• In re Patriot Coal Corporation: United States Bankruptcy Court for the Eastern District of Missouri Adopts Second Circuit's More Flexible Approach To "Necessary" Analysis under Bankruptcy Code sections 1113(b)(1)(A) and 1114(f)(1)(A)
  • June 13, 2013 | Author: H. Alexander Fisch
  • Law Firm: Stutman, Treister & Glatt Professional Corporation - Los Angeles Office
  • On May 29, 2013, the United States Bankruptcy Court for the Eastern District of Missouri authorized Patriot Coal Corporation and certain of its debtor affiliates to reject their collective bargaining agreements (each, a "CBA") under section 1113 of the Bankruptcy Code, terminate retiree benefits for certain of the debtors' retirees under section 1114 of the Bankruptcy Code, and implement the terms of the debtors' alternative proposals in lieu of each.1

    Bankruptcy Code sections 1113 and 1114 were enacted to provide special procedural and substantive requirements for the rejection of CBAs and modification of retiree benefits, respectively.  Specifically, a debtor must first seek consensual modifications through negotiation with the relevant "authorized representative" (typically, a union).  Pending agreement with the authorized representative or a court order, the debtor must comply with the terms of the CBA and timely pay retiree benefits.  Once the debtor resorts to seeking bankruptcy court relief, courts generally apply the nine-point test first articulated in In re American Provision Co., 44 B.R. 907 (Bankr. D. Minn. 1984) to determine whether the application to reject the CBA, or modify the retiree benefits, meets the requirements of sections 1113 or 1114:

    • The debtor in possession must make a proposal to the    authorized representative to modify the CBA or retiree benefits before filing the application to reject or modify;

    • that proposal must be based on the most complete and reliable information available at the time of the proposal;

    • the proposed modifications must be "necessary" to permit the reorganization of the debtor;

    • the proposed modifications must assure that all creditors, the debtor, and all of the affected parties are treated fairly and equitably;

    • the debtor must provide to the authorized representative such relevant information as is necessary to evaluate the proposal;

    • between the time of the making of the proposal and the time of the hearing on approval of rejection of the CBA, or modification of retiree benefits, the debtor must meet at reasonable times with the authorized representative;

    • at the meetings the debtor must confer in good faith in attempting to reach mutually satisfactory modifications of the CBA or retiree benefits;

    • the authorized representative must have refused to accept the proposal without good cause; and

    • the balance of the equities must clearly favor rejection of the CBA or modification of the retiree benefits.

    See In re American Provision Co., 44 B.R. at 909 (in the context of section 1113); In re Horizon Natural Res. Co., 316 B.R. 268, 281 (Bankr. E.D. Ky. 2004) ("The requirements for modification of retiree benefits are . . . substantially the same as the requirements for rejection of collective bargaining agreements, so American Provision's nine-part analysis is equally appropriate."); In re Ionosphere Clubs, Inc., 134 B.R. 515, 519 (Bankr. S.D.N.Y. 1991) ("When Congress enacted § 1114, it used the same procedures and standards as existed for modification or rejection of collective bargaining agreements under § 1113.").

    In granting the debtors' motion, the bankruptcy court added to the rapidly expanding body of case law regarding the treatment of labor legacy costs in bankruptcy in at least three noteworthy respects.  First, the bankruptcy court adopted the Second Circuit's flexible approach to the interpretation of the unwieldy phrase "necessary modifications . . . that are necessary to permit the reorganization of the debtor[,]" which appears in both of sections 1113 and 1114, and focused on what was required for the debtors' reorganization.  The majority of courts follow the Second Circuit's more flexible approach that requires a court to "look into the debtor's ultimate future and estimat[e] what the debtor needs to attain financial health."  See Truck Drivers Local 807 v. Carey Transportation, Inc., 816 F.2d 82, 89 (2d Cir. 1987).  In contrast, the minority view requires the debtor to demonstrate that the proposed modification is essential to prevent liquidation in the near term.  See Wheeling-Pittsburgh Steel Corp. v. United Steel Workers of Am., 791 F.2d 1074, 1088-89 (3d Cir. 1986).  The court found that labor concessions were "necessary" for the "Debtors' survival" and summarized the questions before it as: "What is better?  Something for a time or nothing in a short time?  Half a loaf or no loaf at all?"  Nonetheless, it explicitly adopted the Second Circuit's standard and endorsed a flexible, long-term focus.

    Second, the court held that the debtors provided complete and reliable information that allowed the union to evaluate the debtors' proposals because the debtors had shared the Excel spreadsheet business model that the debtors had used in developing their proposals, and had offered the union direct access to the debtors' accounting system.  The union had identified limitations in the spreadsheet, including that certain assumptions could not be changed because the underlying inputs were "hard coded."  The court, however, noted that the union had declined the opportunity to use the debtors' accounting system to derive its own numbers to input into the spreadsheet in lieu of the debtors' hard coded numbers.  The court also stressed the high degree of uncertainty in any projection, and the fact that the debtors' were under no obligation to create for the union information that did not otherwise exist.

    Third, the bankruptcy court agreed with the majority view that a court should examine a debtor's final proposal when considering an application under sections 1113 and 1114, even though that proposal might only have been offered to the union after the debtor has filed its application.  Thus, to encourage the continuation of negotiation up until the hearing, the court overruled the union's objection that such an approach would require the court to consider a "moving target."

    Adding its voice to the majority view of the meaning of "necessary," the Patriot Coal court provides additional clarity to the governing standard for rejecting a CBA and modifying retiree benefits.  As issues relating to labor legacy costs continue to arise in bankruptcy cases, the solidification of the case law should advance the purpose of sections 1113 and 1114 to promote negotiated resolutions of labor legacy cost disputes in future cases.  For such cases, the fact-intensive analysis undertaken by the court in Patriot Coal can be used as a guide for debtors and labor organizations navigating the ambiguities of sections 1113 and 1114.


    1  See In re Patriot Coal Corp., No. 12-51502 (KAS), 2013 WL 2354049 (Bankr. E.D. Mo. May 29, 2013).