Rejection of Collective Bargaining Agreements in Chapter 11 Bankruptcies: Legal Analysis of Changes to 11 U.S.C. Section 1113 Proposed in H.R. 3652 — The Protecting Employees and Retirees in Business Bankruptcies Act of 2007

Source: Carol A. Pettit, Congressional Research Service, RL34486, May 9, 2008

Introduced in the 110th Congress, the Protecting Employees and Retirees in Business Bankruptcies Act of 2007 (H.R. 3652) proposes a number of changes to the U.S. Bankruptcy Code. According to the sponsors, the changes are needed to remedy inequities in the bankruptcy process and to recognize that employees and retirees have a unique investment in their companies through their labor.

The bill contains many proposals for changing the Bankruptcy Code. This report focuses on the amendments and additions to 11 U.S.C. § 1113, which provides the procedures that are to be followed if a debtor in possession wants to reject a collective bargaining agreement (CBA).

The changes proposed for § 1113 may be intended to promote negotiation between the debtor and the authorized representatives of labor groups that have existing CBAs with the debtor company. They also appear to constrain court involvement in the process. This could lead to more agreed-upon modifications and fewer rejections of CBAs. Alternatively, it could prolong the negotiation process and put burdens on the debtor that would make liquidation more feasible than reorganization.

The bill prescribes the parameters of offers that may be made by the debtor in negotiations as well as the requirements that must be met before a court can approve rejection. It attempts to curtail what the sponsors have referred to as “excesses of executive pay” by making rejection of a CBA difficult if executives are to receive incentive pay and by requiring consideration of past concessions by the labor group in determining whether the labor group is being disproportionately burdened by proposed modifications to a CBA.

H.R. 3652 appears to propose changes to § 1113 that would resolve some differences between courts in interpreting the requirements for modification or rejection of a CBA. It also clearly states that rejection of a CBA is a breach of contract, even when approved by the court, and clarifies the damages that are available.

The bill provides an absolute right of all employees to strike if their CBA is modified or rejected. This contrasts with recent court decisions involving unions representing employees of financially distressed airlines in which the employees were enjoined from striking.

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