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?

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