Can a company in Chapter 11 bankruptcy reject its union contract?

When a debtor files for bankruptcy, it can decide whether to give up on an executory contract, or stick with it. It comes down to whichever of those options will later be most helpful to the debtor’s estate. The contract could be a liability, in which case it will drag down the bankruptcy estate, which is why getting rid of it, to the extent it’s costly, can be useful. So sometimes a debtor can keep a vehicle lease, or a real estate lease, sometimes a contract to purchase property, sometimes an IP license, sometimes a franchise. Sometimes not.

In Chapter 7 bankruptcy (liquidation), the contracts probably simply get rejected, because there’s nothing left. In Chapter 11 bankruptcy (reorganization), which contracts you do (and don’t) retain may well affect the fate of the business (continue to pay the power bill, don’t worry about the spare company car for now). Under bankruptcy law, the debtor gets to keep (assume) or trash the ordinary contract. But a union contract (“CBA,” covering pay, perks, and rules for dealing with union employees) is unique: The debtor can not just say “done.” First the debtor has to try to negotiate with the union. So yes, the chapter 11 company can reject or modify its union contract, but not on its own say-so like a car lease. After negotiating, it must meet the requirements below.

The Precise Terms the Debtor Has to Meet

What the above “first negotiate” means isn’t open-ended: the bankruptcy code spells out the precise terms the debtor has to meet before it can reject a union contract. 11 U.S.C. section 1113 provides that any debtor in a bankruptcy case must, before rejecting its union contract, submit a proposal to the person authorized to deal on behalf of the union. That proposal must be based on the most up to date and complete info available to the debtor, and must include changes necessary to make the business or enterprise work. That proposal must be fair and equitable to everyone: creditors, the debtor, and all parties.

In practice, the debtor (employer) proposes new or amended contract (wages, healthcare contributions, retirement contributions, etc.), accompanied by records of why the current contract is unaffordable (monthly operating reports, past years profit and loss statements, or any other records to help). Everything the debtor can support with financial data helps. The idea is for the proposal to help the business succeed in a reorganization, not for the business to just chop the union employees’ pay.

Courts disapprove of bad faith offers. In bankruptcy, for example, the U.S. Court of Appeals for the Third Circuit, in Wheeling-Pittsburgh Steel v. steelworkers union, stated that the debtor and union should meet at reasonable times and bargain in good faith. The union can of course counter-offer or decline to offer anything, but it has to have ‘good cause’ to do so, i.e. that the debtor was deliberately offering less than the debtor itself needed. The union cannot just show up and say “give me more” - that is simply its interest, and not “good cause.” A reasonably well-documented and fair proposal of your own should set you up in the stronger position.

Every Cost the CBA Imposes

A CBA is more than wages alone, and could include not only wages but also retiree medical bill reimbursement and costs, as well as regular pension fund and retiree healthcare fund payments for union members. Before you draft a proposal to the union (or to retiree benefits trustee), compile a list of every cost the CBA imposes on you. Similarly, for retiree benefits, 11 U.S.C. section 1114 functions like section 1113 for the union contract: A proposal to the union (or to the retirement fund, if the fund is separate from the union). The union has to reject it. Then the debtor (employer) proves the required changes to reorganize the business or enterprise.

What are those changes the debtor needs to make in the union contract? The lawyer’s answer: Well, it depends. But generally speaking you pay the union less money. The debtor could propose new (and lower) wages, or new (and lower) healthcare contributions to the retiree healthcare fund, or both. This can be negotiated, sometimes down to a level the company can afford. Maybe not.

Courts also look for a business that has filed bankruptcy just to get out of its union contract. Courts often take a like to the ‘snap-back’ provision in the plan, under which the changed terms revert back to the original CBA terms, usually after the plan is complete: it reassures the court that the debtor didn’t file just to change or reject the CBA, but is willing to abide by it going forward.

After the above, if the union - and any employee trust administering retiree funds - rejects without “good cause,” the debtor’s next step is to apply to the court; the court may then be empowered to reject the union contract outright or to order it amended in certain ways to reorganize.