In this installment of the Weil Bankruptcy Blog’s series on the ABI Commission Report, we consider the Commission’s recommendations on collective bargaining agreements under section 1113 and retiree benefits under section 1114 of the Bankruptcy Code.

Section 1113: The Commission’s Considerations

Section 1113 of the Bankruptcy Code requires that, before filing an application seeking rejection of a collective bargaining agreement, the debtor must make a proposal to the authorized representative of the employees covered by the agreement, give the representative the information necessary to evaluate the proposal, and meet with the representative to confer in good faith. If the representative refuses to accept the proposal without good cause and the balance of the equities clearly favors rejection, then the court must approve the application for rejection.

In its evaluation of section 1113, the ABI Commission highlighted that the treatment of labor contracts is one of the most important and difficult decisions a debtor with a unionized workforce will make in its chapter 11 case. The Commission identified several problems with section 1113, including its failure to lead to meaningful negotiations and the courts’ proclivity to approve debtors’ motions to reject collective bargaining agreements. The Commission’s additions to section 1113 aim to encourage negotiated resolutions by providing structure to the bargaining process and treating rejection of any collective bargaining agreement as a breach of contract giving rise to a claim for rejection damages.

A More Structured Bargaining Process

The Commission recommends that the debtor first file a request with the bankruptcy court for a conference regarding the initiation of section 1113 and serve the request, along with its initial proposal and the other information required by section 1113(b)(1), on the employees’ representative. The bankruptcy court should then set a status conference to discuss the bargaining process with the debtor and the employees’ representative. The Commission suggests that the status conference be held within 30 days of the filing of the request, but should also be scheduled so as to allow the employees’ representative sufficient time to review the debtor’s proposal and meet with the debtor to discuss issues such as a negotiations timetable, information disclosure, and whether a mediator should be appointed.

At the initial status conference, the debtor and the employees’ representative should finalize the timetable for negotiations and resolve any issues related to the disclosure of information relevant to evaluate the proposal, the potential involvement of a mediator, and any potential roadblocks in negotiations. If the parties cannot reach an agreement after the period specified in their agreed-upon timetable, the debtor may ask for an additional status conference in order to request a case management process for a motion to reject the collective bargaining agreement. At that conference, the court should set a date for the parties to submit a case management and scheduling order. The court should also schedule a trial on the debtor’s motion to reject the collective bargaining agreement within 180 days after the request for the initial status conference.

Post-Litigation Rejection Damages

The Commission also answered the question of whether rejection of a collective bargaining agreement gives rise to a rejection damages claim. Noting the current split in case law regarding the issue, the Commission ultimately decided that rejection of a collective bargaining agreement should constitute a breach of the agreement as of the time of rejection and that employees may assert a general unsecured claim for damages arising out of that rejection. The Commission also agreed that the amount of such a claim should be based on the difference between the pre-rejection contract terms and any post-rejection reductions.

Section 1114: The Commission’s Considerations and Conclusions

As part of its recommendations regarding labor and benefits, the Commission also examined section 1114 of the Bankruptcy Code, which governs the debtor’s treatment of retiree benefits through a procedure similar to that under section 1113. In particular, the Commission focused on the current split in case law regarding whether the term “retiree benefits” includes plans that a debtor has the right to terminate at will.

The Commission ultimately decided that section 1114 should apply to those retiree benefit plans that can be terminated at will. The Commission also stated, however, that changing or terminating benefits under such plans should not create a new claim or modify a claim for unpaid benefits. The debtor can use the fact that it had the right to unilaterally modify or terminate a retiree benefits plan as a defense in an objection to the amount of a claim based upon the modification or termination of the plan.

Implications

If adopted, the Commission’s proposed changes to section 1113 would provide a helpful structure to the process through which collective bargaining agreements are addressed in bankruptcy. The changes to section 1113 also encourage consensual resolutions rather than unilateral rejection of collective bargaining agreements, which increases the likelihood that both the debtor and its employees will be satisfied with the treatment of employee interests. Moreover, while the proposed changes to section 1114 use the broadest definition of “retiree benefits,” they still recognize to some degree that a particular set of benefits may be terminable at will by the debtor. As such, both sets of proposed changes attempt to strike a balance between a debtor’s interest in successfully reorganizing and an employee’s interest in his or her rights under certain labor and employment arrangements with the debtor.