On September 4, 2012, Judge Sean H. Lane granted American’s renewed motion to reject its CBA with the Allied Pilots Association.  As discussed HERE, on August 15, the court denied American’s original motion to reject the CBA on narrow grounds, but allowed American to submit a renewed motion that remedied the codesharing and furlough defects identified by the court.  American submitted a revised proposal to the APA the following day and renewed its motion on August 17.  Notably, the APA did not argue that American’s modifications to the codesharing and furlough provisions were not necessary.  Instead, the APA argued that new information regarding (i) a potential American-US Airways merger, (ii) American’s labor costs as compared to the rest of the airline industry, and (iii) American’s decision to accept a reduced amount of labor savings from its non-pilot employees made American’s proposed changes to the CBA unnecessary to its reorganization.

The court dismissed the APA’s objections and held that the APA had not introduced new facts with respect to a potential American-US Airways merger and American’s labor costs as compared to the rest of the airline industry.  Accordingly, the court refused to revisit its August 15 opinion rejecting these arguments.

The court also rejected the APA’s new argument that because American had agreed to a 17% labor cost savings with its other union and non-union employees, American’s request for a 20% labor cost reduction from the APA was not necessary to its reorganization.

The court held that American’s decision to reduce labor cost savings “ask” from non-pilot employees from 20% to 17% was based on American’s settlement negotiations with those employees.  As a result, the court held that evidence of this reduction was inadmissible under Federal Rule of Evidence 408, which prohibits the use of certain settlement-related materials.  The court noted that Rule 408 was enacted to encourage settlement negotiations and that this policy was particularly strong in the context of section 1113.  Additionally, admitting the reduced ask into evidence would have a “significant chilling effect” on future debtors seeking to renegotiate CBAs.   Even if the reduced ask was admissible, the court found that the “the notion that a 3% difference dooms [American’s renewed motion] is misguided.”

The court reiterated that under prevailing Second Circuit law, debtors need not limit their modification requests to the bare minimum in order to satisfy the necessity requirement of section 1113.  Accordingly, the court held that based on the substantial evidence on the record from the original motion to reject the CBA and the evidence presented in connection with the renewed motion, American had demonstrated that its proposed modifications to the CBA were necessary to its reorganization and authorized American to reject the CBA.  The court urged the parties to reach a new agreement stressing that it was “something that’s got to happen” in order for the bankruptcy cases to proceed.

As noted in our prior posts on the American and Hostess bankruptcies, SDNY Bankruptcy Courts have provided debtors seeking to reduce their labor costs with a roadmap to navigating the section 1113 process and may lead to more debtors attempting to reject their CBAs to achieve those cost reductions.