December 17, 2014 Articles

The House Always Wins: Section 1113 and Debtors with Crippling Labor Expenses

This portion of the Bankruptcy Code may serve as a "Trump" card for debtors facing expired collective bargaining agreements.

By Curtis S. Miller and Matthew R. Koch

Chapter 11 debtors saddled with significant labor obligations may have just drawn the card needed to craft successful plans of reorganization in the face of threatened liquidation. In the recent casino bankruptcy case of In re Trump Entertainment Resorts, Inc., the United States Bankruptcy Court for the District of Delaware determined as a matter of first impression that bankruptcy courts are empowered under Section 1113 of the Bankruptcy Code to reject and modify the terms of expired collective bargaining agreements (CBAs) upon application by the debtor. In re Trump Entm’t Resorts, Inc., 2014 WL 5343818, at *12 (Bankr. D. Del. Oct. 20, 2014). Although the debtor must satisfy the stringent requirements of Section 1113, the court found as a matter of law that the National Labor Relations Act (NLRA) did not limit its authority to approve and enforce a new CBA, even where the existing CBA has expired. Id. at *7–8.

The Bankruptcy Court’s decision effectively grants distressed debtors greater flexibility in dealing with burdensome labor agreements and endeavors to effectuate the union-employer power balance envisioned by Congress and reflected in the Bankruptcy Code. Section 1113 thus provides a useful mechanism by which debtors acting in good faith can unilaterally modify the terms of onerous labor agreements in order to avoid closing their doors and taking away jobs from potentially thousands of employees. Although the Bankruptcy Court’s decision has been certified for direct appeal to the Third Circuit, it will be interesting to see exactly how the decision will impact the labor dynamic surrounding proposed plans of reorganization in the interim.

The Players and Their Bets 
The debtors in this chapter 11 case own and operate two casinos in Atlantic City, New Jersey, including the Trump Taj Mahal Hotel Casino. Faced with mounting expenses and negative cash flow, the casino was forced to file for bankruptcy on September 9, 2014. Pursuant to their collective bargaining agreement with UNITE HERE Local 54 (the union), the debtors were to contribute more than $16 million each year to an employee fund.   

The uncontroverted evidence established that without relief from this burden the debtors would be forced to liquidate and close their business for good. Moreover, having failed thus far to secure DIP financing, expert testimony demonstrated that the little cash collateral keeping the casino open in the interim would run out in less than two months. Put simply, rejection and modification of the CBA, among other concessions, was crucial to the survival of the business and the thousands of attendant jobs at stake.       

Both before and during the bankruptcy case, the debtors made a concerted effort to engage the union in negotiations over the terms of a new CBA. As the court put it, “the Debtors were literally begging the Union to meet [and negotiate] while the Union was stiff-arming” them time and time again. Trump, 2014 WL 5343818, at *3. Confronted with the union’s repeated refusal to meaningfully consider their requests, the debtors unilaterally proposed modifications to the existing CBA (the proposal).   

On September 14, 2014, the CBA expired by its own terms but, pursuant to the NLRA, the debtors were required to maintain the status quo until new terms could be reached. The union, however, largely rebuffed the debtors’ efforts to negotiate and persisted in its prior course of brinksmanship. Seeing no viable alternative, the debtors turned to the court for assistance and moved to reject the terms of the expired CBA and institute those under the debtors’ initial proposal.

The Court’s Hand    
In finding authority to reject the CBA, the court focused on the language and legislative purpose of Section 1113. As stated by the court, Section 1113 is the only provision within the Bankruptcy Code that governs a debtor’s assumption or rejection of a CBA. Trump, 2014 WL 5343818, at *4. Accordingly, a debtor seeking repudiation may do so only if Section 1113 applies and its requirements are satisfied.
To begin its analysis, the court first addressed whether Section 1113 authorizes rejection post-expiration. The union argued that expired CBAs were no longer “executory contracts” capable of rejection under the Bankruptcy Code. Responding to the union’s argument, the court noted that federal courts are split on the issue; namely, whether Section 1113 allows rejection where the CBA only continues in effect “by virtue of the employer’s status quoobligations under the NLRA.” Id. at *5. Nonetheless, for the reasons that follow, the court was persuaded that Section 1113 applied.

First, the court emphasized that nowhere in Section 1113 did Congress use the word “executory.”  Instead, Congress specifically provided for the interim modification of a CBA during the time it “continues in effect.” The court found this word choice intentional, as the phrase has been recognized to be a “term of art regularly used in labor law to refer to [an] employer’s post-expiration status quo obligations.” Trump, 2014 WL 5343818, at *5. Therefore, the court opined, Congress intended to give debtors the ability to modify the effects of a CBA even after it has expired.  Id. at *6. 

The court then went on to reason that implicit in the statute’s authority to modify post-expiration is a similar endorsement of rejection after the fact. According to the court, any other reading would produce an “absurd result” because Congress could not have logically intended to allow “interim modifications to an expired CBA if essential to a Debtor’s business . . . but not allow[] the rejection of the expired CBA terms if necessary” for the debtor to reorganize. Id. at *6(internal quotation marks omitted).

Second, the court found that the legislative policies underlying Section 1113 and the Bankruptcy Code in general supported its interpretation of the statute. Specifically, Section 1113 was enacted by Congress to strike a balance between “affording debtors the flexibility to restructure their labor costs” and “interposing a certain level of court oversight” together with good faith bargaining requirements. Id. Unlike the NLRA, Section 1113 does not require debtors to bargain to an impasse. Rather, it provides for an expedited rejection process by which the court must rule on a debtor’s rejection application within 44 days of filing. See 11 U.S.C. § 1113(d). The court therefore reasoned that the expiration of a CBA does not alter Congress’s intent to avoid protracted negotiation tactics that can destroy the chances of a successful reorganization. See Trump, 2014 WL 5343818, at *6. As such, the court held that Section 1113 applies and a debtor bound by its status quo obligations may seek rejection of an expired CBA under the Bankruptcy Code. Id. at *8.

Lastly, animating the decision was the fact that without rejection the debtors would be forced to liquidate. At that point, the union employees would have nothing—their jobs would be lost and their benefits wiped out. The terms of the CBA would make no difference if the casino was no longer in existence. The court found that result highly undesirable and further supported its conclusion that Section 1113 applies in this context.   

Rules of the Game
The balance of the court’s opinion focused on whether the debtors met their burden of demonstrating that rejection was necessary for a successful reorganization and that the statutory requirements under Section 1113 were satisfied.  In holding that this burden was met, the court again underscored the doomsday effect that continuation of the CBA would have—specifically, liquidation of the business and the loss of all employees’ jobs, both union and non-union alike.  See Trump, 2014 WL 5343818, at *9. Further, the debtors’ proposed course of action provided for fair and equitable treatment of all constituencies involved, each of which were asked to make substantial financial concessions along with the union. Seemingly ignoring the shared sacrifice required in bankruptcy, the union refused to negotiate in good faith and rejected the debtors’ proposal without good cause. Thus, taking the balance of equities into account, the court ruled that rejection of the CBA was more than appropriate in this case. Id. at *11.      

Cashing in Their Chips        
With respect to implementing the febtors’ proposal, the court candidly noted that nothing in the text of Section 1113 explicitly authorized that remedy nor was there controlling law in the Third Circuit on the issue. Id. at *12. Rather, the court looked to secondary sources that affirmed its ability to enforce labor proposals without violating the duty to bargain in good faith under the NLRA. Finding this the more reasoned approach, the court ultimately gave its blessing to the debtors’ proposed terms.      

Future Players Coming to the Table
Trump provides chapter 11 debtors even greater flexibility when it comes to dealing with their pre-petition labor obligations. Going forward, companies entering the bankruptcy arena should be prepared to do battle alone in their efforts to restructure duties imposed by collective bargaining agreements, as this case indicates. Although such a process is highly undesirable from both parties’ perspectives, debtors do have a powerful tool in Section 1113 that enables them to hurdle unrelenting barriers obstructing their paths to successful reorganization.  Even so, debtors and their counsel should note that this tool ideally serves as a last resort solution when compromise cannot be reached.

On the other hand, Trump is just as important to unions representing employees of bankrupt entities as it is to debtors seeking to cut costs.  Unions should be on high alert that courts take the duty to bargain in good faith seriously and that attempts to undermine the bankruptcy process will only serve to their detriment.  At a minimum, unions would be well-advised to confer with the particular debtor and to participate in meaningful negotiations as to the terms of a new CBA.  Otherwise, as witnessed in Trump, the debtor may be authorized to unilaterally impose its own terms without any union input.  As to whether this new power will be cut short by the Third Circuit, time will only tell, but the Court’s rationale nonetheless remains compelling.

Keywords: bankruptcy and insolvency litigation, Section 1113, rejection, In re Trump Entertainment Resorts, Inc., National Labor Relations Act, collective bargaining agreement, labor agreement, liquidation, unions, plan of reorganization

Curtis S. Miller and Matthew R. Koch – December 17, 2014