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Third Circuit Affirms Debtors’ Right to Reject Expired Collective Bargaining Agreement Under Section 1113

In re Trump Entm’t Resorts, Unite Here Local 54, Appellant, No. 14-4807, 2016 WL 191926 (3d. Cir. Jan. 15, 2016), aff’g In re Trump Entm’t Resorts, Inc., 519 B.R. 76 (Bankr. D. Del. 2014)

On direct appeal, the Third Circuit Court of Appeals has affirmed a Delaware Bankruptcy Court ruling (see previous post here) that debtors’ powers under section 1113 of the Bankruptcy Code to reject a collective bargaining agreement remain in effect even if the agreement has expired.

Under the facts of the underlying case, a collective bargaining agreement (the “CBA”) between the Trump Entertainment Resorts debtors (the “Debtors”) and their union, Unite Here Local 54 (the “Union”), expired after the Debtors’ chapter 11 filings.  The Debtors sought to modify the CBA post-petition and, after their efforts failed, moved for authority to reject the labor agreement pursuant to section 1113 of the Bankruptcy Code.  The Bankruptcy Court granted the Debtors’ motion, and the Union appealed.

While in the lower court proceedings the Union opposed the Debtors’ right to reject the CBA on substantive grounds, its threshold argument was that the Bankruptcy Court lacked jurisdiction to permit rejection of an expired collective bargaining agreement under section 1113.  This was the issue before the Third Circuit on appeal.

The Union’s position was grounded in the precepts of section 365 of the Bankruptcy Code, which limit the scope of debtors’ power to reject contracts to “unexpired” or “executory” agreements.  The Union argued that these principals should also apply to collective bargaining agreements under section 1113.  Without the power to reject the contract, the Union further argued that the Debtors were bound under provisions of the National Labor Relations Act (“NLRA”) that would require them to continue to honor the terms of the expired CBA until the parties reached a new agreement or a bargaining impasse.  In effect, the Union argued that expiration negates debtors’ power to reject a collective bargaining agreement in bankruptcy.

The Third Circuit disagreed.  In ruling that section 1113 applies to both expired and unexpired collective bargaining agreements, the Court based its decision on Congressional intent to balance “the concerns of economically-stressed debtors in avoiding liquidation and the unions’ goals of preserving labor agreements and maintaining influence in the reorganization process.”  Op. at *5.  The Court found that removing debtors’ power to reject a collective bargaining agreement even after meeting the strict procedural and substantive requirements of section 1113 would upset that balance.

The Court also disagreed with the Union’s contention that the principles of section 365 of the Bankruptcy Code limit debtors’ power to reject a collective bargaining agreement under section 1113.  The Court noted that “[t]his argument ignores an important distinction between a CBA and any other executory contract:  the key terms and conditions of a CBA continue to burden the debtor after the agreement’s expiration.  Rejection of those terms, therefore, is not a moot issue as would be in the case of other contracts or leases.”  Id. at *7.