[author: Jeffrey H. Taub]

Last month the drama surrounding Hostess’s efforts to reject various collective bargaining agreements drew to a close (pending appeal). Bankruptcy Judge Robert Drain (in an unpublished decision) authorized Hostess to reject its existing CBAs with affiliates of the Bakery, Confectionery, Tobacco and Grain Workers International Union, and modify the terms of its expired CBAs with the Bakers’ Union on an interim basis. The Bakers Union was the last of Hostess’s major unions holding out and refusing to accept modifications to its CBAs. See Transcript of Hearing, In re Hostess Brands, Inc., No. 12-22052 (RDD) (Bankr. S.D.N.Y. Oct 3, 2012). This decision resolves an open question (reported here in our previous coverage of the Hostess case), that arose in May when Judge Drain held that debtors could not reject expired CBAs on a final basis pursuant to section 1113(c) of the Bankruptcy Code but might be allowed to reject such CBAs on an interim basis pursuant to section 1113(e). Cadwalader reviewed the hearing transcript to analyze the opinion.

Background

On January 25, 2012, Hostess filed a motion seeking to reject certain CBAs with the Bakers’ Union. On February 13, 2012, the Bakers’ Union responded to the rejection motion stating that it would focus its attention on negotiating a modified agreement with the Debtors but if the parties could not agree to terms for a new CBA, it would not oppose rejection of CBAs that were in effect at the time the bankruptcy court decided Hostess’s rejection motion. Subsequently, the Bakers’ Union filed a motion to dismiss the rejection motion with respect to certain expired CBAs on the grounds that the bankruptcy court did not have subject matter jurisdiction over expired CBAs.

In May, Judge Drain authorized Hostess to reject its existing CBAs with the Bakers’ Union but held that Hostess could no longer reject the expired CBAs because section 1113(c) of the Bankruptcy Code did not apply to expired CBAs. Restructuring Review analyzed the court’s decision here. Hostess did not reject the existing CBAs at that time. In June, the court denied Hostess’s motion to reject its CBAs with local affiliates of the International Brotherhood of Teamsters. Restructuring Review reviewed the court’s decision here.

Following the court’s spring rulings, Hostess and the Teamsters engaged in further negotiations. On August 11, 2012, Hostess presented the Teamsters with a revised last, best, and final proposal. The Teamsters submitted the proposal to its members who voted to ratify the proposal. After negotiations with the Teamsters were complete, the Bakers’ Union agreed to enter into negotiations with Hostess. On August 29, 2012, Hostess presented the Bakers’ Union with a revised last, best, and final proposal. The Bakers’ Union submitted the proposal to its members who voted to reject the proposal.

Rejecting the CBAs

On September 20, 2012, Hostess filed a motion seeking court approval to reject its existing CBAs with the Bakers’ Union pursuant to section 1113(c)[1] and to modify the expired CBAs on an interim basis pursuant to section 1113(e) so that those terms which survive expiration would be consistent with the last, best, and final proposal.

Section 1113 provides that a debtor can reject a CBA if (i) the debtor makes a proposal to the union, (ii) that contains only those modifications that are “necessary to permit the reorganization of the debtor,” and (iii) the union refuses to accept the proposed modifications without “good cause.” 11 U.S.C. § 1113(c). Section 1113(e) allows a debtor to obtain certain interim changes to a CBA “during a period when the [CBA] continues in effect” if the changes are “essential to the continuation of the debtor’s business, or in order to avoid irreparable damage to the estate.” 11 U.S.C. § 1113(e). Hostess argued that it had satisfied both of the standards set forth in section 1113 because without obtaining concessions from the Bakers’ Union it would be unable to reorganize and would be required to liquidate.

The Bakers’ Union did not oppose Hostess’s request to reject its existing CBAs. However, the Bakers’ Union argued that Hostess was not entitled to interim relief with respect to the expired CBAs because (i) the court’s prior ruling barred Hostess from permanently modifying the expired CBAs and Hostess could not use section 1113(e) to circumvent the limitations of section 1113(c), (ii) section 1113(e) did not apply to expired CBAs, and (iii) Hostess had not demonstrated that interim relief was appropriate because Hostess would not be forced to liquidate. The Bakers’ union contended that there were potential buyers for all or some of Hostess’s assets on a going concern basis and the expired CBAs only covered a small portion of Hostess’s employees and therefore could not be essential to its business or cause irreparable harm.

On October 3, 2012, the court ruled from the bench that Hostess could reject its existing CBAs and could modify the expired CBAs on an interim basis pursuant to section 1113(e). Although the Bakers’ Union had not objected to Hostess’s request to reject the existing CBAs, the court found that Hostess had complied with the requirements of section 1113(c). Specifically, the court held that rejecting the CBAs was necessary to Hostess’s reorganization and the Bakers’ Union did not have good cause to reject Hostess’s last, best, and final proposal because there “truly is no alternative transaction available” for Hostess. The court found that the Bakers’ Union contention that there was a potential buyer waiting in the wings was “simply not true” and stated that the Bakers’ Union’s suggestion to the contrary was “similar to the Dean in Animal House when he said that the students were on ‘super-secret probation’.”

The court also held that it was clear that Hostess was running out of time and that it needed to emerge from bankruptcy promptly “or it [would] not emerge at all.” The court acknowledged that the Bakers’ Union could choose to strike after the CBAs were rejected, however, the court cautioned that a strike “would be in all likelihood causing the liquidation of the debtors [and] the loss of most, if not all, of their jobs promptly.”

Based on these conclusions, the court held that Hostess was also entitled to interim relief pursuant to section 1113(e) because it had demonstrated that modifying the expired CBAs was essential to the continuation of its business or was necessary to avoid irreparable damage. The court noted that in addition to the likelihood of liquidation, allowing the Bakers’ Union to retain the previous terms of the expired CBA after virtually all the other employees had negotiated new CBAs with significant concessions was a “disaster waiting to happen.”

Additionally, the court rejected the Bakers’ Union argument that section 1113(e) does not apply to expired CBAs. The court reaffirmed its May decision that section 1113(c) does not apply to expired CBAs. However, the court reasoned that the introductory clause “during a period when the [CBA] is in effect” in section 1113(e) would serve no purpose if this subsection only applied to the same scenarios that were covered under section 1113(c). Accordingly, the court held that section 1113(e) would apply so long as a CBA was “in effect.” Because “most of the terms” of the terminated CBAs were still binding on the parties, the court held that these CBAs were still “in effect” for purposes of section 1113(e) and Hostess could obtain interim relief to effect changes to the CBAs.

Finally the court rejected the Bakers’ Union’s argument that because the expired CBAs only covered a relatively small amount of employees, leaving the expired terms in place would not cause a business stoppage or irreparable harm. The court found that this reasoning would incentivize CBA counterparties to be the “last man standing” until all other CBAs had been renegotiated and that the bargaining units were indeed “material” to Hostess’s exit strategy.

Conclusion

Judge Drain’s decision authorizing Hostess to reject its CBAs with the Bakers’ Union is the second recent decision in the bankruptcy court of Southern District of New York authorizing a CBA rejection after first denying a debtor’s motion to reject. As was the case in AMR, Judge Drain’s initial denial was based on narrow grounds. As a result, the parties restarted negotiations that led to consensual modifications to Hostess’s CBAs with the Teamsters. The court’s decision to authorize rejection of the Bakers’ Union’s CBAs sends a signal to debtors and unions that it will not allow holdout unions to derail a debtor’s efforts to reorganize and continues to lay out a roadmap for debtors seeking to reject CBAs.