When Going “All In” Pays Off: The Third Circuit Upholds The Decision of the Bankruptcy Court in In re Trump Entertainment Resorts, Inc.

Bryan Cave Leighton Paisner

In an appeal certified directly from the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to the Court of Appeals, the Third Circuit issued a ruling upholding Judge Kevin Gross’s decision that a chapter 11 debtor-employer may reject the continuing terms and conditions of a collective bargaining agreement (“CBA”) under 11 U.S.C. § 1113, despite that the CBA expired post-petition.

The Bankruptcy Court’s Decision

In December 2014, the Bankruptcy Cave first reported on the Bankruptcy Court’s decision in In re Trump Entertainment Resorts, Inc. (the “Bankruptcy Opinion”).  The controversy centered around whether provisions of the National Labor Relations Act (“NLRA”) that maintain the status quo of an expired CBA during negotiations for a new CBA mean that the expired CBA still exists as a contract that can be “rejected” under section 1113 of the Bankruptcy Code.  The Bankruptcy Opinion held in the affirmative – the Debtors could reject the expired CBA because section 1113 failed to distinguish between expired and unexpired CBAs.  The Bankruptcy Opinion was largely driven by practical factual considerations – the Union had engaged in “stiff-arm” negotiation tactics that left the Debtors with few choices, and absent the rejection of the expired CBA, the Debtors faced a complete shut-down, the loss of thousands of jobs, and the shuttering of the business.  The Debtors went “all in” on this poker hand, it was rejection or bust; the Bankruptcy Court agreed with the Debtors.

The Appeal

On appeal, In re Trump Entertainment Resorts, Case No. 14-4807 (3d Cir. Jan. 15, 2016), the Union centered its argument on a parallel to section 365, arguing that because a debtor may not assume or reject an expired executory contract under section 365, it also may not reject an expired CBA under section 1113.  However, the Third Circuit noted that due to the NLRA, the obligations of the expired CBA continue to burden the debtor (unlike that of a traditional executory contract).  In addition, Congress failed to include in section 1113 a distinction between expired or unexpired CBAs, and otherwise failed to address the continuing effect such agreements may have upon a debtor.  To that end, the court opined that Congress must have considered the overlapping impact of these federal statutory regimes.  The interpretation that permits a debtor to reject an expired CBA, held the Third Circuit, best balances a debtor’s ability to proceed through the protracted NLRA process with some speed, while still protecting workers by obligating the estate to honor the CBA’s provisions until there is a rejection.

The Third Circuit also noted the “exigencies” the Trump Debtors faced, which were significant factors in the Bankruptcy Opinion.  The Third Circuit noted that as a policy matter, it is preferable to preserve jobs through rejection rather than face the permanent loss of positions, and an entire business, by requiring debtors to continue to abide by the terms of an onerous CBA.

Analysis and Conclusion

Following the appeal, our initial analysis of the implications of this case appears to hold true.  The Third Circuit’s interpretation of section 1113 may be a boon to a would-be debtor that is laden with burdensome labor obligations, and is nearing the expiration of a CBA.  While outside bankruptcy a company would normally be required to bargain to impasse (a very time consuming endeavor), in bankruptcy court a company may be able to short-circuit this process and obtain rejection of the CBA, even where it expired post-petition.  As explained by the Bankruptcy Court and the Third Circuit, the ability of debtors to reorganize and emerge as operating companies, which is arguably the primary purpose of chapter 11, supports this interpretation of section 1113.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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