Bankruptcy’s Odd Twist With Union Contracts

The pilots union has sued AMR, the parent company of American Airlines. And the complaint, at the end of this post, illustrates nicely one oddity in the bankruptcy code with regard to collective bargaining agreements — a point that is relevant in the many other cases pending currently that involve questions of unionized employees.

In bankruptcy, a debtor has the choice to assume (perform) or reject (breach) any of its contracts. The benefit of rejecting a contract is that that the code backdates the breach to right before the bankruptcy filing. This means that the counterparty’s claim for damages gets paid along with other unsecured claims — at cents on the dollar.

In Chapter 11 – and only in Chapter 11 – this rule gets changed a bit for collective bargaining agreements. After a Supreme Court opinion in the 1980s that held that collective bargaining agreements were contracts like any other for bankruptcy purposes, Congress enacted section 1113. In short, the section provides that rejection can only happen after the debtor has tried to negotiate with the union.

But section 1113 provides that the court can also order an intermediate step: Namely, “if essential to the continuation of the debtor’s business” the court can permit the debtor to make changes to the collective bargaining agreement, while still keeping the agreement in force.

Read the rest of the article at The New York Times