Considering Which Labor Terms a Debtor May Impose on Its Union After Rejecting a Collective Bargaining Agreement Under § 1113

• Publication year: 2013

Considering Which Labor Terms a Debtor May Impose on its Union After Rejecting a Collective Bargaining Agreement Under § 1113

Jacob L. Kaplan

CONSIDERING WHICH LABOR TERMS A DEBTOR MAY IMPOSE ON ITS UNION AFTER REJECTING A COLLECTIVE BARGAINING AGREEMENT UNDER § 1113

Abstract

Section 1113 of the Bankruptcy Code provides courts with a comprehensive set of criteria for determining when chapter 11 debtors can reject collective bargaining agreements during bankruptcy. When courts approve rejection, however, § 1113 and the rest of the Code are silent about which labor terms debtors may unilaterally impose on their unions. On the rare occasions when courts and the National Labor Relations Board have addressed this issue, they have followed one of two approaches. The first approach limits debtors to imposing only labor terms found in their "last, best offer" to unions before filing a § 1113 motion. The second approach, however, permits debtors to impose any labor terms found in any pre-§ 1113 proposals, subject to court approval.

This Comment argues that courts should follow the second approach. The post-§ 1113 scenario when debtors unilaterally impose labor terms is equivalent to the nonbankruptcy scenario of bargain to impasse when employers are permitted to impose terms from any pre-impasse proposals. Applying a similar approach to the post-§ 1113 scenario would enable courts to act consistently in each case. Limiting the terms that a debtor may impose to those of its "last, best offer" would encourage undesirable behavior by the employer, including negotiating in bad faith, failing to meet with the union at reasonable times, and engaging in unlawful surface bargaining. Finally, under the two most commonly applied models of negotiation, the likelihood of the parties reaching a negotiated agreement is higher if debtors have flexibility to impose terms from any pre-§ 1113 proposal.

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INTRODUCTION

Section 1113 of the Bankruptcy Code ("Code") lays out guidelines for courts to follow in evaluating whether to permit debtors to reject collective bargaining agreements during bankruptcy.¹ After an employer files for chapter 11, but before filing a § 1113 motion to reject a collective bargaining agreement, the Code requires the debtor to negotiate with its union in an effort to reach a modified collective bargaining agreement that averts the need to completely reject the existing agreement.² If those negotiations fail, courts may approve rejection of a collective bargaining agreement if the debtor satisfies the requirements found in § 1113.³ While the Code guides courts in approving rejection, it is silent about which labor terms debtors may impose on their unions following rejection.⁴

Courts and the National Labor Relations Board ("NLRB") have utilized two different approaches when determining which labor terms a debtor may unilaterally impose on its union after rejecting a collective bargaining agreement. One approach, friendly towards organized labor, is to limit the permissible terms to only those found in the debtor's "last, best offer" to its union before receiving court approval to reject the existing agreement.⁵ A second approach, friendly towards employers, is to permit the debtor to impose any labor terms found in any proposal made to the union during the mandatory pre-§ 1113 negotiations, including those found in its initial § 1113 proposal.⁶

This Comment argues that the second approach giving debtors broad latitude to impose any labor term from any pre-§ 1113 proposal is the best approach for courts and the NLRB to follow. Part I provides an overview of the manner in which courts and the NLRB treated the intersection of labor law and bankruptcy law prior to Congress passing § 1113, and discusses the criteria

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for rejecting a collective bargaining agreement found in § 1113. Part II highlights the lack of precedent in both court decisions and NLRB rulings regarding which labor terms debtors should be permitted to impose following rejection. It also draws a comparison to the analogous situation outside bankruptcy of "bargain to impasse," and suggests that bankruptcy courts should adopt a similar standard that permits employers to impose any terms "reasonably comprehended" in any pre-§ 1113 proposal.

Part III discusses the perverse incentives debtors would have during negotiations if limited to imposing only terms from their "last, best offer" to unions. If courts gave debtors broad latitude in the terms they could impose, however, the incentive structure during negotiations would encourage desirable behaviors while discouraging undesirable ones. Finally, Part IV examines the two most common models of negotiation—the economic and problem-solving models—and shows that an agreement is more likely under each model if courts permit debtors to impose terms from any pre-§ 1113 proposal if negotiations fail.

I. BACKGROUND

A. Rejecting Collective Bargaining Agreements in Bankruptcy Prior to § 1113

1. 11 U.S.C. § 365(a)

Before Congress adopted § 1113 in 1984, courts looked to § 365(a) of the Code when considering whether to permit debtors to reject collective bargaining agreements.⁷ Section 365(a) gives courts broad authority to permit debtors to unilaterally decide whether to "assume or reject any executory contract or unexpired lease . . . ."⁸ The Code does not define what the term "executory contract" actually means, but courts typically interpret the term broadly.⁹ This gives debtors wide latitude to reject contracts under the

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"business judgment test" if they apply their best business judgment and determine it is in the best interests of the estate.¹⁰ Prior to Congress adopting § 1113, courts considered collective bargaining agreements to be executory contracts that could be rejected by debtors under this simple and deferential "business judgment" standard.¹¹

2. Mixed Early Precedent on the Labor Law Implications of Rejecting Collective Bargaining Agreements in Bankruptcy

While courts held broad authority under § 365(a) to approve the rejection of collective bargaining agreements as executory contracts, many were unsure of the best way to handle the intersection of labor law and bankruptcy law. In particular, courts handed down mixed rulings about whether trustees and debtors were subject to unfair labor practice charges under the National Labor Relations Act ("NLRA") if they rejected collective bargaining agreements while in bankruptcy.¹²

In Durand v. NLRB,¹³ the trustee for the debtor rejected a collective bargaining agreement with Local Union Number 2746, United Brotherhood of Carpenters and Joiners of America, AFL-CIO.¹⁴ The union responded by filing an unfair labor practice charge with the NLRB alleging unlawful unilateral

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modifications of the collective bargaining agreement.¹⁵ The trustee countered by arguing that the NLRB had no jurisdiction in the case because the employer was in bankruptcy.¹⁶ The NLRB, however, found that it did have jurisdiction, and that the trustee had in fact engaged in unfair labor practices.¹⁷ The trustee appealed the ruling to the district court, but the court sided with the NLRB, reasoning "Congress has not seen fit to insulate a receiver or trustee in bankruptcy from the jurisdiction of the National Labor Relations Board as far as unfair labor practices are concerned."¹⁸

In contrast, the bankruptcy court in Shopmen's Local Union Number 455 v. Kevin Steel Products, Inc.¹⁹ allowed the debtor to reject its collective bargaining agreement with Shopmen's Local Union Number 455 International Association of Bridge, Structural and Ornamental Iron Workers, AFL-CIO.²⁰ This led the union to appeal to the district court, and the NLRB filed unfair labor practice charges against the debtor.²¹ After the district court found in favor of the union, the debtor appealed to the Second Circuit.²²

Contrary to both the district court and Durand, the Second Circuit ruled in favor of the debtor, holding that it could reject the collective bargaining agreement without committing an unfair labor practice because "a debtor in possession . . . is not the same entity as the [prebankruptcy] company. A new entity is created with its own rights and duties . . ." and is not subject to the old collective bargaining agreement.²³ Thus, no unfair labor practices accrue against the new, postpetition entity for voiding the collective bargaining agreement of the old, prepetition entity.²⁴

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3. NLRB v. Bildisco & Bildisco²⁵

The uncertainty about how to treat overlapping labor and bankruptcy issues in lower courts ultimately led the Supreme Court to grant certiorari in NLRB v. Bildisco & Bildisco. The Court confronted two key issues. First, the Court sought to dictate the conditions under which a bankruptcy court could permit a debtor to reject a collective bargaining agreement.²⁶ Second, the Court wished to determine whether the NLRB could find a debtor guilty of committing an unfair labor practice for unilaterally terminating or modifying a collective bargaining agreement.²⁷

a. Heightened Standard for Approving Rejection

To shed light on the first issue, the Court began by re-establishing the premise that collective bargaining agreements are executory contracts under § 365(a) of the Code.²⁸ The NLRB did not dispute this premise, but, citing numerous circuit court precedents, argued instead that bankruptcy judges should be required to apply a stricter standard than the classic "business judgment" test when considering whether to permit rejection of collective bargaining agreements.²⁹ The Court agreed with the NLRB, noting that due to the "special nature of a collective bargaining agreement . . . a somewhat stricter standard" should be applied to the rejection of a collective bargaining agreement than to the rejection of other executory contracts.³⁰

To apply this higher standard, the Court chose to adopt the new test endorsed by the Third Circuit in Bildisco, prior to...