CHAPTER 5, D. Eleventh Circuit Affirms Use of § 1114 in Liquidating Chapter 11s

• Jurisdiction: United States

D. Eleventh Circuit Affirms Use of § 1114 in Liquidating Chapter 11s

ABI Journal

April 2019

Jed Donaldson

Vandeventer Black, LLP

Richmond, Va.

In recent years, coal companies have sought bankruptcy protection due to a confluence of factors that include regulatory burdens, environmental liabilities, the decreasing cost of natural gas, and legacy liabilities related to employees and retirees. Many coal companies have historically relied on unionized labor forces governed by collective-bargaining agreements (CBAs).¹

However, the coal industry is not the first industry to grapple with CBAs during the bankruptcy process, as the airline industry also saw a spate of cases in which debtors sought to reject or modify CBAs.² With respect to legacy employee and retiree liabilities, the coal industry is unique due to congressional requirements pertaining to retiree benefits.

The rejection and modification of CBAs and retiree health care benefits are controlled by §§ 1113 and 1114 of the Bankruptcy Code, respectively. Section 1113 authorizes the rejection or modification of a CBA if certain factors are met, with the same being true of § 1114 as to the rejection or modification of retiree benefits. The § 1114 analysis that courts must undertake as to debtors that operate in the coal industry also includes the federal Coal Act, which requires that companies provide benefits for life to retirees.

In late 2018, the Eleventh Circuit issued a decision arising from Walter Energy.³ This bankruptcy case addressed the obligations of a coal company that liquidates in a chapter 11 to fund retiree health care benefits. Walter provides a thorough analysis of the history leading to the enactment of the Coal Act and §§ 1113 and 1114, and how those statutes intersect in a chapter 11 asset sale rather than a confirmed chapter 11 plan. Ultimately, Walter held that bankruptcy courts are authorized to modify or reject retiree health care benefit plans under § 1114 in a liquidating chapter 11.

Background of §§ 1113 and 1114

Section 365 of the Bankruptcy Code addresses executory contracts and unexpired leases, including their rejection at subsections (a), (d) and (g). Broadly, § 365 affords debtors the right to reject, or assume, executory contracts under the business-judgment standard.⁴ In 1988, in response to the U.S. Supreme Court's decision in NLRB v. Bildisco and Bildisco,⁵ Congress enacted the Retiree Benefits Bankruptcy Protection Act of 1988 (RBBPA),⁶ including § 1114. Before Bildisco, bankruptcy courts generally evaluated the rejection of CBAs under § 365's business-judgment standard, as the bankruptcy court did in Bildisco when it authorized rejection of that CBA.⁷ The Supreme Court's Bildisco ruling affirmed the lower courts and held that while a debtor must negotiate in good faith under federal labor law, a debtor might unilaterally reject a CBA.⁸

Bildiscd's analysis provided several factors for consideration in rejecting a CBA: (1) if the CBA burdens the debtor's estate; (2) if the balance of the equities favors rejection; and (3) if "reasonable efforts to negotiate a voluntary modification have been made and are not likely to produce a prompt and satisfactory solution."⁹ With the RBBPA, Congress created stricter standards for the rejection or modification of CBAs and retiree health care benefits.

In order to reject a CBA under § 1113, the trustee must first make a proposal to the authorized representative, "which provides for those necessary modifications in the employees' benefits and protections that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably."¹⁰ The trustee must also show that "the authorized representative of the employees ... refuse[s] to accept such proposal without good cause; and the balance of the equities clearly favors rejection of such agreement."¹¹ Notably, if the court finds each of these three elements present, it must grant a motion to reject a CBA.¹²

Section 1114 addresses the payment of insurance and health benefits to retired employees.¹³ It requires that the trustee make a proposal that "provides for those necessary modifications in the retiree benefits that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably."¹⁴ Next, it must be established that "the authorized representative of the retirees has refused to accept such proposal without good cause."¹⁵ Finally, the trustee must show that "such modification is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities."¹⁶

Section 1114(c) and (d) address who might be the "authorized representative" for retirees, providing that a labor union governed by a CBA that covers the retirees may do so. Alternatively, if a labor union elects not to be the authorized representative, then the court may appoint a committee of retired employees...