The Devil (Dog) ® Is In The Details: Bankruptcy Court Denies Hostess's Motion To Reject Collective Bargaining Agreements On Narrow Factual Grounds

The recent bankruptcy case of Hostess has centered on Hostess's attempts to reject collective bargaining agreements with its unions. Hostess has emphasized that realigning labor costs is essential to its ability to successfully reorganize. Section 1113 of the Bankruptcy Code sets forth detailed requirements that a debtor must meet to modify or reject CBAs. Bankruptcy courts' ultimate decision to authorize rejection of a CBA frequently turns on a detailed examination of the evidence presented in support of the rejection motion.

This post discusses the recent ruling of Judge Robert Drain of the United States Bankruptcy Court for the Southern District of New York denying Hostess's motion to reject several CBAs with local affiliates of the International Brotherhood of Teamsters. Although the court did not issue a written opinion of its decision, we have reviewed and analyzed the lengthy hearing transcript. See Transcript of Hearing, In re Hostess Brands, Inc., No. 12-22052 (RDD) (Bankr. S.D.N.Y. May 14, 2012). Judge Drain analyzed extensively the parties' proposed modifications to the CBAs. Although he found that most of the key modifications related to withdrawing from multiemployer pension plans were necessary and thus permitted under applicable law, he did not authorize the rejection because the Teamsters had cause to reject Hostess's final proposal. Judge Drain's holding turned on a relatively minor point of fact pertaining to a one percent difference in proposed EBITDA margin – an issue only addressed briefly in the pleadings and the ruling.

Section 1113

Congress added section 1113 to the Bankruptcy Code in 1984 as a response to the Supreme Court's ruling in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), which held that a debtor could (i) reject a CBA subject to the bankruptcy court's approval and (ii) unilaterally modify the CBA pending the bankruptcy court's approval of the rejection motion. Congress was concerned with debtors' ability to reject a CBA without any of the employee protections provided under the National Labor Relations Act. Accordingly, Congress enacted section 1113 which sets forth a detailed process that debtors must undertake to obtain bankruptcy court approval of rejection of a CBA and prohibits unilateral modification of the CBA prior to obtaining bankruptcy court approval.

Specifically, in order for a debtor to obtain bankruptcy court approval to modify/reject a CBA, (i) the debtor must make a proposal to the union, (ii) that contains only those modifications that are "necessary to permit the reorganization of the debtor," and (iii)the union must refuse to accept the proposed modifications without "good cause."

Courts are split on the...