Amend Bankruptcy Code To Add Oversight For CBA Changes

By Kenneth A Rosen

As the pandemic continues to take its toll on businesses, more and more companies are turning to Chapter 11 bankruptcy to restructure their debts and survive. In this process, labor costs are often a key target for reductions, as companies seek to improve their bottom line and increase their chances of emerging from bankruptcy successfully. However, this focus on labor cost reduction can come at a significant cost to workers, who may face layoffs, pay cuts, or reduced benefits.

Debtor management often hopes to mask broken promises of performance improvement by focusing on reducing labor, legacy, and environmental costs. This approach can also be seen as a way to shift blame away from management and onto secured lenders and investors, who may have placed too much debt on the debtor or relied too much on underperforming management.

While reducing labor costs can indeed improve profitability and cash flow, it often requires concessions and contributions that equity holders are unwilling to make. As a result, debtors may seek to reject or renegotiate collective bargaining agreements (CBAs) and legacy benefits, often with the support of secured lenders.

The pressure to reduce labor costs can be intense, and debtors may resort to tactics such as setting unrealistic timelines for negotiations or blaming lenders for the fire-drill environment. In these cases, creditors committees are often reluctant to oppose labor cost reductions, as they are primarily concerned with enhancing valuation.

Shareholders, too, are often pleased to see debtors taking extreme measures to reduce costs, as they may benefit from increased share prices. The focus on labor cost reduction can also lead to a rush to reject or modify CBAs, with the court often placed in the difficult position of balancing the rights of employees with the need for reorganization.

While Section 1113 and 1114 of the Bankruptcy Code establish certain procedural and substantive requirements for rejecting or modifying CBAs and retiree benefits, these requirements are often not enough to protect the interests of workers. In many cases, labor costs are not the real problem, or they are only one of several problems. The debtor may be carrying too much debt, management may have failed to achieve its goals, or other factors may be contributing to the company's financial difficulties.

To address these issues, the Bankruptcy Code should be amended to require the appointment of an examiner in cases where a debtor seeks to reject or modify CBAs or benefits. This examiner would act as a public advocate, providing the court with an impartial view of the situation and helping to ensure that the resolution is fair and equitable to all parties in interest.

By appointing an examiner, the court would have access to valuable information about the causes of the debtor's financial difficulties and the appropriate remedy. This information would help the court to make informed decisions about labor cost reductions and other aspects of the reorganization plan.

In an economy where unemployment is high, it is especially important to protect the interests of workers. By requiring the appointment of an examiner, the Bankruptcy Code could help to ensure that labor bears a fair share of the costs of reorganization, while also protecting the interests of other stakeholders.