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Third Circuit Permits Chapter 11 Debtor to Reject Expired CBA

By Natalie Young

It is a familiar scenario: a company is on the verge of bankruptcy, bound by the terms of a collective bargaining agreement (CBA), and unable to negotiate a new agreement.  However, this time, an analysis of this distressed scenario prompted a new question: does it matter if the CBA is already expired, i.e., does the Bankruptcy Code distinguish between a CBA that expires pre-petition versus one that has not lapsed?

Here, in a case of first impression at the circuit court level, the Third Circuit Court of Appeals affirmed the Bankruptcy Court’s order and allowed a debtor-employer to reject an expired CBA pursuant to 11 U.S.C § 1113 of the Bankruptcy Code.  Section 1113 permits a debtor-employer to reject an existing CBA in certain circumstances, including failed negotiations.  However, Section 1113 does not explicitly apply to expired CBAs and so, in this case, the Union argued that Section 1113 was not applicable.  The Third Circuit disagreed in part because an expired CBA is not expired in the traditional sense; instead, federal law requires the parties to the expired CBA to maintain the status quo while a new agreement is negotiated.

The Third Circuit determined that the terms of the CBA, regardless of whether the agreement was ongoing or expired, were a direct impediment to the preservation of jobs and the reorganization of the debtor.  When a debtor’s obligation to maintain the status quo following an expired CBA hinders its reorganization, the Bankruptcy Court is the appropriate venue for review.  Here, the Bankruptcy Court properly intervened when the debtor-employer faced liquidation and 3,000 employees faced unemployment.

The Union further argued that this result would conflict with the National Labor Relations Act (NLRA) by permitting an employer to unilaterally change a CBA after its expiration.  However, Section 1113 allows a debtor to reject a CBA if it determines that such an action is both “necessary” to permit reorganization and fair and equitable to all parties.  Since the debtor-employer was unable to obtain debtor-in-possession financing without the required labor concessions and its financial health was in serious peril, the Bankruptcy Court exercised its authority under Section 1113 and permitted the debtor to reject the expired CBA and implement its plan of reorganization.  Since the same legislative intent of Section 1113 applies to expired and unexpired CBAs, the Third Circuit concluded that it was a distinction without a difference.

The Court's decision is certainly helpful to employer-debtors, providing them with increased flexibility and leverage when working through a reorganization or planning one.

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Eric R. Blythe is a Mintz attorney with deep capabilities in commercial litigation and lending, debt restructuring and workouts, distressed debt advising, and corporate and municipal reorganization. His clients have included lenders, secured and unsecured creditors, corporate borrowers, and bondholders.