question. Based upon the Bildisco opinion and prior lower court decisions, the principal factors that are likely to be considered in reviewing a debtor-in-possession's decision to reject a collective bargaining agreement include the following.
1. "Reasonable efforts to negotiate a prompt and satisfactory solution," a requirement the court bases on § 8(a)(5) of the National Labor Relations Act.(fn6) However, it should be noted that failure to bargain would not in itself be illegal, even though it was a basis for the Bankruptcy Court's refusal to affirm the debtor-in-possession's request to reject the contract.
2. "Successful rehabilitation of [the] debtor" would be served by rejecting the contract.(fn7)
3. "The likelihood and consequences of liquidation absent rejection."(fn8)
4. "The reduced value of the creditor's claims that would follow from affirmance and the hardship that would impose on them."(fn9)
5. "The impact of rejection on the employees." The Court's instruction on striking the balance of interests is that the Bankruptcy Court should weigh "not only the degree of hardship faced by each party, but also qualitative differences between the types of hardship each may face."(fn10)
6. The possibility of a strike and the impact on the debtor of a strike."(fn11)
7. The impact on the debtor and on employees of claims that would be filed against the debtor arising from rejection of the collective bargaining agreement.(fn12)
8. The good faith of the debtor and the unions is important.(fn13)
9. Related to the "balance of hardship" issue is a consideration of sacrifices that are being asked of other creditors and other employees to assist in achieving a successful reorganization.(fn14)
The U.S. Supreme Court's balancing test in Bildisco is basically the test that courts have evolved under the Code and its predecessor, the Bankruptcy Act of 1898. The importance of the Bildisco decision is that it flatly rejected the union's position based upon language in one Second Circuit decision that collective bargaining agreements should only be rejected after "strict scrutiny," upon a showing that rejection was necessary for a successful reorganization.(fn15) The Bildisco test considers a broad range of labor and non-labor factors; Bankruptcy Court judges are left to apply "policies of flexibility and equity."
A wide variety of actions against the debtor to collect or enforce debts are automatically stayed with the filing of a bankruptcy petition;(fn16) but certain proceedings important to the employment relationship are not stayed.
Despite the broad language of the automatic stay provisions of the Code, most Bankruptcy Courts confronted with the issue have held that they are deprived of jurisdiction to enjoin strike activity by the anti-injunction provision of the Norris-LaGuardia Act, even when the union is striking to recover past due payments.(fn17) Debtors have argued that an exception to the Norris-LaGuardia Act should be created for the Bankruptcy Code automatic stay, just as the U.S. Supreme Court has created an exception permitting injunctions against strikes violating...
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