When evaluating a debtor’s bankruptcy or restructuring options, determining how to increase or preserve the debtor’s liquidity is crucial to the analysis. Well-advised debtors with significant labor liabilities will need to explore whether attaining cost savings through rejection of their collective bargaining agreements is a viable alternative. When dealing with the issue of CBA rejection pursuant to section 1113 of the Bankruptcy Code, the bankruptcy court decision in In re Trump Entertainment Resorts, Inc. is a helpful resource. 

The Stakes

In Trump, the debtors, owners and operators of two casino hotels located in Atlantic City, New Jersey, moved to reject the CBA between the limited liability company that owns the Taj Mahal Casino Resort and the union and implement the debtors’ proposal modifying certain terms of the CBA. In support of their motion, the debtors’ investment banker testified that relief from the CBA would have to be granted if the debtors were to avoid closing the casino and liquidating the business. The union, in contrast, did not present any witnesses at the evidentiary hearing (although the court refused to speculate on the reasoning behind its failure to do so).

In resolving the motion, the court tackled three issues: first, whether the debtors had the authority to reject the CBA, given that the agreement had expired after the debtors had filed for bankruptcy but before the debtors had filed the rejection motion; second, whether the debtors complied with the requirements for rejection set forth in section 1113 of the Bankruptcy Code; and finally, whether the court could authorize the debtors to modify the CBA and implement the terms of their proposal.

As to the court’s authority to decide the motion post-expiration of the CBA, the court noted that the National Labor Relations Act requires employers to maintain the status quo after a CBA expires and while negotiations for new CBA terms are ongoing. The union argued that section 1113 did not cover the debtors’ statutory status quo obligations post-expiration of the CBA (as compared to the debtors’ contractual obligations when a CBA is extant), and the Bankruptcy Code does not contain a mechanism to alter the debtors’ status quo obligations. Thus, the union argued that the National Labor Relations Board had exclusive jurisdiction over the issue. The bankruptcy court agreed with the debtors and rejected the union’s argument, observing that section 1113 allows for modification of a CBA while the agreement “‘continues in effect’ so long as the debtor shows that the modification is essential to the continuation of the debtor’s business or to avoid irreparable damage to the estate.” Citing to another decision, the bankruptcy court emphasized that “continues in effect” as a term of art refers to an employer’s post-expiration status quo obligations. Central to the court’s analysis in approving the motion was its certainty, based on “uncontroverted evidence” at trial, that the debtors would be forced to close the casino and liquidate if the requested relief were not granted. The court could not discern a reason for distinguishing between an expired and unexpired CBA because granting the union the power to delay the bankruptcy process would subvert the “policy and bargaining power balances Congress struck in Section 1113 . . . .”

As to the debtors’ compliance with the rejection requirements of section 1113, the court reiterated the “necessary” standard for rejection in the Third Circuit’s Wheeling decision, finding the evidence showed that without the relief requested, the debtors would liquidate and all employees (whether union or non-union) would be adversely affected. The court also found that the debtors complied with their responsibility of providing the most complete and reliable information to the union, the information was relevant and necessary to evaluate the debtors’ proposal, the proposal did not impose a disproportionate burden on the employees (in fact, all constituencies had to make concessions), the union rejected the proposal without good cause (despite receiving information from the debtors that they were facing liquidation and closure), the balance of the equities favored rejection, and the debtors met with the union at reasonable times to confer in good faith (while the union, in contrast, was intransigent in its position).

As to the effect of rejection, the court agreed with the debtors that it could authorize the debtors to modify the CBA and implement the terms of their proposal. Although the court observed that the text of section 1113 did not explicitly grant the court authority to implement the proposal terms, the “reasoned view” is that a debtor in possession is authorized “to implement changes to the terms and conditions of employment that were included in the section 1113 proposals approved by the bankruptcy court.”

Cashing Out

What is the main take-away from the Trump decision? Trump underscores the importance of presenting credible and convincing evidence in support of an 1113 motion at trial. The court granted the debtors’ rejection motion because it was convinced that liquidation would result if the relief were denied, and this conclusion was bolstered by, among other things, the testimony of the debtors’ investment banker. Moreover, the court discussed the millions of dollars in pension, health, and welfare contributions the debtors were required to pay pursuant to the CBA and the debtors’ dire financial straits, such that if relief from the CBA were not granted, the debtors would be forced into closure and liquidation.

UPDATE: On October 23, 2014, the union filed a notice of appeal with the bankruptcy court and is appealing the decision to the United States District Court for the District of Delaware.