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  • CFO.com | US

Labor Unions Urge Chapter 11 Reform

Bankruptcy has become a way for U.S. companies to reorganize and restructure on the back of their employees, said union executives at a recent hearing.

When companies declare bankruptcy, increasingly it’s the unionized employees bearing the brunt of financial restructuring. At least that’s the view of union heads who spoke at the American Bankruptcy Institute’s latest field hearing on reforming Chapter 11 law.

In recent years, they said, distressed businesses have rejected collective-bargaining agreements (CBAs) and terminated retiree health benefits and pension plans without seeking equal sacrifice from other stakeholders and creditors.

There’s evidence to support the claim: 363 sales — in which a buyer structures the deal as a purchase of assets and doesn’t take on the debtor’s obligations — represent 21% of all business bankruptcies since 2000. Such structures are allowing companies “to facilitate escape from pension obligations,” said Joshua Gotbaum, director of the Pension Benefit Guaranty Corp. The obligations get shifted to the PBGC, which is funded by premiums collected from defined-benefit-plan sponsors. Gotbaum cited numerous cases in which this had occurred: Friendly, Georgetown Steel, Levitz, Mosler, Oxford Automotive, and Relizon.

Executives from the Air Line Pilots Association, the Association of Flight Attendants, the International Association of Machinists and Aerospace Workers, and the Transport Workers Union said workers’ rights in all kinds of bankruptcy cases have been eroded.

Although reforms to bankruptcy law in 1984 established a collective-bargaining process in bankruptcy cases, “the process is in need of legislative reform,” said Michael Robbins, director of government affairs for the Air Line Pilots Association, in his prepared statement. “Presently, the process works as a business strategy to pressure employees into giving up huge percentages of their pay, long-term working conditions, and retirement plans, while other creditors and stakeholders are often not so negatively impacted.”

Rep. John Conyers (D-Mich.) introduced H.R. 100, the Protecting Employees and Retirees in Business Bankruptcies Act, in January. Unions are backing the bill enthusiastically, but at the hearing bankruptcy lawyer Michael Bernstein of Arnold & Porter argued that the amendments to bankruptcy law in H.R. 100 “would make Chapter 11 reorganization more costly and more difficult to achieve.”

Much of the discussion at the mid-March hearing concerned Section 1113 of the U.S. code. While Section 1113 gives debtors the authority to ask a bankruptcy court to reject labor contracts, the company must go through a negotiation and litigation process with its unions. H.R. 100 would bolster some of the standards the debtor has to meet to win approval for a labor-agreement modification or termination.

For example, according to David Jury, general counsel of the United Steelworkers, the bill would force a debtor to justify the worker concessions with a detailed business plan, establish a presumption against rejecting a CBA when senior executives receive incentive pay or bonuses during or in the six months before bankruptcy, and require the court to make a finding that the debtor’s proposal would not cause the purchasing power of the affected employees to materially diminish.

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