A Chapter 11 debtor in possession can assign a collective bargaining agreement (CBA) and free itself of all liabilities under that CBA, provided it has assigned all obligations under the agreement to the assignee. However, a debtor cannot free itself of all liabilities by purporting to assign a CBA if less than all obligations are transferred. The United States Court of Appeals for the Third Circuit recently expressed these conclusions in American Flint Glass Workers Union v. Anchor Resolution Corporation. The court's holding clarifies the operation of the Bankruptcy Code where two sections of the Code intersect: section 365, which deals with the assumption and assignment of executory contracts, and section 1113, which governs the modification of collective bargaining agreements in the bankruptcy context.
In American Flint Glass Workers Union, the debtor, Anchor Resolution Corporation, had negotiated CBAs with two different unions shortly before it sought bankruptcy relief. In recognition of the debtor's precarious financial situation, the unions agreed to certain concessions, including wage cuts, in exchange for deferred retroactive payments to be made if Anchor were sold, merged, or transferred during the term of the agreements. Despite the concessions by the unions, the debtor's financial condition required it to file for Chapter 11 bankruptcy protection. In connection with its reorganization, the debtor reached an agreement for the sale of substantially all of its assets to a third-party purchaser. Pursuant to the asset sale, the debtor proposed to assume the CBAs and assign them to the purchaser.
Section 365 of the Bankruptcy Code grants debtors the right to assume or reject their executory contracts, subject to court approval. An executory contract is defined as one where neither party to the contract has fully performed the contract. If the debtor rejects the contract, neither party will be required to perform any further obligations under the contract, and the nondebtor party to the contract generally will have a prepetition claim against the debtor for damages arising from the rejection. On the other hand, if the debtor elects to assume an executory contract, both parties will continue to perform according to the terms of the contract, as before the bankruptcy filing. If a debtor wishes to assign a contract to a third party, it must first assume the contract pursuant to section 365 before the assignment can take place.
Outside of bankruptcy law, one party to a contract ordinarily may not relieve itself of its obligations under a contract by assigning the contract to a third party without first obtaining the consent of the other party to the contract. If the other party to the contract does not consent to the assignment, the assignor retains ultimate liability under the contract. However, if the other party to the contract does consent to the assignment, the assignee of the contract assumes all obligations and liabilities under the contract, thus creating a new contract or novation that relieves the assignor of all liability.
The Bankruptcy Code contravenes the traditional rule regarding assignment of contracts by providing that the debtor-assignor may assign a contract and relieve itself of its obligations under that contract even without the consent of the other party to the contract. Thus, when a contract is assumed and assigned by a debtor in bankruptcy, the assignee of the contract acquires all rights created by the contract and also commits to perform all obligations under the contract. Because the assignment transfers all obligations under the contract, section 365(k) of the Bankruptcy Code relieves the debtor and its bankruptcy estate from liability for any breach of the contract after the assignment.
In American Flint Glass Workers Union, the debtor sought to assign its CBAs with two unions, American Flint Glass Workers Union (AFU) and Glass, Molders, Pottery, Plastics & Allied Workers International Union (GMU), to the purchaser of its assets. With respect to the CBAs with GMU, the purchaser's obligation to close the sale was conditioned on an express agreement that the purchaser would have no obligation for payment of the GMU members' previously bargained-for retroactive wage payments contained in the CBAs the debtor had assumed.
After the asset sale, neither the debtor nor the purchaser made any of the retroactive wage payments required under the CBAs, and the unions filed claims against the debtor for their wage payments. The bankruptcy and district courts held that upon the closing of the sale of the debtor's assets, section 365(k) relieved the debtor of all liability arising from claims based on the CBAs. The unions appealed to the Third Circuit.
In the Third Circuit's view, the GMU collective bargaining agreements that were assigned to the purchaser were not the same agreements that the debtor had negotiated with the union and assumed during the bankruptcy. Because the Third Circuit found that the CBAs had been modified by the debtor prior to assignment, the court concluded that there had been no assignment of the GMU CBAs to trigger application of section 365(k). Therefore, the nonbankruptcy rules regarding assignment of contracts applied, and the debtor remained liable for the retroactive wage payments to union members pursuant to the CBAs that were negotiated with the union before the debtor's bankruptcy filing.
As an alternative basis for its holding, the Third Circuit also found that the debtor had failed to comply with section 1113 of the Bankruptcy Code, which governs the modification of CBAs. The most important provision of section 1113 states that a debtor "may not unilaterally terminate or alter any provisions of a collective bargaining agreement" without following the negotiation procedures and satisfying the conditions specified in section 1113.
The Third Circuit found that the express agreement between the debtor and the purchaser relieving the purchaser of responsibility for the retroactive wage payments amounted to a unilateral alteration of the provisions of the CBA. Since any modification to a debtor's CBA must comply with the procedures specified in section 1113, the court stated that the debtor should have followed those procedures.
The court emphasized that the legislative intent underlying section 1113 was to promote a collective bargaining process that would maintain a balance between labor and reorganizing debtors. Stating that the assignment terms required under the asset purchase agreement stripped GMU of all bargaining power, the court noted that GMU was left with an untenable choice - saving members' jobs without the retroactive wages or not saving the jobs. Thus, the court found that the debtor's attempted application of section 365 to the CBAs ran afoul of the congressional intent underlying section 1113. Consequently, the court found that the debtor's violation of section 1113 was an alternative basis for prohibiting application of section 365(k) to relieve the debtor of its obligations under the CBA, and the debtor was liable for GMU's claims for retroactive wage payments.
With respect to the AFU agreements, the court found that there was no basis to hold the debtor liable for the union's wage claims. AFU argued that the debtor was required to comply with the procedures for CBAs set forth in section 1113 and was not entitled to assign its CBAs pursuant to section 365. AFU contended, therefore, that the debtor was not relieved of its obligations to AFU pursuant to section 365(k).
Noting that the assignment of the AFU agreements was unconditional and all obligations were assigned to the purchaser, the court concluded that no change had been made in AFU's CBAs to trigger the operation of section 1113, which governs only alteration or rejection of CBAs. Accordingly, the court concluded that the outright and unconditional assignment of AFU's CBAs was governed by section 365. Therefore, the debtor was relieved of any obligations under the AFU CBAs pursuant to section 365(k).
In essence, the lesson of American Flint Glass Workers Union is straightforward. Bankruptcy Code section 1113 establishes procedures governing only the alteration or rejection of a CBA. It is not implicated where a CBA is unconditionally assigned to another party and all obligations under the CBA are transferred to the assignee. In such cases, Bankruptcy Code section 365 governs, and section 365(k) relieves a debtor of all liability under an assigned CBA. However, if all obligations are not assigned, section 365(k) will not excuse the debtor from its obligations under the CBA. Additionally, a debtor that assumes a CBA may not modify it before or during the assignment process without complying with the provisions of section 1113.
American Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76 (3d Cir. 1999).