Class 7 Bankruptcy, Spring, 2009 Executory Contracts Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago Copyright © Randal C. Picker. All Rights Reserved.

November 11, 2015Copyright © Randal C. Picker2 Rejection n What does it mean to reject an executory contract? u Rescind the contract? u Breach the contract? u Something else? n Consult 365(g)

November 11, 2015Copyright © Randal C. Picker3 365 (cont.) n Executory contracts and unexpired leases (cont.) u (g) Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease - w (1) if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the filing of the petition; or

November 11, 2015Copyright © Randal C. Picker4 365 (cont.) n Executory contracts and unexpired leases (cont.) u (g)(2) if such contract or lease has been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title - w (A) if before such rejection the case has not been converted under section 1112, 1208, or 1307 of this title, at the time of such rejection; or w (B) if before such rejection the case has been converted under section 1112, 1208, or 1307 of this title - (i) immediately before the date of such conversion, if such contract or lease was assumed before such conversion; or (ii) at the time of such rejection, if such contract or lease was assumed after such conversion.

November 11, 2015Copyright © Randal C. Picker5 Leasing Services n The Question u Does security interest that arises in connection with lease transaction to secure debtor’s payments under the lease survive the rejection of the lease?

November 11, 2015Copyright © Randal C. Picker6 The Deal in Leasing Services LSC Chatham Metler Bank 3: B lends secured to M 1:C leases two cranes to M; lease contains SI in favor of C 2: Assigns leases to LSC; LSC perfects SI M files for Ch7 and rejects leases: what happens to LSC’s SI?

November 11, 2015Copyright © Randal C. Picker7 Register n Core Facts u The Registers execute franchise agreement with Silk Plants u Agreement contains covenant not to compete u Registers file Ch 13 case, reject franchise agreement u Establish competing buiness

November 11, 2015Copyright © Randal C. Picker8 Question n Does the covenant not to compete survive the rejection?

Section Rejection of collective bargaining agreeements n (a) u The debtor in possession, or the trustee if one has been appointed under the provisions of this chapter, other than a trustee in a case covered by subchapter IV of this chapter and by title I of the Railway Labor Act, may assume or reject a collective bargaining agreement only in accordance with the provisions of this section. November 11, 2015Copyright © Randal C. Picker9

Section 1113 n (b)(1) u Subsequent to filing a petition and prior to filing an application seeking rejection of a collective bargaining agreement, the debtor in possession or trustee (hereinafter in this section ‘‘trustee’’ shall include a debtor in possession), shall— November 11, 2015Copyright © Randal C. Picker10

Section 1113 w (A) make a proposal to the authorized representative of the employees covered by such agreement, based on the most complete and reliable information available at the time of such proposal, which provides for those necessary modifications in the employees benefits and protections that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably; and November 11, 2015Copyright © Randal C. Picker11

Section 1113 w (B) provide, subject to subsection (d)(3), the representative of the employees with such relevant information as is necessary to evaluate the proposal. November 11, 2015Copyright © Randal C. Picker12

Section 1113 u (2) During the period beginning on the date of the making of a proposal provided for in paragraph (1) and ending on the date of the hearing provided for in subsection (d)(1), the trustee shall meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications of such agreement. November 11, 2015Copyright © Randal C. Picker13

Section 1113 n (c) u The court shall approve an application for rejection of a collective bargaining agreement only if the court finds that— w (1) the trustee has, prior to the hearing, made a proposal that fulfills the requirements of subsection (b)(1); w (2) the authorized representative of the employees has refused to accept such proposal without good cause; and November 11, 2015Copyright © Randal C. Picker14

Section 1113 w (3) the balance of the equities clearly favors rejection of such agreement. November 11, 2015Copyright © Randal C. Picker15

Section 1113 n (e) u If during a period when the collective bargaining agreement continues in effect, and if essential to the continuation of the debtor’s business, or in order to avoid irreparable damage to the estate, the court, after notice and a hearing, may authorize the trustee to implement interim changes in the terms, conditions, wages, benefits, or work rules provided by a collective bargaining agreement. Any hearing under this paragraph shall be scheduled in accordance with the needs of the trustee. The implementation of such interim changes shall not render the application for rejection moot. November 11, 2015Copyright © Randal C. Picker16

Section 1113 n (f) u No provision of this title shall be construed to permit a trustee to unilaterally terminate or alter any provisions of a collective bargaining agreement prior to compliance with the provisions of this section. November 11, 2015Copyright © Randal C. Picker17

Northwest Airlines n What does rejection mean in Section 1113? n Core Facts u NWA seeks modifications of flight attendant CBA u Negotiates and then does so within framework of National Mediation Board u 9/05: NWA files Chapter 11 November 11, 2015Copyright © Randal C. Picker18

Northwest Airlines u 11/05: Interim modifications granted [1113(e)] u 03/06: NWA seeks to reject CBA; granted; NWA implements new terms and conditions u Flight attendants plan work action; NWA seeks to enjoin that u District court grants preliminary injunction November 11, 2015Copyright © Randal C. Picker19

Relevant Labor Law Framework n Try Three Sources of Obligations u The CBA Itself w “We the union agree not to strike” u The Railway Labor Act w “Once you have a CBA in place, certain obligations kick in and stay in until the CBA expires” Seems to be the idea behind the RLA’s “status quo” rule November 11, 2015Copyright © Randal C. Picker20

Relevant Labor Law Framework u The Railway Labor Act Again w Even if there is no CBA in place, certain obligations arise w This is 45 USC 152 (First) It shall be the duty of all carriers, their officers, agents, and employees to exert every reasonable effort to make and maintain agreements concerning rates of pay, rules, and working conditions, and to settle all disputes, whether arising out of the application of such agreements or otherwise, in order to avoid any interruption to commerce or to the operation of any carrier growing out of any dispute between the carrier and the employees thereof. November 11, 2015Copyright © Randal C. Picker21

Relevant Labor Law Framework n Norris LaGuardia Act u Limits power of federal courts to issue injunctions relating to labor law u 29 USC 108 w No restraining order or injunctive relief shall be granted to any complainant who has failed to comply with any obligation imposed by law which is involved in the labor dispute in question, or who has failed to make every reasonable effort to settle such dispute either by negotiation or with the aid of any available governmental machinery of mediation or voluntary arbitration. November 11, 2015Copyright © Randal C. Picker22

Issue on Appeal n What does a rejection under Section 1113 do to all of that? November 11, 2015Copyright © Randal C. Picker23