Bargaining in Bankruptcy: Unions and Chapter 11

Welcome to the 116th Pari Passu newsletter.

Last week, we went very deep into the famous Neiman Marcus restructuring. Today, we are back with a more tactical (shorter) post: unions in a Chapter 11 context.

Before we get started, Pari Passu has recently passed 20,000 subscribers. To thank you all, I am doing a giveaway of the Pluralsight Deep Dive. This was my favorite and most-read article of 2024. The article is now behind paywall, but you can get it for free here.

Let’s get to today’s topic! Unions have been making headlines recently, from the Park City Ski Patroller Strike [9] to the inflation bomb that could have been a prolonged International Longshoremen’s Association strike [10]. Acronyms like CBA, NLRA, and NLRB are often tossed around by talking heads all the time, but rarely explained. For those who are just trying to make sense of it all, we aim to provide a clear and concise overview of what unions are and how they are treated in the Chapter 11 Process. 

To further your understanding of these concepts, we’ll then dive into two cases that highlight how unions are treated in the Chapter 11 process. Both examples demonstrate the complexities of balancing workers' rights and the financial future of a company, with one showing how Chapter 11 can be used as a tool to provide favorable outcomes for all involved, while the other serves as an example of some of its shortcomings.

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Overview of Unions in Chapter 11

Chapter 11 of the Bankruptcy Code aims to allow distressed businesses to reorganize rather than liquidate, thereby preserving jobs, enterprise value, and hopefully value for creditors. Upon filing for Chapter 11, a business becomes a “debtor in possession” (DIP) and is granted an automatic stay that halts most collection actions, meaning creditors temporarily cannot chase the company for payment. The debtor typically has the exclusive right (for 120 days) to propose a plan of reorganization that repays creditors, at least partly, and allows the business to emerge as a functioning business that continues operating after bankruptcy (a going concern). 

When employees are unionized the reorganization process can become tricky, as not only does the company have to work within the bounds of the already complex U.S. Bankruptcy Code, but also within federal labor laws designed to protect collective bargaining rights. These rights are enshrined in a Collective Bargaining Agreement (CBA). Unlike a standard employment contract, CBAs contain a lot more than just wages and benefits - they are highly negotiated documents detailing work schedules, overtime rules, how shifts are distributed, health and retirement benefits, and disciplinary procedures. They are negotiated through formal talks between an employer and a union and often take weeks (or even months) of bargaining sessions, meetings, and proposals before both parties settle on a final CBA. CBAs are usually negotiated between a union (representing a broader workforce across multiple companies) and individual companies - a nurse’s union, for example, may have hundreds of CBAs for hospitals across the country. 

After spending all this time negotiating, it’s no surprise that union representatives want to preserve their gains and ensure that their members are treated well. On the other hand, the business must also reduce expenses in order to survive. This is where Section 1113 of the Bankruptcy Code, which is specific to CBAs, comes into play [1].

Before we dive into Section 1113, let’s quickly discuss some of the relevant federal legislation. 

• NLRA (National Labor Relations Act)
  Passed in 1935, the NLRA established employees’ right to form and join unions, bargain collectively, and engage in concerted activities (like strikes or picketing) [1]. Section 8 of the NLRA requires employers to bargain in good faith with the authorized union representative - meaning that the employer can’t just go through the motions: it must genuinely listen, consider the union’s proposals, and try to reach an agreement, rather than stonewalling or refusing to discuss any issues. 

• RLA (Railway Labor Act)
  Governing airlines and railroads, the RLA imposes extended procedures (mediation, “cooling-off” periods, potential presidential intervention) before the union can engage in strikes or lockouts [1]. It aims to avoid work stoppages in industries seen as essential to interstate commerce. Interestingly, the Longshoremen strike was not governed by the RLA. For context, the Longshoremen strike involved West Coast dockworkers striking over a wage increase, better benefits, and resistance to automation. The strike threatened to disrupt key ports across the West Coast, delaying trade and rattling supply chains across the country. Though this strike clearly could have affected interstate commerce, the lack of RLA power left the government relatively helpless. While a resolution was eventually reached, it still demonstrates how certain unions have the power to cripple U.S. trade despite the RLA.  

• NLGA (Norris-LaGuardia Act)
  The NLGA was enacted in 1932 to restrict courts’ abilities to interfere with labor disputes. It ensures that workers have the right to strike without the federal courts filing injunctions, which are court orders that can require or prohibit certain actions. [1]. However, its scope can be narrowed if another statute (like the RLA) specifically mandates preserving the “status quo” (the same wages and work rules while negotiations continue).

As a result of this legislation, unions maintain several powerful tools - including the threat of a strike - while employers often rely on chapter 11’s ability to shed burdensome contracts (i.e., expensive CBAs) if they can prove doing so is necessary to reorganize. Whether and how an employer may reject or modify a CBA in bankruptcy is governed by Section 1113 [1].

The Basics of Section 1113

For much of U.S. history, courts often treated CBAs as ordinary executory contracts under Section 365 of the Bankruptcy Code, meaning a debtor could reject a CBA if it decided the contract was too expensive [1]. In NLRB v. Bildisco & Bildisco [1], the Supreme Court ruled that a CBA is indeed an executory contract and can be rejected if it “burdens the estate” (i.e., is too costly) and the equities favor rejection - meaning that the court evaluates whether rejecting contract is fair to everyone involved.  The Court also held that a debtor could unilaterally modify the CBA before rejection was formally approved, which prompted significant backlash from organized labor [1]. 

Unions then lobbied Congress to try and reign in that power. The result was Section 1113 of the Bankruptcy Code, which was put into effect in 1984 [1]. Section 1113 institutes specific procedures that must be followed in order to modify or reject a CBA:

1. Proposal Requirement

   1. Before filing a motion to reject, the debtor must propose specific modifications that are “necessary to permit the reorganization of the debtor” and that treat all parties (including employees) “fairly and equitably” [1].

   2. The proposal must be based on the “most complete and reliable information” available at the time

2. Bargaining in Good Faith

   1. The debtor must meet at reasonable times with the union and “confer in good faith” (you’ll hear good faith a lot in these statutes)  in an effort to reach a mutually satisfactory solution[1]. 

3. Refusal Without Good Cause

   1. If the union refuses to accept the proposal “without good cause,” the court may consider rejecting the CBA [1]. Whether the union has good cause depends on a variety of factors, such as whether the union’s rejection is driven by valid economic objections or whether it is merely stonewalling.

4. Balance of the Equities

   1. Finally, the court will only grant rejection if the balance of the equities “clearly favors” rejection [1]. Courts consider, among other things, whether the likely alternative is liquidation (complete shutdown) and widespread job loss, how rejection would affect other creditors, and how fairly the debtor has distributed the necessary sacrifices among all stakeholders (for example, employees, bondholders, and shareholders).

Of course, like many things regarding the law, clarifications can lead to even more questions. When a court says a modification must be “necessary”, do they mean absolutely essential to avoid liquidation, or is it enough that these modifications help achieve a viable, long-run reorganization? There’s no solid answer yet, as this often depends on the judge’s view. Some judges believe that the proposed modifications must be absolutely minimal and critical for preventing liquidation. Most judges believe that “necessary” permits modifications that are needed to preserve competitiveness and ensure success in reorganization, not just the bare minimum required for corporate survival. 

Of course, this raises the question - if a company plans to reject a CBA, why wouldn’t the union just go on strike? Section 1113 does not, by itself, bar a union from striking if a CBA is rejected [1]. Under the NLRA, striking is generally permissible if the union believes management has changed wages or work conditions unfairly. In practice, the union’s ability to strike can force debtors to negotiate more generous concessions. However, in RLA-governed industries (airlines, railroads), extended mediation and “status quo” provisions often delay or restrict striking. 

Part Two: Case Study – In re Maxwell Newspapers, Inc.

In early 1990s New York, the Daily News was a storied but financially fragile newspaper [1][3]. Over time, it had negotiated CBAs with multiple unions, including the New York Typographical Union No. 6. 

One especially burdensome provision in the typographers’ contract involved “lifetime job guarantees” [1][3]. This arrangement ensured that certain skilled typesetters, whose function was gradually rendered obsolete by modern publishing technology, remained on the payroll indefinitely. As circulation dropped and modern typesetting required less staff, the newspaper’s losses continued to grow [1][3].

Eventually, Maxwell Newspapers, Inc. - owner of the Daily News - filed for Chapter 11 Bankruptcy[1][3]. The sale of the Daily News as a going concern (selling the newspaper to a new owner who would keep it running) became the main path forward, but prospective buyers refused to take on the hefty cost of employing many typographers whose roles were no longer essential [1][3]. Lenders and management feared that if these job guarantees continued, there would be no sale, and liquidation would likely follow [1][3].

Maxwell’s Section 1113 Proposal

Considering the threat of liquidation, Maxwell decided to push for rejection of the CBA. When Maxwell Newspapers prepared its motion under Section 1113, it proposed eliminating the lifetime job guarantees [1][3]. In exchange, it would keep many other union benefits intact, aiming to show that it was distributing the burdens fairly [1][3]. It also provided the union with detailed financial data, including the newspaper’s historical losses, prospective sales offers, and labor cost breakdowns, so the union could see why these cuts were necessary.

The typographers’ union refused the proposed changes, arguing that its members had negotiated these lifetime guarantees years earlier to offset other concessions [1][3]. The union proposed phasing out certain roles, but demanded large lump-sum payouts, additional retirement benefits, or pension contributions - essentially “buyouts” so typographers could retire with financial security [1][3]. Maxwell, as well as potential buyers, found these demands pretty unworkable, especially considering the already precarious state of the business [1][3].

Good Faith Bargaining and “Without Good Cause” Analysis

Under Section 1113, Maxwell had to show that it bargained in good faith (meaning it truly tried to reach a mutually agreeable solution) [1][3]. The union claimed Maxwell’s proposal was too harsh, while Maxwell argued that no buyer would accept the old terms and that the union’s demands far exceeded what the company could afford [1][3]. Ultimately, negotiations deadlocked.

Remember that Maxwell had to meet 2 requirements: bargaining in good faith, and maintaining a balance of the equities. The bankruptcy court found Maxwell had conferred in good faith, citing multiple negotiation sessions, detailed disclosures, and willingness to tweak its proposal [1][3]. Additionally, Maxwell’s willingness to maintain some benefits demonstrated that it was willing to balance the equities, meaning that court weighed the damages and benefits to all involved, and decided that Maxwell’s plan was fair. 

On the Union’s side, the typographers union insisted that the employees deserved significant payouts to surrender the lifetime guarantees [1][3]. The court had to determine whether the Union’s refusal to accept Maxwell’s proposal was for “good cause.” Because no one was likely to purchase the asset if forced to retain dozens of unnecessary employees indefinitely, and because the union had not identified an alternative that met the paper’s needs at a feasible cost, the judge concluded that the union’s stance was unreasonable[1][3].

Finding that the union had refused Maxwell’s proposal without good cause, the bankruptcy court granted the motion [1][3]. The union appealed, and the case went through two more levels of the U.S. court system, before The Second Circuit upheld the bankruptcy court’s decision, arguing that Maxwell’s modifications were indeed necessary for a successful reorganization, that Maxwell had negotiated in good faith, and that the union’s refusal was not justified by a better alternative [1][3]. Following Maxwell’s collapse, the Daily News was sold in 1993 to real estate magnate Mortimer Zuckerman, who subsidized its finances for two decades. In 2017, Tronc  bought the newspaper for $1, taking on its operating and pension liabilities. Four years later, Alden Global Capital acquired Tribune Publishing (Tronc’s successor), transferring the Daily News to a separate Alden-owned entity, where it still survives today.

Additional Case Study: The Bankruptcy of Yellow, Inc.

In 2023, freight trucking company Yellow, Inc. (legally known as Yellow Corp.) abruptly ceased operations and subsequently filed for bankruptcy protection [6], [7], [8]. Pari Passu previously covered the Bankruptcy at length here. 

Yellow employed around 30,000 workers - around 22,000 of whom were covered by a Teamsters (a trade union made up mostly of truckers) union contract [6], [7]. In the years before its collapse, Yellow struggled with significant debt, including a controversial $700mm Treasury loan issued during the pandemic [6], [7]. The company also faced operational challenges stemming from an attempt to modernize or reorganize its trucking divisions, an effort delayed by Teamsters leadership [6].

As the company’s finances deteriorated, disputes between management and union leadership escalated. Yellow claimed the union had stonewalled critical restructuring initiatives needed to refinance over $1.3bn in debt, while the Teamsters alleged gross mismanagement [6], [7], [8]. The union threatened a strike at one point, citing missed benefit payments and a lack of trust in Yellow’s leadership [6]. From the Teamsters’ perspective, workers had already sacrificed over $5bn in wage and benefits concessions since 2009, and further demands were untenable [8].

By August 2023, Yellow halted operations entirely and notified the Teamsters that it planned to liquidate [6]. In the bankruptcy court, Yellow positioned itself for liquidation under chapter 11, rather than chapter 7, likely aiming to maximize asset values through a “Section 363 sale” process, also covered in the aforementioned article [6]. However, its collective bargaining agreements posed a question: Could a buyer pick up Yellow’s assets without honoring the Teamsters’ CBAs or associated pension obligations? [6], [7], [8]. 

In fall 2023, the bankruptcy court approved the sale of Yellow’s core assets to multiple winning bidders. Notably, a large number of Yellow’s trucking terminals were sold for over $1bn, with proceeds designated for secured creditors like the U.S. Treasury [11]. Because the sale was effectively a liquidation, the Teamsters’ members found themselves with limited prospects for future employment at the old Yellow facilities, unless a buyer chose to negotiate a fresh deal with the union.

Like many unionized carriers, Yellow participated in multi-employer pension funds, where different companies pool their money together to provide pensions for members of a labor union. If Yellow were to leave these funds, they would be on the hook for potentially enormous withdrawal liabilities (lump-sum payments meant to cover a company’s share of future obligations)  if its CBAs were rejected [6], [8]. Under the Bankruptcy Code’s priority scheme, however, pension and wage-related claims often fall behind secured creditors. Thus, the Teamsters union has argued that workers lose out under the current system; their best chance was a buyer assuming the CBAs, which rarely happens when the goal is liquidation [6], [7], [8].

Throughout this process, both Yellow management and Teamsters leadership blamed each other for the company’s demise. Yellow maintained that the union sabotaged the company’s revival plan, while the union pointed to years of poor corporate governance and missed benefit payments [6], [7], [8]. Teamsters President Sean O’Brien stated that “corporate bankruptcy law in the U.S. is a joke” and argued for reforms to protect union contracts and prioritize wage claims [6], [8]. 

Even after completing its 363 asset sales, Yellow continued to press legal claims against the Teamsters. One year after the bankruptcy filing, the former carrier appealed to a federal court of appeals seeking to revive a $137mm lawsuit that blamed the union for “sabotaging” its restructuring [11]. This lawsuit centers on the argument that Teamsters leadership breached the CBA by blocking the critical second phase of the “One Yellow” plan and tying it to higher wage demands. A lower federal court dismissed the case, ruling that Yellow failed to exhaust the grievance process required under the CBA. Yellow now contends that it should be allowed to bypass those internal union procedures and seek damages, and the appeals process is currently ongoing. 

Key Takeaways 

CBAs can add significant complexities to the Chapter 11 process due to their provisions protecting workers’ rights. Section 1113 aims to streamline this process by providing a framework for modifying or rejecting CBAs, which are contracts that govern the relationship between a union and an employer. The statute requires that any proposed changes be necessary, fair, and negotiated in good faith. 

At the same time, it’s also important to pay attention to Federal Labor Laws, such as the NLRA, RLA, and NLGA, which all give unions the right to organize, bargain, and strike. Unions in some industries, such as railways and airlines, are limited in their power for the sake of broader economic interests.

Courts are tasked with the difficult task of balancing the survival of a business against the protections afforded to its workers. Restructuring, after all, is a game of sacrifices, and a key responsibility of the courts is ensuring that these sacrifices are shared equitably among employees, creditors, and shareholders. The ultimate objective is to strike a balance that allows the business to successfully reorganize while minimizing harm. Maxwell Newspapers is a great example of how Section 1113 can be used to reject unsustainable provisions, such as lifetime job guarantees when deemed essential for a company’s survival. On the other hand, Yellow's more recent bankruptcy demonstrates how difficult it can be for unions to protect their members during liquidation. 

[1], [2], [3], [4],[5], [6], [7], [8], [9], [10],[11]

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