Employee Benefits in Bankruptcy Committee

ABI Committee News

Decisions under §1113 in the Northwest Airlines Bankruptcy Case May Have Lasting Consequences

Of the myriad decisions handed down in the recently-concluded Northwest Airlines bankruptcy, none presents more significant issues than those arising out of Northwest’s efforts to achieve labor cost savings from its unionized workforce. Three decisions in particular, two from the bankruptcy court and one from the Second Circuit Court of Appeals, which were precipitated by protracted and often stalemated negotiations with the airline’s flight attendant workforce, may have significant and long-lasting implications for debtors and unions locked in §1113 negotiations. Northwest’s experience will provide potentially important lessons regarding the impact of chapter 11 on distressed labor negotiations.

When Northwest Airlines entered bankruptcy on Sept. 14, 2005, its pension plans, covering more than 35,000 (mostly unionized) employees, were under funded by $3.8 billion and its unit labor costs were alleged to be the highest in the industry. Approximately 85 percent of Northwest’s current 30,000 workers are represented by unions, with 98 percent represented by the Airline Pilots Association (ALPA), the International Association of Machinists and Aerospace Workers (IAM) and the Association of Flight Attendants (AFA). Thus, Northwest sought chapter 11 protection in part as a means to achieve a level of labor savings through the use of §1113 of the Bankruptcy Code.

Northwest’s §1113 “Ask” and Negotiations with Its Unions

Almost immediately after filing for bankruptcy, Northwest issued a proposal to its unions for concessions under §1113 of the Bankruptcy Code. Section 1113 sets forth the exclusive means by which a debtor may reject collective bargaining agreements (CBAs) with its union workforce. Since the enactment of §1113, courts have developed a nine-point test for determining motions to reject CBAs under that section. See In re Wheeling-Pittsburgh Steel Corp., 50 B.R. 969, 974-75 (Bankr. W.D. Pa. 1985), aff’d., 52 B.R. 997 (W.D. Pa. 1985). Bankruptcy courts consistently apply these nine factors when deciding §1113 motions. See Truck Drivers Local 807 v. Carey Transp. Inc., 816 F.2d 82, 92 (2d Cir. 1987); Wheeling-Pittsburgh Steel Corp. v. United Steelworkers of America, 791 F.2d 1074, 1080 (3d Cir. 1986). These nine factors are:

(1)        The debtor must make a proposal to modify the CBA or obtain concessions from the union;

(2)        The debtor’s proposal must be based on the most complete and reliable information available at the time the proposal is made;

(3)        The proposal must be necessary to the debtor’s reorganization;

(4)        The proposal must treat fairly and equitably creditors, the debtor and all other affected parties; and

(5)        The debtor must provide the union with relevant information as is necessary to evaluate the proposal.

After making a proposal and before the hearing:

(6)        The debtor must meet at reasonable times with the union; and

(7)        The debtor must negotiate in good faith with the union in an attempt to reach mutually satisfactory modifications of the CBA.

After the above steps are satisfied, courts have the authority to grant a rejection motion only if:

(8)        The union has refused to accept the debtor’s proposal without good cause; and

(9)        The balance of the equities clearly favors rejection of the CBA.

See In re Wheeling-Pittsburgh Steel, 50 B.R. at 974-75 (citing to Code §1113). All nine of these factors must be satisfied before a CBA can be rejected.

Northwest’s §1113 proposal called for approximately $1.4 billion in total average annual savings from its union workforce in the form of wage reductions, work rule changes and pension savings. However, given the airline’s poor pre-bankruptcy relations with its union workforce, these efforts were met by ardent union opposition.

Many represented workers felt that in making the §1113 proposal to its unions, Northwest failed to consider that it had already gone to the union well numerous times in the years before the bankruptcy. Notably, just prior to filing chapter 11, members of the Aircraft Mechanics Fraternal Association (AMFA) struck the airline over failed contract negotiations. ALPA agreed to a short-term collective bargaining agreement to save the airline money while it formulated a plan to rehabilitate the business. And the IAM and the flight attendants, who were then represented by the Professional Flight Attendants Association (PFAA), were in negotiations over the airline’s request for hundreds of millions of dollars in concessions. Moreover, in the decade leading up to the bankruptcy, several unions agreed to several hundred million dollars of annual cost savings. When Northwest issued its post-petition demand for still more concessions, the union workforce was unwilling to agree.

Settlement with IAM and ALPA

Following intensive and extensive negotiations over its §1113 proposals, Northwest managed to reach tentative agreements with the leaderships of three unions—two representing a comparatively small number of employees and one with the IAM. These tentative agreements were ultimately ratified (after one unit of the IAM initially rejected it) and modified CBAs were approved by the bankruptcy court and implemented. While the CBAs provided substantially the dollar level of savings sought by Northwest they were achieving those savings in different ways than originally proposed. Northwest then reached a tentative agreement with ALPA and the company’s pilot membership ratified the agreement. Northwest also reached a tentative agreement with PFAA’s leadership on March 1, 2006, but the flight attendants voted it down by a large margin (close to 4 to 1) on June 6, 2006.

The decision by the IAM, ALPA and other unions to settle with Northwest and their ability to have the tentative agreements ratified by their memberships before the court ruled on the debtors’ §1113 motion provided concrete, less drastic relief than that sought by Northwest in its motion. In particular, as part of the modified CBAs, the IAM and ALPA were granted allowed, unsecured claims against Northwest, totaling several hundred million dollars. Having these allowed claims prior to confirmation of Northwest’s plan of reorganization, when trading in Northwest claims by claim traders was at its most vibrant, enabled the IAM and ALPA to monetize a substantial portion of their claims by selling them in the marketplace. The proceeds from these claim sales were distributed to IAM and ALPA members and somewhat mitigated the financial burden that these employees had agreed to accept as part of Northwest’s restructuring efforts. By refusing to settle, the flight attendants had no claim to sell, no CBA and were faced with the prospect of lengthy, contentious, expensive and uncertain litigation with Northwest over wages, work rules and the fate of their pension plan.

In addition, Northwest proposed to freeze all of its defined benefit pension plans and pay the unfunded liability in accordance with the yet to be passed Pension Protection Act of 2006 (PPA) (if that act did not pass, Northwest would have sought to terminate these plans). The IAM and ALPA were able to use the expected savings to be achieved on the passage of the PPA to mitigate the concessions sought by Northwest and conclusively resolve the fate of their pension plans. The PPA allows commercial airlines that freeze their defined benefit pension plans to elect to extend the amortization period for unfunded benefit liabilities to 17 years, thereby giving electing airlines the ability to greatly reduce their annual plan funding requirements. Northwest made this election effective Oct. 1, 2006.

The Court’s Ruling on Northwest’s Motion to Reject The Flight Attendants’ CBA

After the flight attendants voted down the tentative agreement on June 6, Bankruptcy Judge Allan L. Gropper issued a lengthy opinion on June 29, 2006, granting Northwest’s §1113 motion and authorizing Northwest to reject the flight attendants’ CBA if no new agreement was reached within 14 days after entry of the order implementing his decision. See, In re Northwest Airlines Corp., 346 B.R. 307 (Bankr. S.D.N.Y. 2006). The court readily concluded that Northwest satisfied its burden of proof under §1113 and that the concessions demanded of the flight attendants were both “necessary” to its reorganization and rejected by the flight attendants without “good cause.” The real issue for the court, however, was the terms that Northwest could impose on the flight attendants.

The flight attendants argued that §1113 only authorized Northwest to impose the terms of the March 1, 2006 tentative agreement, which the union refused to ratify. That agreement provided for approximately the same level of savings from the flight attendants as Northwest’s last §1113 proposal on Feb. 22, 2006, but it achieved those savings in ways that materially differed. Most significantly, PFAA remained adamant about limiting Northwest’s ability to outsource flight attendants or hire foreign flight attendants on foreign routes. So important were these items to PFAA that they sought to buy them back in exchange for increased wage reductions and cuts in vacation pay. Northwest argued it had the right to impose the terms of the Feb. 22, 2006 proposal because the PFAA rank-and-file had rejected the March 1 tentative agreement. The February 22 proposal permitted Northwest to outsource and hire foreign flight attendants at the levels it desired, while providing for smaller wage reductions.

Judge Gropper concluded that §1113’s requirement that Northwest make a good faith proposal, which the union rejected without good cause, renders the last rejected proposal “the key proposal for purposes of §1113.” For support, the court looked to the reasoning of In re Maxwell Newspapers Inc., 981 F.2d 85 (2d Cir. 1992), in which the Second Circuit conditioned the debtor’s rejection of collective bargaining agreements on its “continuation of offers recently negotiated by the parties.” The court concluded, as had the Second Circuit in Maxwell, that offers made by Northwest could not be withdrawn. The court acknowledged that its holding provides little incentive to flight attendants to continue negotiating because the terms of the last offer represent the very worst terms that will be imposed. Nevertheless, the court believed that this disincentive was not enough to permit Northwest to implement the terms of its last §1113 proposal rather than the terms of the last tentative agreement, which was not ratified, on the flight attendants.

On July 6, 2006, the day after Judge Gropper entered an order implementing his June 29 decision, the flight attendants voted to replace PFAA with AFA. Negotiations with the airline resumed, and on July 17, AFA and Northwest reached a new tentative agreement that was put to a vote. On July 31, the AFA announced that its membership had voted down the new tentative agreement. Northwest immediately announced that it was imposing the terms of the March 1 tentative agreement on the flight attendants, per Judge Gropper’s June 29 decision. The next day, the AFA threatened a strike. Northwest then moved the bankruptcy court for an order enjoining such a strike under the Railway Labor Act. On Aug. 17, Judge Gropper denied the motion, holding that the bankruptcy court lacked jurisdiction to enjoin the AFA. In re Northwest Airlines Corp., 346 B.R. 333, 344-45 (Bankr. S.D.N.Y. 2006). The union set an August 25 strike date.

On Aug. 25, however, District Judge Marrero issued a preliminary injunction blocking AFA members from striking. He subsequently issued a lengthy decision on Sept. 14, 2006 reversing the bankruptcy court’s holding that it lacked jurisdiction and extending the injunction against AFA pending a final decision on the merits. In re Northwest Airlines Corp., 349 B.R. 338 (S.D.N.Y. 2006). The union filed an appeal in the Second Circuit.

During the pendency of the appeal, the parties resumed mediated talks, and the union filed claims in the bankruptcy for more than $1 billion in CBA rejection damages.

With no agreement in sight, the Second Circuit issued an opinion on March 29, 2007 affirming the district court’s strike injunction. The court of appeals held that AFA had not sufficiently pursued the RLA’s dispute resolution processes and that any strike now would violate the union’s duty under §2 (First) of the RLA to make every reasonable effort to reach a new agreement. In re Northwest Airlines Corp., 483 F.3d 160 (2d Cir. 2007). Importantly, the appellate court held that Northwest did not breach the CBA when it rejected the agreement, but rather by following the §1113 process to its conclusion had “abrogated” the agreement, after which the CBA ceased to exist.

The union, disinclined to accept the Second Circuit’s decision, announced in early April that it would seek review in the Supreme Court. Meanwhile in the bankruptcy court, Northwest seized on the court of appeals “abrogation” analysis to argue that the AFA’s claim for more than $1 billion in rejection damages must be thrown out. At the same time, the AFA asked Judge Gropper to reconsider his June 29, 2006 decision authorizing Northwest to reject the flight attendants’ CBA. On April 13, 2007, the bankruptcy court issued a decision following the Second Circuit’s analysis and holding that a union has no claim for damages when a debtor rejects the CBA pursuant to a bankruptcy court‘s order under §1113. Judge Gropper also denied the union’s request for reconsideration.

On April 26, 2007, Northwest and AFA reached a new tentative agreement that granted the airline $195 million in annual savings while giving AFA members an allowed unsecured claim for $182 million. On May 30, the AFA membership approved the agreement and the next day Northwest exited chapter 11.

Conclusion

Judge Gropper’s June 29, 2006 decision is particularly important in large chapter 11 cases where §1113 negotiations tend to be long, complex and contentious. Previously it was unclear what right a debtor has to impose employment terms after exhausting the §1113 process. Did the debtor have the right unilaterally to impose any conditions? Or could the debtor impose the terms of its very first §1113 proposal? Judge Gropper’s decision makes clear that it is the terms of the last tentative agreement or if there is none, the debtor’s last proposal, that the debtor may impose. Now, debtors and unions involved in §1113 negotiations need to be cognizant of the impact that incremental negotiations, designed to achieve consensus and, ultimately, agreement, may have on a court imposed result if negotiations fail. Of course, lurking in the background of those negotiations will also be Judge Gropper’s April 13, 2007 decision, holding that there is no claim for rejection damages when a debtor rejects a CBA pursuant to court order under §1113.