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Bankrupt employers.

Bankrupt employers

By filing a petition under chapter 11 of the Federal bankruptcy laws,6 a failing business can obtain a measure of protection from its creditors while it attempts to reorganize its affairs. Among other things, chapter I I allows the debtor business to postpone or avoid paying many of its debts, reject certain of its contracts, and, in some cases, modify its workers' terms of employment, all while it continues in business.7

In 1984, the Supreme Court held in NLRB v. Bildisco & Bildiscol that a chapter I I debtor can repudiate a collective bargaining agreement without a court's prior approval if the agreement "burdens the [bankrupt's] estate and ... if the equities balance in favor of rejecting the contract."9 The Court's decision caught the immediate attention of labor leaders and Federal lawmakers, who objected to the notion that businesses could unilaterally modify or terminate collective bargaining agreements outside of the National Labor Relations Act's well-established procedures. As a result of these concerns, Congress enacted a new chapter 11 provision, 11 U.S.C. 1113, limiting the number of situations in which collective bargaining agreements may be rejected by bankrupt companies.

Under section 1113(b)(1), a debtor seeking to modify or reject a collective bargaining agreement must follow a well-defined procedure. The debtor first must present a proposal to its employees' union that includes the "modifications ... that are necessary to permit the reorganization of the debtor." If the debtor and the union cannot agree on these modifications, the debtor can ask the bankruptcy court to modify or terminate the collective bargaining agreement. The court may then do so, but only if (1) the union has refused to accept the proposal without good cause, (2) the equities clearly favor modifying the agreement, and (3) the proposal is necessary" to the company's reorganization. 13

The Court of Appeals for the Tenth Circuit recently was asked to decide, in Sheet Metal Workers Local 9 v. Mile Hi Metal Systems, Inc.,14 whether the procedures set forth in section I 1 13 require a union to discuss with the debtor a proposal that would, if implemented, be an unfair labor practice under the National Labor Relations Act." After reviewing the policies embodied in Federal bankruptcy and labor laws, the court concluded that simply because a proposal violates the National Labor Relations Act does not automatically preclude its consideration in a chapter I I proceeding. According to the court, a proposal contravening Federal labor law may still be fair, equitable, and necessary for the debtor's reorganization, in which case Federal bankruptcy policies prevail.

The Mile Hi court also was asked to determine when a proposed modification to a collective bargaining agreement is "necessary" for the employer's reorganization. Two courts of appeals previously had ruled on this issue. One had taken a narrow view, holding that a proposal may go no further than what is absolutely required to avoid imminent liquidation.16 The other had taken a more expansive view, allowing a collective bargaining agreement to be modified if the proposal "contains necessary, but not absolutely minimal, changes that will enable the debtor to complete the reorganization process successfUlly."17 The Mile Hi court reviewed each of these decisions and, without extended analysis, concluded that the latter view is the better reasoned. In the court's view, [t]he proposals must be more than potentially helpful; they must be directly related to the debtor's financial condition."
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Title Annotation:Significant decisions in labor cases; labor laws vs. bankruptcy laws
Author:Hukill, Craig
Publication:Monthly Labor Review
Date:Jul 1, 1990
Words:572
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