3 Easy Steps to Rejecting Collective Bargaining Agreements

By: Lauren E. Stulmaker
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
In a decision with important implications for public sector bankruptcies, the United States Bankruptcy Court for the Eastern District of California held that the rejection of collective bargaining agreements (“CBAs”) in chapter 9 cases is governed by § 365, rather than the enhanced standards of § 1113. [1]   However, rather than the relaxed business judgment standard normally applicable to contract rejections under § 365, the court applied the three part test established by the Supreme Court in NLRB v. Bildisco & Bildisco, before letting the City of Vallejo out of its collective bargaining agreements (“CBAs”).[2] The court in In re City of Vallejo, addressed the issue of whether chapter 9 of the Bankruptcy Code would allow a municipal debtor to reject the CBAs in place for its public sector unions.[3] After the City filed for bankruptcy under chapter 9 and sought to escape the CBAs at issue, the municipal employees sought protection under California’s state labor laws. Because the federal labor laws only govern private sector employment, the city employees attempted to rely on the state labor laws yet the court held that the state laws were entirely preempted by the Bankruptcy Code.[4] 
 
The court found that not only do federal laws preempt conflicting state laws, but also, that chapter 9 filings are unique in that the state approves the city’s decision to declare bankruptcy. Thus, the court reasoned that the State of California, by allowing the City of Vallejo to declare chapter 9 bankruptcy, essentially conceded that the benefits of bankruptcy outweighed the protections of its state laws. The court continued that once the City declared chapter 9 bankruptcy, with the state’s approval, federal bankruptcy law should govern any analysis of the City’s plan. As such, the City was able to reject executory contracts, including CBAs, under the authority granted in 11 U.S.C. § 365.[5] Nevertheless, the court noted that, while section 365 permits a chapter 9 debtor to reject executory contracts, the Supreme Court has mandated certain requirements that must be met before a court will allow complete rejection of those contracts.
 
Following the Supreme Court’s decision in NLRB v. Bildisco & Bildisco[6], the court in In re City of Vallejo required the City to meet a three-part test in order to dissolve the CBAs. In Bildisco, the Supreme Court, guided by the policies of the National Labor Relations Act (“NLRA”) which governs private sector labor law, found that before the CBAs in that case could be rejected, the debtor had to demonstrate that, “(1) the collective bargaining agreement burdens the estate; (2) after careful scrutiny, the equities balance in favor of contract rejection; and (3) ‘reasonable efforts to negotiate a voluntary modification have been made, and are not likely to produce a prompt and satisfactory solution.’”[7] This test, the Supreme Court stated, upholds the policies of the NLRA by ensuring that parties undergo a reasonable attempt to negotiate and reach an agreement before a Bankruptcy Court will be permitted to step in and terminate executory contracts.[8] Noting that there was no estate in a chapter 9 bankruptcy, the court in In re City of Vallejo amended the first prong of the Bildisco test slightly and required the City to show that the CBAs would burden its ability to reorganize.[9] 
 
The chapter 9 bankruptcy facing the City of Vallejo represents a very complicated scenario, where the debtor is not only the city, but also the employer of many individuals. The court in In re City of Vallejo has provided some protections to city employees by requiring the municipality satisfy the Bildisco test, and thus allow the unions to exhaust their negotiation options before their CBAs are rejected. 


[1] See In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. 2009).
[2] See id.
[3] Id. at 75.
[4] Id.at 76.
[5] Id. (citing 11 U.S.C. § 365 (2006) which allows the rejection of contracts, and § 901 which fully adopts § 365 into chapter 9 cases).
[6] 465 U.S. 513 (1984).
[7] 403 B.R. at 78 (quoting Bildisco, 465 U.S. at 526 (footnote omitted)).
[8] 465 U.S. at 526.
[9] 403 B.R. at 78 n.2 (citing Bildisco, 465 U.S. at 525–26).