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Issue Of First Impression: Delaware Bankruptcy Court’s Jurisdiction Encompasses The Authority To Approve Rejection Of Expired Collective Bargaining Agreements

In re Trump Entm’t Resorts, Inc., No. 14-12103(KG) (Bankr. D. Del. Oct. 17, 2014)

In a sharply written Opinion, the Honorable Kevin Gross decided an issue of first impression in Delaware:  whether the Court has jurisdiction under Bankruptcy Code section 1113 to rule on a debtor’s motion to reject a collective bargaining agreement (“CBA”) that expired post-petition but its obligations continued status quo pursuant to Federal labor law.  Judge Gross found that the language and legislative purpose of section 1113 establishes the Court’s jurisdiction to enter an order approving rejection.  Applying the facts of the case, His Honor granted the motion to reject, finding that the debtors easily met the section 1113(c) requirements for rejection.  Additionally, the Court authorized the debtors to unilaterally modify the terms of the CBA consistent with the proposal made to the union post-petition.

Trump Entertainment Resorts, Inc. and its affiliated debtors (the “Debtors”) filed their chapter 11 petitions on September 9, 2014.  To successfully reorganize, the Debtors identified three events that must occur: (i) rejection of and modification to their existing CBA to reduce employee payments; (ii) certain property tax relief; and (iii) conversion of the secured creditor’s debt to equity and a capital infusion of $100 million.  Without these concessions, the uncontroverted evidence demonstrated that the Debtors would be forced to liquidate.  To achieve their first goal (and fulfill certain obligations under section 1113 of the Bankruptcy Code), the Debtors attempted to negotiate a new CBA with UNITE HERE Local 54 (the “Union”).  The Debtors’ communications began in March 2014 and involved a CBA modification proposal (the “Proposal”), which would yield the Debtors $14.6 million in annual savings.  Rather than trying to reach agreement, the Union actively attempted to undermine the Debtors and their business.  In the Court’s words, “the Debtors were literally begging the Union to meet [and negotiate] while the Union was stiff-arming the Debtors.”  On September 14, 2014, the CBA expired by its terms but, pursuant to the National Labor Relations Act (“NLRA”), its status quoobligations continued until new terms could be negotiated.  On September 26, 2014, the Debtors sought Court approval to reject the CBA and to implement the terms of the Proposal under section 1113(b) and (c) of the Bankruptcy Code.

Section 1113 of the Bankruptcy Code is the sole recourse for a debtor to assume or reject a CBA.  In this case, the Union argued that the expired CBA was no longer an “executory contract” capable of rejection.  Instead, it stated that the Court must defer to the exclusive jurisdiction of the National Labor Relations Board to decide this CBA dispute.  Judge Gross acknowledged a split among courts as to whether section 1113 applies to expired CBAs still in effect by virtue of the NLRA’s status quoobligations.  Ultimately, the Court ruled—for three main reasons—that section 1113 applies and that the Court has jurisdiction to approve a rejection of continuing obligations under an expired CBA.

First, the Court parsed the words of section 1113 to find authority for the rejection under the Bankruptcy Code.  Importantly, the Court highlighted that the word “executory” is not used in section 1113.  Moreover, it observed that, in certain circumstances, section 1113(e) provides for interim modification of a CBA “during a period when [it] continues in effect.”  The Court found it significant that Congress chose the phrase “continues in effect” instead of “executory” and opined that this phrase was selected to give courts the authority to modify the continuing effects of an expired CBA.  Accordingly, the Court reasoned that if an expired CBA could be modified under section 1113(e), it followed that an expired CBA could be rejected if the requirements of section 1113 were met.  Any other read would lead to an absurd result.

Second, the Court relied on the legislative underpinnings of section 1113(c) and the Bankruptcy Code.  More specifically, section 1113 was enacted following the Supreme Court’s decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984) to strike a balance between affording debtors flexibility to restructure their labor costs while imposing court oversight and good faith bargaining requirements.  According to the Court, it is clear that Congress intended section 1113 to allow for an expedited process whereby parties can quickly negotiate in good faith and avoid any protracted process under the NLRA that could destroy a reorganization.  The expiration of a CBA does not alter Congress’s intent or the applicability of section 1113.

Third, the Court noted a few practical aspects supporting its conclusion.  If rejection of the CBA was not permitted, it would be extinguished when the Debtors liquidated.  Moreover, no provisions of the NLRA would be implicated in the application of section 1113 to the CBA.  And finally, application of section 1113 to expired but maintained CBAs would “preserve the pre-existing union-employer power dynamic” struck by Congress in the Bankruptcy Code.

The Court devoted the remainder of the Opinion to evaluating whether the Debtors met the stringent rejection requirements of section 1113(c).  In holding that they did, the Court emphasized that: (i) the Debtors will be forced to liquidate without rejection of the CBA; (ii) every constituency will suffer significant losses in these cases, not just the Union; and (iii) the Union refused to negotiate in good faith.  Moreover, as a final point, the Court held that the Debtors may implement the Proposal.  Despite little judicial guidance on the issue and an acknowledged lack of statutory authority, the Court relied upon a few secondary sources that note a debtor’s continuing obligation to bargain in good faith following CBA rejection and ability to implement proposals approved by the bankruptcy court without violating the NLRA.