By Paul Galligan and Samuel Sverdlov
Employers scored a big victory in In re Trump Entertainment Resorts, a case of first impression in the Third Circuit, which held that a debtor-employer can terminate their obligations under an expired Collective Bargaining Agreement (CBA) and implement the terms of a final offer.
By way of background, Trump Entertainment employs 1,467 unionized workers in the Trump Taj Mahal casino in Atlantic City, New Jersey, most of whom are represented by UNITE HERE Local 54. Although the Taj Mahal is one of the preeminent casinos in Atlantic City, it filed for Chapter 11 bankruptcy protection on September 9, 2014. Trump Entertainment made several proposals aimed at keeping the Taj Mahal afloat, but the union staunchly refused the terms and engaged in a corporate campaign communicating with the Taj Mahal’s customers who had scheduled conferences at the Casino to urge them to take their business elsewhere.
The CBA expired on September 26, 2014, and Trump Enterprises filed a motion pursuant to 11 U.S.C. § 1113, “seeking to reject the CBA and implement the terms of [Trump Enterprise’s] last proposal to the union.” Section 1113 allows a Chapter 11 debtor to ‘reject’ its CBAs under certain circumstances, with the Bankruptcy Court’s approval. If the Bankruptcy Court denied Trump Entertainment’s motion, then Trump Entertainment would have to maintain the “status quo” and continue the terms of the expired CBA until it bargained to a legal impasse with the Union, a potentially long drawn out process.
The Bankruptcy Court for the District of Delaware balanced the need for an expedited process by which debtors could restructure labor obligations and protections necessary for union employees, and held that § 1113 was applicable to both expired and unexpired CBA’s. (519 B.R. 76 (Bankr. D. Del. 2014)). However, the Court noted that “the Union was not focusing its efforts on negotiating to reach agreement with Debtors.” The Court held that it had the authority to authorize Trump Enterprise “to modify the expired CBA and implement the terms of [its] proposal.” UNITE HERE Local 54 thereafter appealed the Bankruptcy Court’s decision to the Third Circuit.
Third Circuit Decision
The Third Circuit affirmed the finding of the Bankruptcy Court. The Circuit Court only considered “whether the Bankruptcy Court may grant a motion to reject an expired CBA under § 1113.” Trump Enterprise, in the opinion of the Court, illustrated the very essence of a § 1113 rejection of a CBA. Trump Enterprises needed to reject the CBA in order to restructure their company, and if they were unable to do so, they would be forced to liquidate. Furthermore, the Court held that Trump Enterprises was very willing and forthright in their efforts to bargain in good faith, while the Union “stalled the bargaining sessions engaged in picketing, and attempted to harm [Trump Enterprise’s] business.” As, Judge Roth explained, “it is preferable to preserve jobs through a rejection of a CBA, as opposed to losing the positions permanently by requiring the debtor to comply with the continuing obligations set out by the CBA.”
Advise for Employers
In the wake of this precedential opinion, employers entertaining a Chapter 11 bankruptcy can explore a § 1113 motion to reject their obligations under an expired CBA. However, employers must remember that “before the bankruptcy court will consider an application to reject, the debtor must make a proposal, provide relevant information, meet at reasonable times, and confer in good faith.” In this respect, employers would do well to follow in the footsteps of Trump Entertainment Resorts, and engage the union proactively as Trump Enterprises did with UNITE HERE.
It is important to note that Bankruptcy Courts are divided on whether § 1113 permits debtors to reject CBAs and to what extent. For instance, in Hostess Brands, Inc., 477 B.R. 378 (S.D.N.Y. 2012), the court refused to relieve a debtor from maintaining its obligations under an expired CBA under similar circumstances. Therefore if you are considering filing a Chapter 11 bankruptcy, and you have outstanding CBA obligations, you should contact your local Seyfarth Shaw attorney to decide whether a § 1113 is an available option.