Third Circuit Holds Bankruptcy Rules “Trump” the NLRA in Case Involving the Trump Taj Mahal Casino

In September 2014, amid “deteriorating financial health” and a “desperate” financial situation, Atlantic City, New Jersey’s Trump Taj Mahal filed for Chapter 11 bankruptcy protection. Around that same time, the Taj Mahal was attempting to bargain with UNITE HERE Local 54 (the “Union”) to renegotiate the parties’ collective bargaining agreement (the “CBA”) prior to its expiration on September 14, 2014. The parties were unable to reach agreement and the CBA expired. In an effort to restructure its business and avoid closing the casino, the Taj Mahal sought permission from the bankruptcy court to reject the terms of its expired CBA with the Union pursuant to § 1113 of the Bankruptcy Code. Ruling on an issue of first impression, the bankruptcy court allowed the Taj Mahal to reject the CBA. The Union appealed to the Third Circuit. See In re: Trump Entertainment Resorts, No. 14-4807 (3d Cir. Jan. 15, 2016).

On appeal, the Third Circuit was required to harmonize competing principles of the Bankruptcy Code and the National Labor Relations Act (the “NLRA”). Section 1113 of the Bankruptcy Code provides that a debtor may reject a collective bargaining agreement if certain conditions are satisfied. The Third Circuit noted that it is clear that § 1113 allows rejection of unexpired collective bargaining agreements, but the bankruptcy courts were divided as to whether debtors may reject expired agreements.

The Union argued that § 1113 applies only to unexpired collective bargaining agreements. The Union reasoned that “collective bargaining agreement” as it is used in § 1113 means “a contract between an employer and a labor union” and when a collective bargaining agreement has expired, there is no “contract” to reject. The Third Circuit disagreed, finding that the Union’s argument ignored the obligations that continue under an expired collective bargaining agreement and the purpose of allowing debtors to reject collective bargaining agreements.

When a collective bargaining agreement expires, the employer must maintain the “status quo” with respect to mandatory subjects of bargaining until it either enters into a new contract or bargains to impasse. In effect, the employer is required to continue abiding by many of the provisions of a collective bargaining agreement even after it has expired. In light of the fact that § 1113 was enacted to permit reorganizations when labor obligations will prevent the success of a reorganization, the Third Circuit held that it did not make sense to distinguish between expired and unexpired collective bargaining agreements under § 1113. Whether the agreement is expired or unexpired, it imposes continuing obligations on a debtor. Requiring a debtor to continue abiding by those burdensome obligations in the face of a difficult financial situation would not be consistent with the Bankruptcy Code’s purpose of allowing debtors to restructure their affairs and avoid liquidation.

The need for the Taj Mahal to reject the CBA was apparent to the Third Circuit. As of September 5, 2014, the Taj Mahal’s working capital cash was approximately $12 million, and its secured debt was approximately $286 million. Under the CBA, however, the Taj Mahal was required to make more than $3.5 million per year in pension contributions, and $10 to $12 million per year in health and welfare contributions. Those contributions were required to continue after expiration of the CBA as part of the status quo. Under the Taj Mahal’s proposal to reject the CBA, it would save approximately $14.6 million per year. Because the Taj Mahal’s proposal satisfied the requirements of § 1113 and were necessary to an effective reorganization and restructuring, the Third Circuit affirmed the bankruptcy court’s order allowing the Taj Mahal to reject the expired CBA.

As the Third Circuit’s ruling shows, even expired collective bargaining agreements can impose substantial obligations on employers. If you have a question about your continuing obligations under an expired collective bargaining agreement, contact a member of Verrill Dana’s Labor & Employment Practice Group.