On January 15, 2016, the United States Court of Appeals for the Third Circuit (the “Third Circuit”) held in In re Trump Entertainment Resorts that section 1113 of the Bankruptcy Code permits a debtor to reject an expired collective bargaining agreement (“CBA”). The Court ruled that section 1113 is not limited to “unexpired”  or  “executory”  CBAs,  provided  that  the  bankruptcy court  determines  that  the  statutory requirements for rejection under section 1113 have been met.1   Under the National Labor Relations Act (“NLRA”), debtors are required to maintain the status quo and continue making payments pursuant to a CBA even after it expires.  The Court held that rejection of an expired CBA allows the bankruptcy court to subsequently authorize a debtor to implement the terms of the debtor’s proposed modified CBA to the extent permitted by section 1113.

Background

Trump Entertainment Resorts, Inc., and its affiliated debtors (the “Debtors”), own and operate the Trump Taj Mahal casino in Atlantic City, New Jersey (the “Casino”). The Casino employs 2,953 employees, 1,467 of whom are unionized. UNITE HERE Local 54 (the “Union”) is the largest of the employee unions, representing 1,136 employees. The most recent CBA between the Union and the Casino was negotiated in 2011 for a three-year term. The CBA contained a duration provision that provided that the agreement would remain in effect until September 14, 2014 and would continue in full force and effect from year to year thereafter unless either party served sixty days written notice of its intention to terminate, modify, or amend the CBA.

In early to mid 2014, due to the Casino’s deteriorating financial condition, the Debtors gave the Union notice of their “intention to terminate, modify or amend the CBA” and attempted to negotiate a new agreement, but were unsuccessful. On September 9, 2014, the Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code. On September 14, 2014, with no new agreement in place and the Debtors having served the notice, the CBA expired.

On September 17, 2014, the Debtors sent the Union a proposal and supporting documentation to demonstrate their “dire” financial condition, requesting to meet “on any day and at any place” within the next seven days to discuss a new agreement. After a meeting between the Debtors and the Union, a counter-proposal was sent to the Debtors by the Union.

On September 26, 2014, the Debtors filed a motion pursuant to section 1113 of the Bankruptcy Code seeking to reject the CBA and implement the terms of the Debtors’ last proposal to the Union, asserting that rejection of the CBA was necessary for the Debtors’ successful reorganization.

The Debtors’ section 1113 proposal included substantial annual savings in pension, health and welfare contributions, and work rule changes. The Debtors’ reorganization plan also included obtaining tax relief, converting the first lien secured creditor’s debt to equity, and infusing $100 million of capital from the first lien secured creditor. The first lien secured creditor’s performance was contingent on rejection of the CBA and obtaining tax relief. Thus, if the court denied the Debtors’ section 1113 motion to reject the CBA, the Debtors would be forced to liquidate.

Bankruptcy Court Decision

On October 17, 2014, the Bankruptcy Court granted the Debtors’ motion to reject the expired CBA and authorized the Debtors to implement their last proposed agreement. In granting the motion, the Bankruptcy Court addressed three issues.

  1. Authority to Grant the Motion to Reject an Expired CBA

The Bankruptcy Court first considered whether it had authority to grant the Debtors’ motion to reject the CBA, given that it had expired after the Debtors filed for bankruptcy but before the Debtors filed the rejection motion. The Bankruptcy Court noted that, in passing section 1113, Congress recognized the need for an expedited process by which debtors could restructure labor obligations while still providing protection for union employees. The Bankruptcy Court saw no reason to distinguish between expired and unexpired CBAs. To make such distinction would grant the Union the power to delay the bankruptcy process regardless of whether the CBA expired and would subvert the “policy and bargaining power balances Congress struck in section 1113.” The Bankruptcy Court concluded that section 1113 permitted rejection of expired CBAs.

  1. The Debtors’ Sat isfaction of Section 1113 Requirements

The Bankruptcy Court also found that the Debtors satisfied the requirements of section 1113.  Under section 1113, the Bankruptcy Court must find that (i) the debtor made a proposal to its employees which provides for those modifications in the employees benefits and protections that are necessary to permit reorganization and assures that all creditors, the debtor and all affected parties are treated fairly and equitably; (ii) the authorized representative of the employees refused to accept the debtor’s proposal without good cause; and (iii) the balance of the equities clearly favors rejection of the CBA. The Bankruptcy Court found that the Debtors met each of the requirements and that the balance of equities clearly favored rejection of the CBA in light of the Union’s uncooperativeness in negotiations and the fact that the Debtors would be forced to close the Casino and liquidate if the requested relief were not granted.

  1. Implementation of the Debtors’ Proposal

Third, the Bankruptcy Court determined that, under section 1113, the Court could authorize the Debtors to modify the expired CBA and implement the terms of the Debtors’ proposal. The Bankruptcy Court recognized that section 1113 does not explicitly grant the Court authority to implement a proposal, but the “reasoned view” was that a debtor in possession would be authorized to “implement changes to the terms and conditions of employment that were included in the section 1113 proposal approved by the bankruptcy court.”

Third Circuit Decision

The Union petitioned the Third Circuit for direct appeal of the Bankruptcy Court’s decision. The Union limited its challenge to only the first issue addressed by the Bankruptcy Court, namely, whether a bankruptcy court may grant a motion to reject an expired CBA under section 1113.2 The Third Circuit was confronted with the need to resolve the effect of two potentially conflicting provisions of federal law: (1) section 1113 of the Bankruptcy Code, which allows a chapter 11 debtor to reject CBAs under certain circumstances, and (2) the NLRA, which prohibits an employer from unilaterally changing the terms and conditions of a CBA even after its expiration.

The Union argued that the plain meaning of a “collective bargaining agreement” is a “contract between an employer and a labor union,” and that because the CBA had expired, there was no “contract” to be rejected under section 1113. The Union also relied on the NLRA’s requirement that once a collective bargaining relationship has been established, an employer may not make a change affecting the mandatory bargaining subjects without affording the union the opportunity to bargain over the change. The Union, therefore, argued that the Debtors were required to bargain to impasse before modifying the key terms and conditions of the expired CBA.

In its decision, the Third Circuit found that the procedural and substantive requirements of section 1113 were intended to prevent employers from terminating negotiated CBAs and avoiding obligations to employees merely by entering bankruptcy. The provision balances the need for economically-distressed debtors to avoid liquidation and the goals of unions to preserve labor agreements and maintain influence in the reorganization process. The Court noted that section 1113 was designed to ensure that “when the NLRA yields to the Bankruptcy Code, it does so only for reasons that will permit the debtor to stay in business.”

As of September 5, 2014, the Debtors had working capital cash of approximately $12 million and the obligation to make annual pension, health and welfare contributions of $13.5-$15.5 million under the CBA even after it expired. The Third Circuit observed that the very circumstances at hand formed the basis for Congressional intent in providing for CBA rejection. Allowing a debtor to reject an expired CBA, or its continuing obligations under an expired CBA, is consistent with the purpose of the Bankruptcy Code, which is intended to provide debtors with the flexibility to restructure their affairs by reducing or extending their debts in a timely manner. Section 1113 furthers the Bankruptcy Code’s goals by allowing debtors to restructure their labor obligations promptly, without being bound by an expired CBA’s burdensome terms while parties in other contexts would otherwise negotiate to impasse.

Conclusion

The Third Circuit’s decision in In re Trump is the first court of appeals decision to permit a debtor that meets the requirements of section 1113 to reject an expired CBA. In the absence of the means and ability to reject an expired CBA, liquidation and failure would be inevitable because debtors would be required under the NLRA to maintain the status quo and fulfill their obligations under an expired CBA.