Rejection of Collective Bargaining Agreements in Chapter 11 and the Probability of Strikes: Tipping the Balance of Equities


For 50 years, the aim of national labor relations policy has been to encourage collective bargaining as the means of resolving labor disputes. A critical mechanism for furthering this policy is section 8(d) of the National Labor Relations Act (“NLRA”), which prohibits an employer from altering a collective bargaining agreement without first complying with certain statutory requirements. In 1978, however, Congress may have qualified its support of collective bargaining when it amended the bankruptcy laws to enable corporations to enter and exit Chapter 11 more readily. One provision of these amendments – section 365 – permits a debtor to “reject any executory contract.” The application of section 365 to executory labor contracts thus created the possibility that such contracts would be unilaterally rejected by debtor corporations, and placed the goals of federal bankruptcy law and those of federal labor law squarely at odds.

Bankruptcy judges after 1978 interpreted the language of section 365 as they had interpreted similar language in the old Bankruptcy Act, that is, to encompass labor agreements. But in an effort to reconcile the conflict between these statutes on the one hand and the NLRA on the other, the courts developed stricter tests for rejecting collective bargaining agreements than the “burdensome” standard used for other executory contracts. Federal courts of appeals upheld these tests, although until 1984 they disagreed over how strict the test should be. The Third and Eleventh Circuits adopted a “balance of the equities” standard, while the Second Circuit endorsed a very rigorous test which required the debtor to show that the reorganization would fail without rejection.

In the 1984 case of NLRB v. Bildisco & Bildisco, the Supreme Court sought to resolve the conflict over when a debtor could reject its collective bargaining agreements. The Court’s ruling was in two parts. First, it unanimously adopted the “balance of equities” test employed by the court below. Although the Court gave little indication as to how this test should be applied, Justice Rehnquist’s opinion did enumerate some factors to be considered: “[T]he likelihood and consequences of liquidation for the debtor absent rejection, the reduced value of the creditors’ claims that would follow from affirmance and the hardship that [such reduced value] would impose on them, and the impact of rejection on the employees.”

Second, the Court found that a debtor’s unilateral termination of its collective bargaining agreement was not an unfair labor practice. Justice Brennan, joined by three other Justices, dissented from the majority view on this issue. He felt that the Court had given short shrift to the objectives of federal labor law and that the decision would foment labor strife. He went on to state that “because labor unrest is inimicable to the prospects for successful reorganization, and because unilateral modifications of a collective-bargaining agreement will often lead to labor strife, such unilateral modification will more likely decrease the prospects for successful reorganization.”  Thus, Justice Brennan saw unilateral rejection as contrary to the goal of the Bankruptcy Code as well as to the NLRA.

The second part of the Court’s opinion was legislatively overruled by the 1984 amendments to the Bankruptcy Code. The current law details a series of procedures – which includes securing the prior approval of the bankruptcy judge – that the debtor is required to follow before it can reject the collective bargaining agreement.  Yet, while the 1984 amendments incorporate the “balance of equities” test adopted in Bildisco, it remains to be determined what factors should be weighed by this balance.

Bildisco provides some guidance. Before authorizing rejection courts should consider “not only the degree of hardship, but also any qualitative differences between the types of hardship each [creditor] may face.” This statement supports special consideration of employee interests because sacrifices by employees are qualitatively different from banks deferring receipt of payments. Employees stand to lose health insurance, retirement savings, and accumulated seniority, in addition to the value of their rights under the NLRA. Moreover, the Bankruptcy Code itself recognizes the special nature of employee sacrifices in assigning certain employee claims a priority status.

However, from a bankruptcy judge’s perspective, the more important reason why rejection requires particular attention to employees’ interests is that employees can strike once their contract is rejected. Bildisco endorses the Third Circuit’s application of the “balance of equities” test, which explicitly mentions strikes as a factor in the balance. The case also implicitly supports consideration of the likelihood of a strike by including the “impact of rejection on employees” as a factor in the equation and by declaring that the “[t]he Bankruptcy Court must focus on . . . how the equities relate to the success of the reorganization.” The impact of rejection on the employees thus encompasses the decision to strike, since a successful strike can threaten the debtor’s reorganization.

This Note will attempt to define how much weight a court should give to the strike factor when evaluating a debtor’s motion to reject its labor contracts. The Note proposes that the key criteria a court should consider are the probability that rejection will precipitate a strike and the likelihood that a strike will undermine the debtor’s attempts to reorganize.

Part I examines the Chapter 11 filing of Wheeling-Pittsburgh Steel Corporation as a case in point of how rejection of a collective bargaining agreement can provoke a strike that nearly leads to liquidation of the company. Part II looks at labor contract rejections in the aggregate – the number of attempts to reject labor contracts, the percentage of cases where the bankruptcy judge allowed the debtor to reject such contracts and how often these rejections led to strikes. Part III analyzes selected court opinions where the judges either identified and evaluated the strike factor or failed to do so. Part IV assesses how courts should consider the likelihood and consequences of a strike following labor contract rejection. In conclusion, the Note inquires whether given their record and limited scope of expertise, bankruptcy courts are the proper forum for adjudicating labor contract rejections.

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