by: Sharon L. Levine and S. Jason Teele
Lowenstein Sandler PC; Roseland, N.J.
Section 1113(c) of the Bankruptcy Code sets forth the requirements that debtors must satisfy before a bankruptcy court can authorize rejection of a collective bargaining agreement (CBA). Fundamentally, to meet the requirements under §1113(c), the debtor bears the burden of making a proposal for necessary changes in the CBA including providing the union with complete and reliable information about its business plan and financial condition to enable the union to analyze the proposal, negotiating with the union in good faith over the debtor’s proposal and showing that the union rejected the debtor’s proposal without good cause. Recently, in the airline, chemical and auto industries, debtors have used §1113(c) as a tool to restructure employee and pension liabilities.
Two recent decisions denying motions to reject CBAs provide insight into the burden that debtors carry under §1113(c). The first case, In re Mesaba Aviation, provides great detail of the proofs a debtor must put on under §1113(c). The second, In re Delta Airlines, Inc., calls into question a key tool in §1113(c) negotiations – the so-called contingency clause, in which an agreement on CBA modifications between the debtor and a union is contingent upon the debtor’s other unions agreeing to the same treatment.
In Mesaba Aviation, case no. 05-39528 (Bankr. D. Minn. May 18, 2006) (Kishel, J.), the U.S. Bankruptcy Court for the District of Minnesota denied the debtor’s motion to reject its CBAs with pilots, flight attendants and mechanics. First, the court found that the debtor refused to provide the unions with a “live” version of its business model (i.e., an electronic copy of the built-out spreadsheet) that could be manipulated by the unions. The unions argued that a live version of the business model was necessary for them to analyze and ultimately challenge the assumptions underlying the debtor’s business plan. The Mesaba court held that a live model was relevant to the unions’ consideration of the debtor’s §1113(c) proposal because it would allow the unions to input different assumptions and challenge the debtor’s business plan and, thus, the necessity of the proposal. In refusing to provide a live version of the business plan, the court found that the debtor withheld relevant information from the union and therefore did not satisfy the “complete and reliable information” prong of the statute.
Second, the court found that the debtor misled the pilots union in regard to how pilot savings were calculated in the business plan. During negotiations with the pilots, the debtor agreed that it would not add anticipated costs for retraining pilots in the raw cost of wages and benefits. The business model, however, did just that. The pilots discovered this and confronted the debtor, who then admitted that they had always intended to include these costs in the raw cost of pilot wages and benefits. The court had no trouble finding that the debtor bargained in bad faith.
Finally, the unions challenged the debtor’s assumptions regarding the size of the union workforce in the later years of the business plan. The court found that the debtor’s assumptions did not properly account for reasonable-to-expect permutations and this failure translated into the debtor’s §1113(c) proposal asking for more than was necessary. Thus, the debtor’s proposal was not necessary.
The court strongly urged the parties back to the negotiating table after the debtor cured its informational deficiencies. If a consensual resolution still was not forthcoming, then the debtor could renew its §1113(c) motion.
In Delta Airlines, case no. 05-19923 (Bankr. S.D.N.Y. April 26, 2006) (Hardin, J.), Comair, a Delta affiliate, sought to reject its flight attendant CBA. At issue in this case was the propriety of the contingency clauses in §1113(c) negotiations and whether the debtor had attempted to use them with the flight attendants in bad faith. In Comair the answer was yes. Therein lies the importance of the Comair decision.
Debtors and unions commonly agree to certain concessions contingent upon other labor groups agreeing to similar or identical concessions. The wage issue offers the simplest example of such a clause. One union might agree to accept a percentage wage reduction subject to a second union’s accepting at least the same percentage reduction. If the second union negotiates a lower reduction, then the first union’s percentage reduction will be adjusted accordingly. Contingency clauses are important bargaining tools because they permit debtors to reach agreements with multiple unions in seriatim and guarantee the unions that their sacrifices will be shared equally with other labor groups. Although the Comair decision can be read as disapproving the way the debtor used the contingency clauses in its negotiations with the flight attendants, the court also questioned the use of such contingency clauses at all in §1113(c) negotiations, a position that is at odds with common practice.
After making its §1113(c) proposal, Comair adopted a strict take-it-or-leave-it bargaining position with the flight attendants. Comair refused to agree to anything that deviated from its original §1113(c) proposal. The debtor’s position apparently was driven not by financial or business concerns, but by the contingency clauses in the debtor’s agreements with other unions. Comair was unwilling to agree to anything with its flight attendants that may implicate other unions’ contingency clauses and reopen the negotiations with those other unions. The court was offended by the inclusion of the contingency clauses in other unions’ §1113(c) agreements for two reasons.
First, the court found that the debtor did not negotiate in good faith with the flight attendants because its bargaining position was materially limited by the contingency clauses in the other unions’ agreements. Second, and more importantly, the court questioned whether such clauses were appropriate inasmuch as they usurp the court’s function to independently judge the debtor’s proposal under §1113(c) standards. The court rejected outright the debtor’s argument that the clauses to which it agreed with other unions can be given the effect of constraining the court’s judgment and discretion in applying the statutory criteria to determine whether the debtor’s motion to reject the flight attendant CBA should be granted or denied. The court directed the parties to return to the bargaining table, noting that Comair could renew its motion if no agreement were reached.
Although the extent to which these decisions will affect §1113(c) proceedings remains unclear, it is clear that all parties must adhere strictly to the requirements of §1113, as explained in great detail in Mesaba, and be mindful of the potential for a court to view negatively a bargained-for contingency clause, as did the court in Comair.