• Court in Journal Register holds that Successor Clause in Expired Collective Bargaining Agreement Does Not Prevent Sale of Debtors' Businesses
  • April 16, 2013 | Author: Gregory W. Fox
  • Law Firm: Stutman, Treister & Glatt Professional Corporation - New York Office
  • In In re Journal Register Co., 2013 Bankr. LEXIS 1060 (Bankr. S.D.N.Y. Mar. 21, 2013), the Bankruptcy Court for the Southern District of New York approved a sale of substantially all of the debtors' assets to a buyer that was not assuming the debtors' obligations under existing collective bargaining agreements ("CBAs").  The court allowed this sale to proceed even though the CBAs had not been rejected and contained successor clauses requiring any purchaser of the debtors' operations to assume the debtors' obligations under the CBAs.  This case provides important guidance on how debtors with unionized workforces can complete section 363 sales of their businesses to buyers that will not assume obligations to employees.[1]

    The debtors in Journal Register (the "Debtors") operated a multi-regional print and digital news company.  When the Debtors filed for chapter 11 they were parties to several CBAs with unions representing their employees.  The relevant CBAs contained "successor clauses," which purported to condition the Debtors' ability to sell their businesses on the purchaser's agreement to assume the Debtors' obligations under the CBAs.  These CBAs, however, were set to expire by their terms prior to the closing of the sale.

    Months after commencing their bankruptcy cases, the Debtors entered into an agreement to sell substantially all of their assets to 21st CMH Acquisition Co. (the "Buyer").  In the purchase agreement the Buyer expressly disavowed any obligation to "accept or adopt any wage rates, employee benefits, employee policies or any other terms and conditions of employment currently or previously maintained by [the Debtors]."  Because the terms of the sale violated the successor clauses in the CBAs, certain of the affected unions filed grievances and objected to the proposed sale.

    The basis for the objection was that the Debtors had not rejected the CBAs under section 1113 of the Bankruptcy Code, which establishes a negotiation process that a debtor must satisfy before rejecting a CBA, and prohibits a debtor from unilaterally terminating or altering any provision of a CBA.  11 U.S.C. § 1113(b), (c) and (f).  Moreover, rejection of a CBA under section 1113 requires that a debtor prove that "the balance of equities clearly favors rejection of such agreement."  11 U.S.C. § 1113(c)(3).  The unions argued that the Debtors were bound to honor the successor clauses of the CBAs unless and until the Debtors formally rejected the CBAs under section 1113.

    In his opinion, Judge Bernstein agreed with the general proposition that chapter 11 debtors may not use a section 363 sale to bypass the requirements of section 1113 or unilaterally breach a provision of a CBA.  The court stated that a failure to abide by the successor clause - a material provision of the CBA - could be interpreted either as a de facto rejection of the CBA or a unilateral alteration of the CBA's terms, both of which are impermissible absent compliance with the provisions of section 1113.  The court, however, determined that the Debtors were not barred from completing the sale to the Buyer because the CBAs at issue were going to expire prior to the date by which the sales would close.  Finding that the provisions of section 1113 do not apply once a CBA expires, the court rejected the unions' objections and approved the sale.[2]

    Author's Comments

    Journal Register reaffirms that a 363 sale generally cannot be used by a chapter 11 debtor to circumvent the additional bargaining requirements and burdens of proof that Congress imposed on debtors seeking to reject CBAs with their unions.  This includes successor clauses, which may compel a debtor to attempt to find a buyer that is willing to work with the union before seeking to reject or modify its successor clause obligations under section 1113.[3]

    That said, this case highlights a potential shortcut around the time, cost and uncertainty involved in rejecting a CBA under section 1113.  If a successor clause in a soon-to-expire CBA would prohibit a section 363 sale to a buyer unwilling to assume the CBA, debtors with the financial wherewithal to remain in business prior to the sale may wait for the CBA to expire by its terms rather than formally rejecting it under section 1113.[4]  Since successor clauses are commonly included in CBAs, it will be interesting to see if more debtors take this approach in future cases.

    [1] It is worth noting that section 363(f) of the Bankruptcy Code permits a debtor to sell its assets "free and clear" of a third party's interest in such property if certain criteria are met.  11 U.S.C. § 363(f).  Assuming such criteria are met, this section of the Bankruptcy Code can protect purchasers of a bankruptcy debtor's assets from certain liabilities, including, in some cases, successor liability claims seeking to hold the purchaser liable for the debtor's obligations.
    [2] Courts have disagreed over whether and to what extent section 1113 applies to an expired CBA.  Compare In re Hostess Brands, Inc., 477 B.R. 378, 382-83 (Bankr. S.D.N.Y. 2012) (section 1113 rejection does not apply to an expired CBA, however, court may authorize interim changes to debtor's obligations to employees pursuant to section 1113(e)), with In re Karykeion, Inc., 435 B.R. 663, 674 (Bankr. C.D. Cal. 2010) (debtor may use section 1113 to "reject the continuing effects of expired collective bargaining agreement....").
    [3] For example, in In re Bruno's Supermarkets, LLC, 2009 Bankr. LEXIS 1366, at * 13 n.14 (Bankr. N.D. Ala. Apr. 27, 2009), the court held that the union had good cause to oppose the abrogation of a successor clause, notwithstanding the debtor's contention that no one would buy its assets if required to comply with the clause.  At least two potential buyers had offered to negotiate new CBAs with the union, thus demonstrating that abrogation of the successor clause might not be necessary.
    [4] Note, however, that the Journal Register opinion does not discuss (i) what continuing obligations under applicable labor laws the Debtors owed to employees covered by the expired CBAs, or (ii) whether the Debtors' non-compliance with provisions of the expired CBAs - including the successor clause - gave rise to claims by the unions against the bankruptcy estates.  Accordingly, a debtor that sells its assets in violation of a successor clause without formally rejecting the CBA may face repercussions that were not addressed or at issue in Journal Register.