Hostess Court Dismisses Motion to Reject Expired Collective Bargaining Agreements Under Bankruptcy Code Section 1113

by Cadwalader, Wickersham & Taft LLP
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[authors: Jeffrey H. Taub, Nicole M. Stephansen]

On June 22, 2012, Judge Robert Drain of the United States Bankruptcy Court for the Southern District of New York granted the motion of the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union to dismiss Hostess’s motion to reject certain expired collective bargaining agreements. The court held that section 1113 of the Bankruptcy Code no longer applied to key portions of the CBAs because the agreements had expired – certain CBA obligations remained in force only by operation of the National Labor Relations Act. In re Hostess Brands, Inc., 2012 WL 2374235 (Bankr. S.D.N.Y. June 22, 2012).

The court’s decision discussed in this post addresses Hostess’s motion to reject its CBAs with the Bakers’ Union. Restructuring Review previously reported on the court’s decision denying Hostess’s motion to reject its CBAs with the Teamsters HERE.

Section 1113

A debtor must comply with the provisions of section 1113 to reject a collective bargaining agreement. At bottom, section 1113 provides that a bankruptcy court may approve the rejection of a CBA only if the debtor first proposes a modified CBA to the union that contains only those modifications necessary to the reorganization, and the union refuses to accept the modifications without good cause. A debtor may then make an application to the bankruptcy court for rejection of the CBA, and the court may approve rejection only if it finds that the debtor has complied with the provisions of section 1113. For further discussion of section 1113, read HERE.

Background

On January 25, 2012, Hostess filed a motion seeking to reject certain CBAs with the Bakers’ Union and local affiliates of the International Brotherhood of Teamsters. On February 13, 2012, the Bakers’ Union responded to the rejection motion, but stated that it would focus its attention on negotiating a modified agreement with the Debtors rather than wasting resources on litigation. The Bakers’ Union went on to state that if the parties could not reach an acceptable agreement, the Union would not oppose rejection of its CBAs that were in effect at the time the bankruptcy court decided the rejection motion.

On March 5, 2012, before the parties reached an agreement or the court considered the rejection motion, the Bakers’ Union filed a motion to dismiss the rejection motion on the grounds that the bankruptcy court did not have subject matter jurisdiction with respect to thirty CBAs that were the subject of the rejection motion. The Union based its argument on the fact that the thirty CBAs had expired two days earlier and were allegedly governed by the National Labor Relations Act, which required the parties to comply with the key terms of the CBA and to bargain in good faith until impasse. The Union argued that section 1113 was not intended to interfere with the NLRA, and thus because the NLRA now governed the expired CBAs, section 1113 no longer applied to the expired agreements. Accordingly, the Union argued that the bankruptcy court did not have subject matter jurisdiction to consider rejection of the agreements.

Hostess objected, arguing that section 1113 applied even if the CBAs had expired. Hostess asserted that because the NLRA required the parties to comply with key provisions of the CBA until good faith negotiations reached an impasse, the parties were still bound by the agreements, and thus section 1113 would still apply. Moreover, the debtors, following other courts, relied on section 1113(e), which provides that “during a period when the bargaining agreement continues in effect”, a bankruptcy court may authorize the debtor to implement interim changes to the provisions of a CBA related to the term, conditions, wages and benefits, or work rules. The debtors argued that this section would apply to the terms of an agreement that remain in effect, not just an agreement as a whole.

Hostess further argued that the purpose of section 1113 is to allow for expedited, good faith bargaining so that the debtors can reorganize by lowering their labor costs under CBAs, and a determination by the court if the parties cannot reach an agreement. Subjecting the debtors to the NLRA provisions after a CBA expired would deter from this purpose and would be burdensome to the debtors. Thus, Hostess argued that based on the purpose and policy behind section 1113, this section should apply with equal force post-expiration.

The CBA Expired and Cannot Be Terminated or Modified

The court held that the bulk of the CBAs had not expired because Hostess had not complied with CBAs’ notice provisions related to termination. See Transcript of Hearing, In re Hostess Brands, Inc., No. 12-22052 (RDD) (Bankr. S.D.N.Y. May 14, 2012). Accordingly, the court authorized Hostess to reject these CBAs.

However, with respect to those CBAs that had expired by their terms, the court agreed with the Bakers’ Union and held that upon expiration of a CBA, section 1113 no longer governs the process under which the parties must negotiate. Although the court acknowledged that the case law on this point is fairly evenly divided, it held that the better reasoned decisions restricted the application of section 1113 to unexpired collective bargaining agreements. In reaching this decision, the court focused on the plain language of the statute and the lack of any evidence that limiting section 1113 to unexpired CBAs would disturb the policies underlying the section.

The court reasoned that sections 1113(a)-(d) and (f) – which contain the provisions related to the parties’ duty to negotiate in good faith and the court’s authorization to reject a CBA – refer to an effective “collective bargaining agreement.” Consequently, applying these subsections to an expired agreement would effectively extend the statute’s reach beyond its plain meaning. Moreover, the court noted that the NLRA only requires key provisions of the CBA to survive post-expiration, so a debtor could not assume an expired CBA in total, and it follows that if an expired CBA cannot be assumed, it cannot be rejected either.

The court disagreed that that the use of the term “when the bargaining agreement continues in effect” in subsection 1113(e) indicates that Congress intended all of section 1113 to apply to rejected CBAs still in effect under the NLRA. Rather, Judge Drain viewed section 1113(e) as a “exception to Section 1113’s other provisions that generally focus on the contract itself and not on terms that would be in effect.” Therefore, under 1113(e), “if it is essential to the continuation of the debtor’s business, or in order to avoid irreparable damage to the estate, the court may authorize, on an interim basis, the implementation of interim changes to terms conditions, [waivers] benefits or work rules” even with respect to expired CBA terms that remain in effect under applicable law. But here, of course, Hostess sought permanent modifications.

The court also rejected Hostess’s argument that the policy and purpose of section 1113 applies to post-expiration CBAs as well as current CBAs. The court held that section 1113 serves as a method for debtors to reduce labor costs.  Like the NLRA, section 11113 generally requires bargaining in good faith to an impasse. Therefore, it was “hard” for the judge to find “such a clear dichotomy between the process that the union says must apply here and what the debtor contends Congress intended to apply under Section 1113.”

Conclusion

As Hostess discovered, it lost the protections granted by section 1113 once those agreements expired, and now is subject to the processes required under the NLRA. While Judge Drain implies that the burdens under both 1113 and the NLRA are similar, the Debtors seem to expect the NLRA to impose greater burdens. However, the Judge appears to agree that debtors could implement interim changes to even expired CBA provisions that remain in effect under the NLRA, if necessary to avoid irreparable damage to the estate.

As a result, potential debtors and creditors should pay close attention to the notice provisions and expiration dates of their CBAs. It is critical that companies begin the 1113 negotiation process as early as possible in anticipation of bankruptcy. Failure to negotiate expeditiously could hamper value and a debtor’s ability to reorganize effectively.

[View source.]

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