FeatureBy AdAm H. IsenBerg And monIque BAIr dIsABAtIno1

Generally, a contract that has expired in accordance with its terms is not sub-ject to assumption or rejection under the

Bankruptcy Code. However, a collective-bargain-ing agreement (CBA) presents interesting assump-tion/rejection issues because even when such an agreement expires, the parties to the agreement may be statutorily bound to its terms under the National Labor Relations Act (NLRA). The ques-tion thus arises as to whether an expired CBA, or its “continuing terms,” may be assumed or rejected under the Code. In 710 Long Ridge Road Operating Company II LLC,2 the U.S. Bankruptcy Court for the District of New Jersey recently held that a debtor can reject an expired CBA under § 1113 of the Bankruptcy Code. This decision is the latest case to take a position in a dispute among courts as to whether expired CBAs may be rejected under § 1113(c).3 The issue is sig-nificant because, absent rejection under § 1113, a debtor must comply with the modification/termina-tion procedures prescribed by the NLRA.

Taking a Step Back: The Rejection of CBAs under the Bankruptcy Code The rejection of a CBA is governed by § 1113, so a brief overview of the relevant provisions is nec-essary before examining the Long Ridge decision. Section 1113 (a) of the Bankruptcy Code provides that a debtor may assume or reject a “collective-bargaining agreement” in accordance with the pro-visions of the statute.4 Section 1113 (c), which is the provision governing rejection of a CBA, requires a debtor, as a precondition to rejection, to make a pro-posal to union representatives containing proposed modifications to the CBA. This proposal must sat-isfy the requirements of § 1113 (b), which requires the debtor to engage in a meaningful bargaining

process with union representatives, and specifies that the proposed modifications must be necessary to permit the debtor’s reorganization and ensure that all affected parties are treated fairly and equitably.5 In addition to these preconditions, rejection under § 1113(c) requires a bankruptcy court to find that (1) the union representative refused to accept the proposal without good cause and (2) the balance of the equities clearly favors rejection.6 Since rejection under § 1113 (c) requires a debtor to submit proposed modifications to union represen-tatives, it is not uncommon to see references to mod-ification and rejection used interchangeably, even if the goal is rejection under § 1113 (c). An important distinction exists, however, between the rejection of a CBA under § 1113 (c) and the interim modification of a CBA under § 1113 (e). Specifically, because chapter 11 debtors often require immediate relief from CBA obligations, § 1113 (e) allows courts to authorize interim modifications to CBAs during a period when a CBA “continues in effect,” as long as certain conditions are present.7 Such interim changes do not render moot any application to reject under § 1113 (c). Significantly, § 1113 (e) is the only subsection that references a CBA that “continues in effect” as opposed to a “CBA.” This distinction has proven meaningful to certain courts interpreting this section.

The Facts of Long Ridge In Long Ridge, the debtors operated elderly nurs-ing care facilities in Connecticut. Approximately 700 of the debtors’ employees were represented by the New England Healthcare Employees Union, District 1109, SEIU (the “union”). Each debtor was party to a substantially similar CBA with its respec-tive union employees. Nearly two years prior to the debtors’ bankrupt-cy filing, the CBAs expired, and the debtors and the union engaged in negotiations to modify the CBAs. After numerous fruitless bargaining sessions, the debtors determined that they had reached an impasse and implemented the “last, best and final” terms that they had offered to the union. In response, union employees organized a strike and walked out, and the debtors hired replacement workers. Following the debtors’ hiring of replacement workers, the debtor, union and National Labor

Monique Bair DiSabatinoSaul Ewing LLPPhiladelphia

Expiration Dates May Not Matter710 Long Ridge and the Rejection of Expired CBAs

1 The authors thank Robert C. Nagle, a partner in Saul Ewing’s Labor, Employment and Employee Benefit Practice, for his useful comments on this article.

2 In re 710 Long Ridge Road Operating Co. II LLC, No. 13-13653 (DHS), 2014 WL 407528 (Bankr. D.N.J. Feb. 3, 2014).

3 Compare In re Hostess Brands Inc., 477 B.R. 378, 383 (Bankr. S.D.N.Y. 2012) (finding that expiration of CBA left parties under fallback provisions of otherwise applicable law, including NLRA); San Rafael Baking Co. v. N. Cal. Bakery Drivers Security Fund (In re San Rafael Baking Co.), 219 B.R. 860, 866 (B.A.P. 9th Cir. 1998) (holding that § 1113 does not allow courts to impose obligations of expired CBAs on debtors); and In re Sullivan Motor Delivery Inc., 56 B.R. 28, 29 (Bankr. E.D. Wis. 1985) (holding that § 1113 does not apply to expired CBAs); with In re Karykeion Inc., 435 B.R. 663, 674 (Bankr. C.D. Cal. 2010) (granting motion to reject provision in expired CBAs); United Steelworkers of Am., AFL-CIO-CLC v. Ormet Corp. (In re Ormet Corp.), No. 2:04-CV-1151, 2005 WL 2000704, at *1 (S.D. Ohio Aug. 19, 2005) (upholding court order granting motion to reject and modify expired CBA); and United Food & Commercial Workers Union, Local 770 v. Official Unsecured Creditors’ Comm. (In re Hoffman Bros. Packing Co.), 173 B.R. 177, 184 (B.A.P. 9th Cir. 1994) (concluding that § 1113 extends to continuing CBA obligations).

4 See 11 U.S.C. § 1113(a).

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Adam Isenberg is a partner and Monique DiSabatino is an associate in Saul Ewing LLP’s Bankruptcy and Restructuring Practice in Philadelphia.

5 See 11 U.S.C. § 1113(b) and (c).6 Id. at § 1113(c).7 Id. at § 1113(e).

Adam H. IsenbergSaul Ewing LLPPhiladelphia

Relations Board (NLRB) instituted a variety of legal actions. Most notably, the NLRB, on behalf of the union, brought a claim against the debtors in the Office of Administrative Law (the “ALJ proceeding”) for unfair labor practices and the unfair imposition of terms in the absence of a genuine impasse. Pending the outcome of the ALJ proceeding, the NLRB obtained a federal district court injunction in favor of the union, pursuant to § 10 (j) of the NLRA, which required the debtors to reinstate all of the union employees and pro-vide them with the benefits and compensation that were required under the expired CBAs.8 Faced with having to comply with the injunctive relief, the debtors filed for bank-ruptcy on Feb. 24, 2013. Immediately after the bankruptcy filing, the debtors obtained permission to implement interim changes to the expired CBAs under § 1113 (e). Later, the debtors filed a motion to (1) reject the continuing economic terms of the expired CBAs under § 1113 (c) and (2) implement the terms of the debtors’ proposed modifications to the CBAs under § 1113 (b).

Court Authority over Expired CBAs The preliminary issue in Long Ridge was whether the court had the authority to permit the debtors to reject the continuing terms of the expired CBAs under § 1113 of the Bankruptcy Code. Reasoning that a CBA’s status as expired does not negate a debtor’s need to reject its continuing terms to ensure survival, the court held that § 1113 (c) did provide it with the authority to reject the continuing terms of the expired CBAs, notwithstanding the countervailing mandate of the NLRA to bar employers from making unilateral changes to CBAs absent an agree-ment or impasse in negotiations. Several factors informed the court’s decision. First, the court distinguished the Long Ridge case from decisions declining to apply § 1113 to the rejection of expired CBAs, including, most notably, the decision of the U.S. Bankruptcy Court for the Southern District of New York in In re Hostess Brands Inc.9 In Hostess, the court dismissed the debtor’s motion to reject certain CBAs, rea-soning, among other things, that § 1113 (e) — which, again, governs interim modifications to CBAs that “continue in effect” — is an exception to the other provisions of § 1113, which do not reference CBAs that “continue in effect.” Based on the plain language of § 1113 and the distinctions between § 1113 (e) and the other provisions of the section, the court held that § 1113 did not extend to the rejection of the expired CBA. The court distinguished the Long Ridge case from Hostess, noting first that the Hostess court’s conclusion that § 1113 (e) is an exception to § 1113 as a whole was not essential to the court’s holding and therefore was dicta. In addition, unlike the debtors in Hostess, the debt-ors in Long Ridge presented evidence demonstrating that the length of the ALJ proceeding, which they anticipated

would not conclude until 2015, was lengthy and burden-some, and would jeopardize its reorganization. Given the projected timeline of the NLRA adjudication process, the debtors testified that absent the § 1113 (c) relief that was sought, they would lose continued funding for shortfalls in their operations and risk liquidation. Second, relying on reasoning employed by the U.S. Bankruptcy Court for the Central District of California in Karykeion,10 the court held that its ruling was appropriate in light of § 1113’s statutory language, legislative history and Bankruptcy Code policy, which seeks to allow debt-ors to lower labor costs if necessary for successful reor-ganization. The court explained that § 1113 was enacted in response to the Bildisco decision,11 wherein the U.S. Supreme Court (1) authorized the rejection of a CBA under § 365 (a) and (2) held that a CBA is not enforceable under the NLRA until it is assumed by the debtor, and thus compliance with the NLRA was not a prerequisite for rejection of the “unassumed” CBA. Taking this reasoning one step further, the court explained that because compliance with the NLRA was only required with respect to an assumed CBA in Bildisco, com-pliance with the NLRA was not required for the rejection of an unassumed and expired CBA.12 Rather, such an expired CBA could be subject to rejection under § 1113, which was enacted to codify and modify Bildisco by imposing limita-tions greater than § 365 (a). Next, the court noted that the NLRB has itself held that a debtor may avail itself of § 1113 (c) to reject an expired CBA.13 The court also reasoned that its exercise of jurisdic-tion over the rejection of continuing terms avoids an “absurd result,” since strict adherence to the union’s interpretation of the statute would cause the debtors’ liquidation and the loss of employment for hundreds of workers. Upon finding that it had the authority to authorize the rejection of the expired CBAs, the court examined the debtors’ proposed CBA modi-fications and determined that the requirements for rejection under § 1113 (c) were met.

Why It Matters: What’s the Alternative? The significance of the Long Ridge decision is most apparent when one considers the alternative route, under the NLRA, for a debtor to modify or terminate its obliga-tions with respect to an expired CBA. Section 8 (a) (5) of the NLRA makes it an “unfair labor practice” for an employer to refuse to bargain collectively and in good faith with the representatives of its employees.14 An employer violates this duty to bargain if, absent a bargaining impasse, it unilater-ally imposes changes to the terms and conditions of employ-ment.15 Accordingly, it is typically only when the parties to a CBA are at an “impasse” (i.e., when good-faith negotiations have exhausted the prospect of reaching agreement) that an employer’s statutory duty to maintain the status quo during

8 Section 10(j) of the NLRA provides the following: “The [NLRB] shall have power, upon issuance of a com-plaint as provided in subsection (b) of this section charging that any person has engaged in or is engag-ing in unfair labor practice, to petition any United States district court ... for appropriate temporary relief or restraining order.” 29 U.S.C. § 160 (j).

9 477 B.R. 378, 382 (Bankr. S.D.N.Y. 2012).

10 See In re Karykeion Inc., 435 B.R. 663 (Bankr. C.D. Cal. 2010).11 See NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).12 See 710 Long Ridge at *12.13 Id. at *13 (citing Accurate Die Casting Co., 292 N.L.R.B. 982 (1989)).14 See 29 U.S.C. § 158(a)(5).15 Id. at § 158(d).

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post-contract negotiations ends and the employer can make unilateral changes. Whether the parties have reached an impasse is a case-specific inquiry that may be difficult to determine and is like-ly to be vigorously contested by the employees’ bargaining representative. In Long Ridge, the debtors believed that they had reached an impasse after holding 36 bargaining sessions over a 16-month period. The NLRB disagreed — and insti-tuted the ALJ proceeding — on the grounds that there was no genuine impasse. The uncertainty over what bargaining to impasse entails sheds light on the potential downsides to an ALJ proceeding, which were debated in Long Ridge. In that case, the debtors claimed that the NLRA procedures were burdensome, time-consuming and constituted an impediment to the reorganiza-tion process. Testimony from the debtors indicated that prior to the bankruptcy filing, 27 days of testimony had taken place in the ALJ proceeding, with an additional 19 days scheduled, and that an NLRB decision on appeal would not likely be decided until 2015. The union, on the other hand, noted that a fast-track procedure is available under the NLRA when a § 10 (j) injunction is in place, but did not present evidence demonstrating how long this “fast-track” procedure would actually take. Although the length and burdens of the NLRA process might be debated, it is worth noting that one month after the

Long Ridge court granted the debtors’ motion to reject the CBAs, the debtors were able to confirm a chapter 11 plan and move forward with its reorganization. It seems unlikely that the debtors would have been able to confirm a plan so quickly without rejecting their CBAs.

Conclusion For a debtor with an expired CBA, the issues raised by Long Ridge are highly significant. Will the debtor be permitted to reject its expired CBA and modify its continuing obligations under the CBA without having to “bargain to impasse?” Alternatively, will the debtor be required to bargain to impasse — and perhaps litigate as to whether an impasse has occurred — and comply with applicable NLRA procedures before imposing new terms upon its employees? The Long Ridge decision reflects the tensions that may arise between debtors and employees in bankruptcy cases, as well as the balancing of employee interests with a debtor’s goal for successful reorganization. It remains to be seen how other courts will balance these competing interests in deter-mining whether § 1113 (c) permits the rejection of expired CBAs, as well as in addressing other critical employee-relat-ed issues that will continue to arise and shape chapter 11 cases in the future. abi

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