By: Cecilia Ehresman
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Chicago Construction Specialties, Inc.,[i] the United States Bankruptcy Court for the Northern District of Illinois recently held that the debtor must satisfy the requirements of section 1113 of the Bankruptcy Code, even though the debtor was liquidating under chapter 11 instead of reorganizing.[ii] In Chicago Construction, debtor, a demolition construction company, ceased operations, sold substantially all its assets outside of bankruptcy, and sent the union representing its workers a notice that it intended to reject a collective bargaining agreement[iii] before the company filed for bankruptcy.[iv] Subsequently, the debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code and moved to reject its CBAs pursuant to section 1113 of the Bankruptcy Code.[v] The union objected, arguing that the debtor had unilaterally rejected the CBA by providing an ultimatum rather than a proposal for modification.[vi] The Chicago Construction court ruled in favor of the debtor, finding that there was no good reason not to allow the debtor to reject the CBA because the debtor had already liquidated and the only effect of not allowing the debtor to reject the CBA would be to elevate the union’s claims over those of the debtor’s other creditors.[vii]
Section 1113 governs the modification or rejection of a CBA by a chapter 11 trustee or a debtor-in-possession.[viii] Section 1113 was enacted by Congress to provide special treatment and protections to a CBA in bankruptcy when a trustee or debtor-in-possession seeks to modify or reject such agreement. In particular, the section requires the court to balance the potential for abuse with a debtor’s legitimate need to modify or reject the agreement.[ix] Section 1113 states that a chapter 11 trustee or debtor-in-possession “may assume or reject a CBA only”[x] if the trustee or debtor-in-possession (a) “make[s] a proposal to the authorized representative of the employees covered by such agreement, based on the most complete and reliable information at the time of such proposal;”[xi] (b) provides the authorized representative with “such relevant information as is necessary to evaluate the proposal;”[xii] and (c) has met with the authorized representative at reasonable times to, in good faith, attempt to reach “mutually satisfactory modifications of such agreement.”[xiii] Under Section 1113, a court will likely approve the application for the rejection or modification of the CBA if (1) the trustee or debtor-in-possession fulfills the above requirement; (2) the authorized representative refuses to accept the proposal without good cause; and (3) “the balance of the equities clearly favors” the rejection of the agreement.[xiv]
It is unclear from the language of section 1113, however, whether the section applies in liquidation cases since “the procedural requirements imposed by [section] 1113 appear ill-suited to a liquidation proceeding” as many of the section’s provisions “are premised on the notion that the company is still conducting business.”[xv] Since a debtor may liquidate under either chapter 7 or chapter 11, the courts have had to decide whether section 1113 applies in a liquidation under each chapter. On one hand, the majority of courts have held that section 1113 does not apply in a chapter 7 case.[xvi] Several courts have concluded that section 103(g) of the Bankruptcy Code makes section 1113(f) irrelevant in a chapter 7 case since subchapter 1 of chapter 11, which includes section 1113, only applies in chapter 11 cases.[xvii] Other courts have arrived at the same conclusion by looking at the language of section 1113 from the perspective of chapter 7 cases, finding that section 1113 itself does not apply in chapter 7 cases because section 1113 refers to a debtor-in-possession which only exists under the provisions of chapter 11.[xviii] On the other hand, the Chicago Construction court found that section 1113 applied in a chapter 11 liquidation because (1) courts that have not applied section 1113 in chapter 11 cases have been remanded on appeal and (2) the conclusion that section 1113 does not apply to chapter 11 liquidation cases is inconsistent with the overall language of chapter 11 itself since a debtor can liquidate under chapter 11.[xix] The Chicago Construction court then adapted the nine-factor test, which the majority of courts use when applying section 1113 in chapter 11 reorganizations, so that the test could apply to chapter 11 liquidations.[xx] First, the court considered certain factors of the test unnecessary since the debtor in a liquidation case has no ability to proceed as a business.[xxi] Second, in applying this modified test,[xxii] the court found that (a) the debtor provided proper prior notice[xxiii] that contained complete[xxiv] and sufficient information to the counterparty[xxv] and acted as a proposal rather than an ultimatum,[xxvi] (b) the debtor’s rejection of the CBA was necessary for the debtor’s liquidation,[xxvii] and (c) the balance of equities favored the debtor.[xxviii] Based on these findings, the Chicago Construction court concluded that the union’s refusal to accept the debtor’s proposal was without good cause.[xxix]
Chicago Construction is important because it demonstrates that a trustee or debtor-in-possession in a liquidating chapter 11 case must comply with section 1113 when seeking to modify or reject a CBA. Ultimately, the burden that section 1113 will impose on such a debtor will likely depend on how the trustee or debtor-in-possession is seeking to sell the property. On one hand, if the debtor’s assets are going in a going concern sale, the court will probably be less likely to permit the debtor to reject the CBA because the company will continue to operate. Moreover, the company may require the debtor to satisfy the test applied in reorganization cases since the company will continue to operate post-bankruptcy just as it would in a reorganization case. On the other hand, if the debtor’s assets are going to be sold piecemeal, the court will probably be more likely to allow the modification or rejection of the CBA because there will be no company going forward for the debtor’s unionized employees to work at and rejecting the agreements prevents the union’s claims from being elevated over those of the debtor’s other creditors.
[i] 510 B.R. 205, 224 (Bankr. N.D. Ill. 2014).
[ii] Id. at 210.
[iii] Hereafter, “collective bargaining agreement” will be referred to as “CBA.”
[iv] In re Chicago Construction Specialties, Inc., 510 B.R. 205, 224 (Bankr. N.D. Ill. 2014).
[v] Id.
[vi] Id. at 224.
[vii] Id.
[viii] Id. at 211.
[ix] Id.
[x] 11 U.S.C. § 1113(a)
[xi] 11 U.S.C. § 1113 (b)(1)(A)
[xii] 11 U.S.C. § 1113 (b)(1)(B)
[xiii] 11 U.S.C. § 1113 (b)(1)(B)(2)
[xiv] 11 U.S.C. § 1113 (c)
[xv] In re Chi. Constr. Specialties, Inc., 510 B.R. at 215 (quoting Rufener Contr., Inc., 53 F.3D 1064, 1067 (9th Cir. 1995)).
[xvi] Id. at 213-14 (citing In re Rufener Constr., Inc., 53 F.3d 1064, 1067 (9th Cir. 1995); In re Moline Corp., 144 B.R. 75, 79 (Bankr. N.D. Ill. 1992); In re Liberty Fibers Corp., 2007 Bankr. LEXIS 2950, at *4 (Bankr. E.D. Tenn. 2007); In re U.S. Truck Co. Holding, 2000 Bankr. LEXIS 1376, at *9 (Bankr. E.D. Mich. 2000).
[xvii] 11. U.S.C. § 103(g) states that “[e]xcept as provided in section 901 of this title, subchapters I, II, and III of chapter 11 of this title apply only in a case under such chapter.”
[xviii] In re Chi. Constr. Specialties, Inc., 510 B.R at 214 (citing Liberty Fibers Corp., 2007 Bankr. LEXIS 2950, at *4; In re Rufener Constr. Inc, 53 F.3d 1064, 1068 (9th Cir. 1995)).
[xix] Id. at 215.
[xx] Id. The nine-factor test is meant to balance the debtor’s ability to effectively reorganize its obligations with the protection against abuse from debtors. “The factors…are as follows:
- The debtor in possession must make a proposal to the union to modify the collective bargaining agreement.
- The proposal must be based on the most complete and reliable information available at the time of the proposal.
- The proposed modifications must be necessary to permit the reorganization of the debtor.
- The proposed modifications must assure that all creditors, the debtor and all of the affected parties are treated fairly and equitably.
- The debtor must provide to the union such relevant information as is necessary to evaluate the proposal.
- Between the time of the making of the proposal and the time of the hearing on approval of the rejection of the existing collective bargaining agreement, the debtor must meet at reasonable times with the union.
- At the meetings the debtor must confer in good faith in attempting to reach mutually satisfactory modifications of the collective bargaining agreement.
- The union must have refused to accept the proposal without good cause.
- The balance of the equities must clearly favor rejection of the collective bargaining agreement.”
Id. (citing In re American Provision Co., 44 B.R. 907, 909 (Bankr. D. Minn. 1984)).
[xxi] Id. at 219.
[xxii] First, the second factor, which requires the debtor to gather “the most complete information at the time and…base its proposal on the information it considers reliable,” was deemed unnecessary since it is presumed, from the circumstances, that the decision to liquidate is made from the most complete and reliable information available. Second, to make the third factor, which deals specifically with reorganization, applicable to liquidation, the Chicago Construction court looked to the bankruptcy appellate panel in Family Snacks who stated that “[w]hile ‘reorganization’ is not a statutorily defined term, it is generally understood to include all types of debt adjustment, including a sale of assets, piecemeal or on a going concern basis, under § 363 followed by a plan of reorganization which distributes the proceeds of the sale to creditors in accordance with the Bankruptcy Code’s priority scheme.” Based on this understanding, the Chicago Construction court found that the language of the third factor means, in the context of liquidation, “necessary to the Debtor’s liquidation.” Finally, the Chicago Construction court changed the ninth factor to consider the “possibility of liquidation, the impact of the losses suffered by the individual employees in proportion to the losses suffered by the other creditors, and the good faith of the parties.”
[xxiii] Id. at 218 (citing 11 U.S.C. § 1113(b)(1)(A)) (explaining that under section 1113 (b)(1)(A), the first factor is satisfied if the debtor simply makes an offer to the union and, in this case, the debtor’s notice met this minimal standard by notifying the union of the proposed modification to the CBA more than four months prior to the debtor filing bankruptcy).
[xxiv]Id. at 219 (reasoning that because the notice stated that the debtor was no longer conducting business nor did the debtor have any prospects for doing business, the second and fifth factors were satisfied in that these types of decisions are generally made based on the most complete and accurate information available at the time).
[xxv] Id. at 220-21 (finding the fifth factor satisfied since the union had chosen not to engage with the debtor, thereby rendering itself unable to prove that the debtor’s disclosures in the notice were inadequate).
[xxvi] Id. at 223-24 (finding the sixth, seventh, and eighth factors satisfied since, while the debtor’s notice could have been drafted more clearly to demonstrate that it was a proposal rather than an ultimatum, nothing in section 1113 states that relief to the debtor should be denied because the notice lacks in form and, furthermore, since no meeting took place between the union and the debtor, there is no evidence that the debtor was uncooperative in negotiations).
[xxvii] Id. at 221.
[xxviii] Id. at 222.
[xxix] Id. at 224.