In In re Trump Entertainment Resorts, Inc., a bankruptcy case currently pending before the United States Bankruptcy Court for the District of Delaware at Case No. 14-12103, the union at a famous Atlantic City casino made a bet on its ability to “hold up” the casino’s bankruptcy process and force hard line negotiations on an expired collective bargaining agreement. Ultimately, this gamble did not pay off, as the Honorable Judge Kevin Gross held that the casino was permitted to reject the expired collective bargaining agreement as an “executory contract” under the Bankruptcy Code. Put succinctly, the union’s negotiation tactics resulted in the loss of all benefits under the collective bargaining agreement for union members

While the holding in Trump is predicated on extreme factual circumstances, it serves as a reminder that parties seeking to “stiff-arm” negotiations may face serious repercussions, particularly in the context of bankruptcy.

Introduction

The circuits are split on the issue of whether a bankruptcy court retains jurisdiction to consider a motion to reject an expired collective bargaining agreement under 11 U.S.C. § 1113(c), or if a bankruptcy court lacks jurisdiction because the only duties following the expiration of a collective bargaining agreement are statutory (specifically, arising under the National Labor Relations Act (“NLRA”)), and thus, fall outside a bankruptcy court’s powers to accept or reject such agreements under section 1113. Weighing in on this issue, on October 20, 2014, Judge Gross entered an opinion (“Opinion”) in the Trump bankruptcy case finding that the Court retained jurisdiction to approve the rejection of an expired collective bargaining agreement under section 1113(c).

Facts

The Debtors, which include affiliates Trump Entertainment Resorts, Inc. and Trump Taj Mahal Associates, LLC (“Taj Mahal”) filed for bankruptcy protection on September 9, 2014, and shortly thereafter, on September 26, 2014, filed a motion (“Motion”) seeking to reject the collective bargaining agreement (“CBA”) between Taj Mahal and UNITE HERE Local 54 (“Union”) on the grounds that the affiliated Debtors would be forced to liquidate if the estates were not permitted to reject the CBA.

The Debtors operated two casinos, including the Taj Mahal Casino Hotel on the Atlantic City boardwalk. The Court characterized the Debtors’ financial situation as “desperate,” with EBITDA falling from $32 million to negative $6.1 million in 2013, and with the last twelve months EBITDA of negative $25.7 million as of June 30, 2014. Opinion, pp.2-3. At the time of the Motion, the Debtors only had enough cash to operate for two months and were unable to obtain debtor-in-possession financing.

Prior to bringing the Motion, the Debtors made various efforts to negotiate the terms of the CBA with the Union, which “stiff-armed” the Debtors and engaged in a “program of misinformation” designed to drive customers away from the Taj Mahal Casino. Opinion, p.7. The rejection of the CBA offered the Debtors a chance to save $14.6 million per year in payments thereunder, which, along with a handful of other concessions, would enable the Debtors to remain operational. Absent the rejection of the CBA, the Debtors would be forced to shut down by October 20, 2014, liquidate all assets, and lay off over 3,000 employees. Thus, the Debtors’ reorganization was “dependent on rejection of the CBA.” Opinion, p.8.

Analysis

When a collective bargaining agreement expires, the NLRA provides that an employer must maintain the status quo of the prior agreement while negotiating the terms of a new collective bargaining agreement. Under the Bankruptcy Code, a debtor’s ability to accept or reject a collective bargaining agreement is governed by section 1113. Courts have split on the issue of whether section 1113 applies “in a situation where a collective bargaining agreement has expired but the terms of the agreement remain in effect by virtue of the employer’s status quo obligations under the NLRA.” Opinion, p.10 (collecting cases).

In Trump, the Union argued that since the CBA had expired and the Debtors’ only continuing liabilities thereunder were statutory (e.g., imposed by the NLRA) rather than contractual, the expired CBA was no longer an “executory contract” that the Debtors were able to accept or reject under section 1113. The Court rejected the Union’s reading of section 1113, and found that both the language and legislative history of the provision established that the Court may enter an order rejecting the obligations under a CBA that continue in effect due to the NLRA in the wake of an expired collective bargaining agreement. Opinion, p.11. The Court also noted that the Union’s reading of section 1113 made “little sense,” and created an “illogical result” in which the Debtors would be forced to liquidate and all employees (including Union members) would lose their jobs. As such, the CBA would be of no effect.

Finally, the Court stated that there is little reason to distinguish between an expired and unexpired collective bargaining agreement, as the distinction would merely give labor unions the “power to hold up a debtor’s bankruptcy case.” Opinion, p.18. This “hold-up power . . . wholly ignores the policy and bargaining power balances Congress struck in Section 1113 and exalts form over substance.” Id. Given these factors, the Court found that it had jurisdiction under section 1113(c) to consider the Motion, which it ultimately granted.

Practical Implications

While the ruling in the Trump case seems to be driven largely by extreme facts (e.g., the reality of a complete shut-down absent the rejection of the CBA, and a Union that was unwilling to negotiate), the Opinion eliminates any distinction between an expired and unexpired collective bargaining agreement in bankruptcy. This holding may operate to shift the balance of negotiating power to debtors. In jurisdictions following this holding, bankruptcy may prove a particularly attractive option for a company that is heavily laden with union obligations and is facing difficult negotiations, as it enables the employer to short-cut its negotiation obligations under the NLRA, which otherwise requires the parties to negotiate to an impasse. Thus, parties seeking to agree to the terms of a collective bargaining agreement that is near expiration would be wise to factor this bankruptcy-effect on NLRA regulations as a risk in pushing off or shirking negotiation responsibilities.