Game Over, Man! Bankruptcies Trump Ongoing Obligations under Expired CBAs

June 1, 2016

Yesterday, the Supreme Court denied the cert. petition of Unite Here Local 54, Atlantic City’s largest casino workers’ union, which challenged a Third Circuit decision affirming a Delaware Bankruptcy Court decision that allowed Trump Entertainment Resorts to reject the continuing terms and conditions of the parties’ expired collective bargaining agreement because it is undergoing Chapter 11 reorganization. The decision affects the health and pension benefits for over 1,000 Trump Taj Mahal personnel, but its implications reach far wider than these employees, Carl Icahn, who now owns Trump Taj Mahal and Trump Entertainment, or even The Donald himself.

The Third Circuit panel was the nation’s first federal appellate court to address the question of whether bankruptcy courts may discharge corporate debtors from expired CBA obligations pursuant to Bankruptcy Code Section 1113. Section 1113 was enacted in opposition to the 1984 Supreme Court decision NLRB v. Bildisco & Bildisco, which found that after declaring bankruptcy, corporate debtors could unilaterally change CBAs without bankruptcy court approval, and that corporate debtors’ failure to comply with CBAs was not an unfair labor practice.

Section 1113 requires bankruptcy courts to take the helm by balancing the equities and determining whether, among other things, the debtor made good faith attempts to propose and negotiate mutually satisfactory modifications of the CBA, the union refused the modifications without good cause, and the modifications are essential to the debtor’s survival. If these conditions are satisfied, the debtor may then reject the CBA.

The panel acknowledged that the statute does not distinguish between “unexpired” and “expired” CBAs and that federal bankruptcy courts are firmly divided on whether they (as opposed to the NLRB) may apply Section 1113 to CBAs of the latter variety. However, after examining the circumstances under which Section 1113 was enacted and the statute’s place in the overall Bankruptcy Code, the panel concluded that:

[W]hen the employer’s statutory obligations to maintain the status quo under the terms of an expired CBA will undermine the debtor’s ability to reorganize and remain in business, it is the expertise of the Bankruptcy Court which is needed rather than that of the NLRB. For that reason, whether the CBA is in effect or is expired, it is the Bankruptcy Court which should make the review and decide on the necessity of the modification.

In focusing on the specific equities, the panel emphasized that when Trump Entertainment filed for bankruptcy, it was faced with $12 million in working capital cash, $286 million in secured debt, and a CBA that required annual employee pension contributions and health and welfare benefits totaling a combined $13.5-$15.5 million.  When push came to shove, the survival of the corporate debtor took precedence over the CBA, which pro-union commentators believe is indicative of the bankruptcy code’s baked-in biases against organized labor.

Wherever your sympathies lie on the union-management spectrum, the Third Circuit decision likely represents the first step toward a High Court showdown. Legal commentators theorize that the Supreme Court denied cert. because there is yet to be a circuit split. Once this happens, a SCOTUS decision could, like Bildisco, cause a day of reckoning and spur Congress to reexamine the interaction of our bankruptcy and organized labor laws.

If you have been meaning to give your legal counsel a call and catch up, now is a great time to reach out to your preferred labor relations and employment law and bankruptcy specialists and find out what this Third Circuit decision means for you.