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.
Lack of a business plan was an issue in the November 2011 bankruptcy of American Airlines, said James Campbell Little, president of the Transport Workers Union of America AFL-CIO. While employees ratified a new CBA in that case, there was no immediate need for Section 1113 relief, he said, and “there were not market-tested projections or [a] business model against which all constituents were being asked to make sacrifices.” (On Wednesday a bankruptcy court approved American’s merger with U.S. Airways.)
Panelists also suggested more moderate changes to parts of the bankruptcy code. For example, retired bankruptcy judge Stephen Mitchell said the 14-day mandated time frame for a court hearing on a Section 1113 motion is insufficient. The time required for even “modest discovery into the financial need for the relief makes even 21 days completely unrealistic,” he said in his prepared testimony, “particularly given the gravity and complexity of the issues at stake.”
But Bernstein, the bankruptcy attorney, said that delaying the Section 1113 process would make bankruptcy more expensive and risky for the company. “Labor costs are often a gating item in a Chapter 11,” he said in his prepared statement. “Other essential elements, including (but not limited to) obtaining exit financing and other new investment capital, typically require knowing the company’s post-emergence cost structure.”
No one on the panel seemed to dispute that the Chapter 11 process is putting some workers’ jobs and retirement security at greater risk. But the PBGC’s Gotbaum stressed the commission should seek balance in its recommendations surrounding the issue. Rather than tweaking the bankruptcy code “for this interest or that,” the reform commission should think broadly, he said. “In one sense, we’re arguing to return equity to courts of equity,” said Gotbaum. “Think about what level of specificity is right for setting the priorities among creditors and the allocations of powers and leverage — and what should be reserved for bankruptcy judges.”
Renewed protection for workers in bankruptcy could be a key part of any Chapter 11 reform. Mitchell, the former judge, said that authorizing companies to reject a CBA or terminate retiree benefits or a pension plan were “easily the most difficult decisions I had to make as a bankruptcy judge.”
The American Bankruptcy Institute’s commission aims to submit a proposal to overhaul the U.S. bankruptcy code, and it plans to issue its recommendations in April 2014. The hearing on March 14 was one of five scheduled between now and early June.