Bankruptcies and Bargaining in the time of COVID

Posted on Nov 3, 2020

Olivia Hunter

 

The impact of COVID-19 on business operations has sparked a wave of both bankruptcy filings and labor unrest. Many companies that were struggling to hold on before the pandemic were unable to weather the blow brought on by lockdown restrictions and the accompanying shift in consumption habits.[1] Businesses seeking reorganization since March of 2020 under Chapter 11 of the Bankruptcy Code (the “Code”) include JCPenny, Hertz, Le Pain Quotidien, Modell’s Sporting Goods, and at least 100 others.[2] At the same time, COVID-19 has shone a spotlight on employee protections. Essential workers were placed at elevated risk of contracting the virus by virtue of not being able to work from home, and especially because many workplaces did not have adequate protections in place.[3] Other conversations focused on layoffs and lack of job protection or safety nets.[4] Unions rallied around these issues to “energize” workers and start a conversation around employee “voice” in the workplace.[5] The relevance of bankruptcy and worker protection to post-COVID-19 economy recovery leads to another question: what about the protection of workers of companies in bankruptcy?

Against this backdrop, on June 25, 2020, U.S. Senator Dick Durbin and House Judiciary Committee Chairman Jerrold Nadler introduced the Protecting Employees and Retirees in Business Bankruptcies Act of 2020.[6] This bill proposes an overhaul of section 1113 of the Code, which regulates modification or rejection of a Collective Bargaining Agreement (CBA) by a debtor in Chapter 11 proceedings.[7]

Section 1113 leaves ample discretion to bankruptcy court judges to allow a debtor to reject a CBA.[8] It implements an expedited negotiation process between the union and the debtor in possession and is usually evaluated using a 9-prong balancing test.[9] Section 1113 requires, among other things, that in order to reject a CBA the debtor must provide the union with a proposal along with enough information so that the union can reasonably evaluate the proposal.[10] In addition, the debtor must confer with the union at reasonable times, that the union may only reject the company’s proposal for rejection or modification with “good cause,” and that “the balance of the equities must clearly favor rejection.”[11]

Section 1113 has received consistent criticism from workers and union members in recent years. Airline workers, for example, argue that section 1113 does not adequately protect them during airline bankruptcies.[12] “Notwithstanding congressional intent” of §1113, airlines file for bankruptcy serially in order to reject Collective Bargaining Agreements and lower the cost of labor.[13] As witnesses testifying before the Subcommittee on Commercial and Administrative Law, Witnesses complained that airlines have greater access to the bankruptcy process and use their leverage to “ravage” collective bargaining agreements, which has allowed wages for pilots and stewards to stagnate while executive compensation remains high.[14]

The new section 1113 would impose additional requirements related to the CBA negotiation procedure and address perceived loopholes in the current statute.[15] The bill proposes, for example, that before allowing rejection of a CBA, the court must consider counterproposals submitted by the labor organization.[16] It also proposes a stricter standard for abandoning negotiations between the debtor and union representatives, only allowing the court to consider rejection when “further negotiations regarding the proposal of the trustee or an alternative proposal by the labor organization are not likely to produce an agreement.”[17]

Additionally, executive compensation, which has received significant media attention in relation to the wave of COVID-19 bankruptcies,[18] is a major focus of the bill, which alleges that “management compensation plans devised for those in charge of troubled businesses have become more prevalent and are escaping adequate scrutiny.”[19] Indeed, corporations will often maintain high levels of managerial compensation while at the same time slashing pay for non-management employees or even conducting mass layoffs.[20] For example, JCPenny, which declared bankruptcy in May and laid off 1,000 workers, paid executives bonuses totaling over $10 million on the eve of its filing.[21] The company’s chief executive personally received $4.5 million.[22] Companies are currently also able to continue to grant stock options and performance contingent bonuses to executives throughout the bankruptcy process.[23] The bill, through proposed its amendments to section 1113(c) and 1113(d), addresses these bonus packages, ensuring that companies are not reorganizing simply to avoid their contractual labor obligations.

The bill proposes two new provisions to address the issue of outsized executive compensation. First, any modification proposed by the debtor in possession or trustee “shall be proposed only as part of a program of workforce and nonworkforce cost savings devised for the reorganization of the debtor, including savings in management personnel cost.”[24] Second, the corporation may not reject a CBA if it has “implemented a program of incentive pay, bonuses, or other financial returns for an insider of the debtor, a senior executive officer of the debtor, any of the 20 highest compensated employees of the debtor who are not insiders or senior executive officers” or any consultants.[25] Further, rejection of a CBA is prohibited if any of these activities occurred within 180 days of filing.[26]

The bill would also overturn some controversial court decisions. For instance, the proposed changes clarify that rejection of a CBA gives rise to a breach of contract claim and that the union can recover damages in bankruptcy court.[27] In addition, the bill allows for a labor organization to use “economic self-help” in the event of rejection of a CBA, which means that the labor union cannot be enjoined from striking.[28] This suggested provision responds to decisions where unions were issued injunctions prohibiting striking after their CBA was rejected by their employer in bankruptcy court.[29]

Bills to amend section 1113 of the Code have been introduced consistently— each congressional session—since 2007.[30] On September 30, 2020,  H.R. 7370 passed the House Judiciary Committee, marking the first time a bill to modify section 1113 has gotten out of committee to be put to a vote on the Congressional floor.[31] While passing in a Democrat-controlled House may be feasible, the bill may have a harder time getting through the current Republican-controlled Senate due to its pro-union effects and the current political polarization. It is difficult to tell how the Covid-19 pandemic and the resulting economic crisis have transformed national political sentiment, but it is possible that it has made constituents and representatives alike more open to worker-friendly legislation. After all, the National Labor Relations Act was passed partially in response to the Great Depression’s effect on workers.[32] This crisis could potentially result in the passage of pro-labor legislation such as the Protecting Employees and Retirees in Business Bankruptcies Act of 2020.[33] If successful, the changes will amount to a near overhaul of the section 1113 negotiation process and a major win for unionized workers.

 

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[1] Hank Tucker, Coronavirus Bankruptcy Tracker: These Major Companies are Failing Amid the Shutdown, Forbes (May 3, 2020), https://www.forbes.com/sites/hanktucker/2020/05/03/coronavirus-bankruptcy-tracker-these-major-companies-are-failing-amid-the-shutdown/#7655ea4e3425.

[2] Id.; Le Pain Quotidien Entity Announces Agreement to Sell U.S. Restaurant Business to Aurify Brands, http://dr201.s3.amazonaws.com/pqny/LPQ%20Filing%20Press%20Release%20(FINAL).pdf (last visited Oct. 19, 2020); Modell’s Sporting Goods Voluntarily Files for Chapter 11 Bankruptcy Protection, businesswire (Mar. 11, 2020), https://www.businesswire.com/news/home/20200311005740/en/Modell’s-Sporting-Goods-Voluntarily-Files-Chapter-11. 

[3] Steven Greenhouse, Covid-19 Puts Workers in Danger. It’s Another Reason We Need Unions, The Guardian (July 24, 2020), https://www.theguardian.com/commentisfree/2020/jul/24/covid-19-workers-dangers-unions; see also Jimmy O’Donnell, Essential Workers During COVID-19: At Risk and Lacking Union Representation, Brookings (Sept. 3, 2020) https://www.brookings.edu/blog/up-front/2020/09/03/essential-workers-during-covid-19-at-risk-and-lacking-union-representation/.

[4] Laura Benshoff, This Labor Day, Unions Face New Pressures and Possibilities Due to COVID-19, WHYY (Sept. 7, 2020), https://whyy.org/articles/this-labor-day-unions-face-new-pressures-and-possibilities-due-to-covid-19/; see also Protecting Employees and Retirees in Business Bankruptcies Act, H.R. 7370, 116th Cong. § 2 (2020).  

[5] Allen Smith, Unions Organize in Response to COVID-19 Safety Concerns, SHRM (June 26, 2020), https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/coronavirus-unions-organize-in-response-to-safety-concerns.aspx; see also Greenhouse supra note 3; Cf Beverly Alfon, Another Symptom of COVID-19: Union Organizing, JDSUPRA (May 26, 2020), https://www.jdsupra.com/legalnews/another-symptom-of-covid-19-union-92405/ (warning employers about the push by unions to capitalize on the COVID-19 crisis to expand their membership).

[6] H.R. 7370, 116th Cong. (2020). The bill has passed through the House Judiciary Committee but has not yet been voted on by Congress.

[7] See 11 U.S.C. § 1113 (allowing a debtor to reject or modify a collective bargaining agreement after submitting a proposal to the employee representative, including all relevant information so the union can properly evaluate the proposal, and requiring the debtor to meet with the union to negotiate at reasonable times).

[8] See 11 U.S.C. § 1113(c)(3) (providing that the court consider the “balance of equities” in determining an application for rejection of a collective bargaining agreement).

[9] See e.g. In Re American Provision Co., 44 B.R. 907, 909 (Bankr. Minn. 1984).

[10] 11 U.S.C. § 1113.

[11] Id.; Requirements for obtaining court approval of rejection of collective bargaining agreement by debtor in possession or trustee in bankruptcy under 11 U.S.C.A. §1113(b) and (c), 89 A.L.R. Fed. 299 (1988).

[12] Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. On Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 4-9 (2009) (statement of Chelsey Sullenberger); Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. On Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 10-17 (2009) (statement of Arnold Gentile).

[13] Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. On Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 2 (2009) (statement of Representative Steve Cohen).

[14] Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. On Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 5 (2009) (statement of Chelsey Sullenberger); see also Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. On Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 13 (2009) (statement of Arnold Gentile).

[15] H.R. 7370 supra note 4; Carol A. Petit, Cong. Rsch. Serv., American Law Division, Rejection of Collective Bargaining Agreements in Chapter 11 Bankruptcies: Legal Analysis of Changes to 11 U.S.C. Section 1113 Proposed in H.R. 3652 - The Protecting Employees and Retirees in Business Bankruptcies Act of 2007 3 (May 9, 2008).

[16] H.R. 7370 supra note 4 at 13.

[17] H.R. 7370 supra note 4 at 13.

[18] See e.g. Sissi Cao, Dozens of Bankrupt Firms Paid Top Execs Huge Bonuses Before Layoffs: Report, Observer (July 17, 2020), https://observer.com/2020/07/coronavirus-bankruptcy-companies-pay-executive-bonus-before-filing/.

[19] H.R. 7370 supra note 4 at 3.

[20] Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. on Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 20, 24 (2009) (statement of Robert Coffman); Protecting Employees in Airline Bankruptcies: Hearing Before the Subcomm. On Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 111th Cong. 36 (2009) (statement of Robert Roach, Jr.); Mike Spector & Jessica DiNapoli, On eve of bankruptcy, U.S. firms shower execs with bonuses, Reuters (July 17, 2020), https://www.reuters.com/article/us-health-coronavirus-bankruptcy-bonuses/on-eve-of-bankruptcy-u-s-firms-shower-execs-with-bonuses-idUSKCN24I1EE; Executive Compensation In Chapter 11 Bankruptcy: How Much is too Much?: Hearing Before the Subcomm. on Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 110th Cong. 7 (2007) (statement of John Conyers, Jr.).

[21] Spector & DiNapoli supra note 19.

[22] Peter Eavis, These Companies Gave Their C.E.O.s Millions, Just Before Bankruptcy, N.Y. Times (June 23, 2020), https://www.nytimes.com/2020/06/23/business/ceo-bonsues-before-bankruptcy-coronavirus.html.

[23] Executive Compensation In Chapter 11 Bankruptcy: How Much is too Much?: Hearing Before the Subcomm. on Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, 110th Cong. 11 (2007) (statement of Damon A. Silvers).

[24] H.R. 7370 supra note 4 at 11.

[25] H.R. 7370 supra note 4 at 14.

[26] Id.

[27] See generally Christopher Updike & Ingrid Bagby, Collective Bargaining Agreements and the Bankruptcy Code: Are Damage Claims for Rejection of Collective Bargaining Agreements Available Under Section 1113?, 4 Pratt’s Journal of Bankruptcy Law 20-42 (2008). 

[28] H.R. 7370 supra note 4 at 16; Petit supra note 14 at 16.

[29] Petit supra note 14 at 16.

[30] H.R. 3652, 110th Cong. (2007); H.R. 4677, 111th Cong. (2010); H.R. 6117, 112th Cong. (2012); H.R. 100, 113th Cong. (2013); H.R. 97, 114th Cong. (2015); H.R. 138, 115th Cong. (2017).

[31] Bill History – Congressional Record References, H.R. 3652 - Protecting Employees and Retirees in Business Bankruptcies Act of 2007, CONGRESS.GOV, https://www.congress.gov/bill/110th-congress/house-bill/3652?q=%7B%22search%22%3A%5B%22h.r.+3652%22%5D%7D&s=3&r=1 (showing the progress of the bill); Bill History – Congressional Record References, H.R. 4677 – Protecting Employees and Retirees in Business Bankruptcies Act of 2010, CONGRESS.GOV, https://www.congress.gov/bill/111th-congress/house-bill/4677/all-actions?q=%7B%22search%22%3A%5B%22%5C%22Protecting+Employees+and+Retirees+in+Business+Bankruptcies+Act+of+2010%5C%22%22%5D%7D&r=1&overview=closed&s=5#tabs; Bill History – Congressional Record References, H.R. 6117 – Protecting Employees and Retirees in Business Bankruptcies Act of 2012, CONGRESS.GOV, https://www.congress.gov/bill/112th-congress/house-bill/6117/all-actions?q=%7B%22search%22%3A%5B%22%5C%22Protecting+Employees+and+Retirees+in+Business+Bankruptcies+Act%5C%22%22%5D%7D&r=9&overview=closed&s=7#tabs; H.R. 100 – Protecting Employees and Retirees in Business Bankruptcies Act of 2013, CONGRESS.GOV, https://www.congress.gov/bill/113th-congress/house-bill/100/all-actions?q=%7B%22search%22%3A%5B%22%5C%22Protecting+Employees+and+Retirees+in+Business+Bankruptcies+Act%5C%22%22%5D%7D&r=7&overview=closed&s=7#tabs; Bill History – Congressional Record References, H.R. 97 – Protecting Employees and Retirees in Business Bankruptcies Act of 2015, CONGRESS.GOV, https://www.congress.gov/bill/114th-congress/house-bill/97/all-actions?q=%7B%22search%22%3A%5B%22%5C%22Protecting+Employees+and+Retirees+in+Business+Bankruptcies+Act%5C%22%22%5D%7D&r=5&overview=closed&s=7#tabs; Bill History – Congressional Record References, H.R. 138 – Protecting Employees and Retirees in Business Bankruptcies Act of 2017, CONGRESS.GOV, https://www.congress.gov/bill/115th-congress/house-bill/138/all-actions?q=%7B%22search%22%3A%5B%22%5C%22Protecting+Employees+and+Retirees+in+Business+Bankruptcies+Act%5C%22%22%5D%7D&r=3&overview=closed&s=7#tabs; Durbin, Nadler: Corporations Must Give Workers And Retirees Fair Treatment In Bankruptcy, Dick Durbin United States Senator Illinois (June 25, 2020), https://www.durbin.senate.gov/newsroom/press-releases/durbin-nadler-corporations-must-give-workers-and-retirees-fair-treatment-in-bankruptcy.

[32] National Labor Relations Act, 29 U.S.C. §§151-169; see also Benshoff supra note 4.

[33] Benshoff supra note 4.