Bankruptcy Code Eclipses National Labor Relations Act

April 30, 2017 by Amy E. Martinez, Esq.

The Third Circuit Court of Appeals recently posed a query in regards to a dilemma facing federal appeals courts. Namely, the question of whether or not a Chapter 11 debtor-employer, when faced with an expired labor contract, may decline the current terms and conditions of a collective bargaining agreement under Section 1113 of the Bankruptcy Code. Under the rules of the National Labor Relations Act (NLRA), employers must maintain the terms of a collective bargaining agreement until a new agreement is in place, even after it has expired.

The case shows that the bankruptcy debtors in In re Trump Entertainment Resorts, 2016 WL 191926 (3rd Cir. 2016) operate the Trump Taj Mahal Casino in Atlantic City, New Jersey, which employees 2,953 individuals. UNITE HERE Local 54 (the “union”), the largest of the casino’s employee unions, represents 1,136 of these employees.

The union and Taj Mahal reached a collective bargaining agreement in 2011, which included a three-year term with the following durational provision: “The collective bargaining agreement shall remain in effect until 11:59 p.m. on Sept. 14, 2014, and shall continue in full force and effect from year to year thereafter, unless either party serves 60 days written notice of its intention to terminate, modify or amend the collective bargaining agreement.”

The bankruptcy approached the union with notice on March 7, 2014, declaring their “intention to terminate, modify, or amend” the labor agreement before requesting to initiate a new agreement with the union. The union neglected to respond, and subsequently received a follow up request on April 10. The union responded on April 30, describing a hesitance towards a new collective bargaining agreement, given how prematurely the debtors demanded change (as in, five months before the expiration of the contract). The union notified the debtors that they would respond before the expiration of their current contract.

The debtors subsequently requested a meeting with the union on August 20, voicing concern over their precarious financial circumstances. The union did not respond, as such, the debtors recommended some alterations to their agreement on August 28, suggesting a 401(k) program to replace pension contributions and requesting subsidized coverage via the Affordable Care Act instead of the current health and welfare program. Although the union was interested in resolutions to its pension dilemma, it would not comply with suggestions regarding the health and welfare program. Overall, the two parties did not reach an agreement.

This impasse, caused the debtors to file for Chapter 11 bankruptcy protection on September 9, 2016. Two days later, the debtors approached the union with a request to extend the term of the labor agreement—a request the union denied. The debtors and the union did not reach a new arrangement, and the previously established agreement expired on September 14, 2016. Three days later, on September 17, 2016, the debtors sent another proposal to the union, providing evidence of the debtor’s grim financial situation and a request to meet within one week. The union agreed to a meeting with the debtors on September 24, and after that meeting, the union asked for more evidence – items the debtors quickly produced. Apparently, it did little to satisfy the union, and after two days, the union approached the debtors with inquiries for even more information.

On September 26, 2016 the debtors filed a motion under section 113 of the U.S. Bankruptcy Code requesting the dismissal of the labor pact and incorporation of what the debtors initially wanted in their last proposal. According to the debtors, dismissal of the labor pact was essential to a three-part business plan towards reorganization that expects allowances from the union, lien lenders, and local and state authorities. Without the requested relief, the debtors would have no choice but to liquidate and shut down the casino. The motion in question was granted by the Bankruptcy Court, and the debtors were subsequently obligated to satisfy their proposal. The Bankruptcy Court ascertained the debtor’s fulfilment of requirements laid out in Section 1113 of the Bankruptcy Code. The Bankruptcy Court came to the conclusion that debtors’ proposal was crucial to its reorganization efforts, and the union rejected the debtor’s proposal on unfair and unjustified grounds.

The union, on the other hand, has grown to be a source of concern for both the Bankruptcy Court and the debtors. The union continued to visibly protest, voice slanders and dissuade customers from setting up conferences at the casino. The court noted that the union was not as receptive to negotiations as the debtors, but was more interested in making business exceedingly difficult for debtors. When the Bankruptcy Code supplants the NLRA, measures are only taken to keep the debtor in business and recognize that reorganization is the best way to accomplish preservation of the enterprise.

The first lien secured creditor was explicit – action would only take place if the labor agreement and tax relief contingencies were fulfilled – as relief is critical to the survival of the business. Debtors’ plans to reorganize can only come to fruition when terms sanctioned by the NLRA are rejected. To that effect, the Bankruptcy Code gives debtors the breathing room to collect themselves and restructure. A debtor can modify its debts to ensure its longevity with a Chapter 11 reorganization, for example, building profits to reimburse creditors in light of any losses incurred from bankruptcy. Economically speaking, it is in the best interests of employers and employees to restructure and not liquidate, keeping assets and jobs intact.

A successful reorganization is contingent on time, however, and rejection via Section 1113 is faster than the more gradual and elaborate process laid out by the NLRA. Section 1113 nonetheless carries a potential obstacle, a holding that refuses debtors the chance to reject expired bargaining agreements or its proceeding terms. For all of Section 1113’s beneficial goals, such a holding may prevent a business’s survival. The alternative presented itself to the debtors who, when restrained by either the NLRA or their contract, yielded to the expired agreement, prohibiting any restructuring from taking place. The 3rd Circuit contends that the debtors should not be forced to submit to the expired agreement’s terms until both parties negotiate, just because they filed a Section 1113 motion a week after the agreement expired. In regards to this whole dilemma, the Court of Appeals was in sound agreement with the Bankruptcy Court’s judgment.