In a case of first impression, the United States Court of Appeals for the Third Circuit recently ruled that federal bankruptcy courts may extinguish a Chapter 11 employer’s obligations under an expired collective bargaining agreement pursuant to Section 1113 of the Bankruptcy Code where such relief is necessary to permit reorganization. In re: Trump Entertainment Resorts, 2016 WL 191926 (3d Cir. 2016).

The Trump Entertainment case arose from a Chapter 11 bankruptcy petition filed by the owners of the Trump Taj Mahal Casino. Shortly after it filed for bankruptcy, Trump Entertainment’s collective bargaining agreement (CBA) with UNITE HERE Local 54 (Union) expired. After the CBA expired, Trump Entertainment was unable to reach a successor agreement with the Union. As a result, the National Labor Relations Act (NLRA) required it to maintain the "status quo" under the terms of the expired CBA until it reached a new agreement or a bargaining impasse with the Union. The "status quo" included paying $13.5 to $15 million each year in pension, health and welfare contributions.

During bankruptcy proceedings, Trump Entertainment filed a motion pursuant to 11 U.S.C. § 1113 seeking to reject the expired CBA and implement its most recent bargaining proposal to the Union. It argued that rejection of the expired CBA’s terms was necessary to its reorganization under Chapter 11. In response, the Union argued, among other things, that Section 1113 applies only to current collective bargaining agreements and did not permit rejection of an expired CBA’s terms, because those terms continue by operation of labor law and not contract.

The bankruptcy court granted Trump Entertainment’s motion, finding that it was necessary to permit reorganization. On appeal, the Third Circuit affirmed the bankruptcy court’s decision. The court held that an employer’s post-contract status quo obligations under the NLRA do not necessarily take precedence over its need to successfully reorganize under Chapter 11. The court reasoned that Trump Entertainment "should not be bound by the expired agreement’s burdensome terms until the parties negotiate to impasse. That interpretation of the statute would undercut the rehabilitative function of Chapter 11."

Notably, the National Labor Relations Board (NLRB) filed an amicus brief in support of the Union. The NLRB argued that "the duties of the parties during the period after expiration of a collective bargaining agreement constitute an area of labor law reserved exclusively for the expertise of the National Labor Relations Board." The court, however, explained that "when the employer’s statutory obligations to maintain the status quo under the terms of an expired CBA will undermine the debtor’s ability to reorganize and remain in business, it is the expertise of the Bankruptcy Court which is needed rather than that of the NLRB." Therefore, the court concluded that Section 1113 of the Bankruptcy Code applied to both extant and expired CBAs.

The Trump Entertainment case is significant for employers in reorganization, because it eliminates the need for union negotiations to reach an actual impasse before new terms can be implemented and, perhaps more importantly, it avoids the possibility that the NLRB could file a claim during the bankruptcy proceeding that would overturn a change in the employees’ terms and conditions of employment.