Summary of Section 1113 of the Bankruptcy Code

Page updated: November 17, 2004

“Rejection of Collective Bargaining Agreements”

November 5, 2004

United Airlines is again seeking court approval for additional concessions from employees. This continued assault on our Contract exploits the bankruptcy code to restructure the airline on the backs of employees who have already sacrificed so much. Although we have experienced the Section 1113 process before, it is important that we again review this bankruptcy law as we face this new assault on our jobs in a two year old bankruptcy and under different circumstances so that we may be fully armed with fact in determining our best course of action.

The Section 1113 of the Bankruptcy Code is titled "Rejection of Collective Bargaining Agreements" because this code ultimately is the provision through which a company (a "debtor") may seek to reject a Contract. Bankruptcy law affords a company with this right, providing the debtor meet certain criteria in the process. Section 1113 of the Bankruptcy Code allows the debtor to modify or reject a collective bargaining agreement in two different ways: Section 1113(c) and Section 1113(e). United Airlines has initiated the Section 1113(c) process by presenting its term sheet to AFA.

Section 1113(c) Motion Review

Section 1113(c) is the bankruptcy code under which a debtor seeks to reject a collective bargaining agreement or reach a consensual agreement with the Union to put in place long-term or permanent modifications to the Contract.

Example:

It was under a Section 1113(c) that the Restructuring Agreement, effective May 1, 2003 , came into effect. Absent this agreement, the court would have ruled on whether to accept or reject our Contract.

United’s Bankruptcy Judge Eugene Wedoff made the following statement in court on April 30, 2003 when approving the six-year concessionary agreements between United and each of the Unions, “… the power of the Court in a situation like this is really very limited ... the only power the Court has is to either grant or deny a motion by the debtor to reject a collective bargaining agreement. It's an all or nothing proposition. The parties themselves have the opportunity to create solutions of considerably more subtlety and appropriateness for the case.”

This section of the bankruptcy code provides the following parameters:

1. Prior to filing to reject a Contract, the debtor must make a proposal to the Union that details all of the modifications “necessary” to restructure while also assuring that all creditors and affected parties are treated “fairly and equitably.”

2. The debtor must provide the Union with relevant information necessary to evaluate the debtor’s proposal.

3. Both parties are required to meet, at a reasonable time, to confer in “good faith” in an attempt to reach mutual agreement on modifications to the Contract.

Once the debtor officially files a Section 1113(c) motion with the court, a hearing will be scheduled to occur within 14 days after the filing date unless the parties mutually agree to a later date or the court determines a need to extend the hearing date according to the circumstances of the case. The bankruptcy judge will make a ruling on the motion within 30-days of the hearing. Discussions between the company and the Union may continue in an effort to work toward a consensual agreement up to the date of the court ruling.

Absent a consensual agreement and assuming the debtor has met the parameters listed above, the court will approve the rejection of the Contract if:

1. the Union has refused to accept such proposal without “good cause” (as determined by the court including the parameters listed above); and
2. the court determines that the concessions of other constituencies in the bankruptcy is commensurate to those made by labor .

Section 1113(e) Motion Review

Section 1113 (e) allows a debtor to ask the court for temporary or interim relief on an emergency basis. The Company must show that the changes sought are “essential to the continuation of the debtor’s business” or needed “to avoid irreparable damage” to the Company. Unlike the bankruptcy code under Section 1113(c), the court has more latitude to determine the application of changes to a collective bargaining agreement.

Example:

It was under a Section 1113(e) motion that the Interim Relief Agreement, effective January 1, 2003 , went into “emergency” effect for nearly 9% cut in our wages. It was under this motion that the International Association of Machinists and Aerospace Workers Districts 141 and 141-M (IAM) refused a consensual agreement for a 13% “emergency” wage cut and the court subsequently imposed a wage cut of 14%.

On October 15, 2004, US Airways employees experience the effects of a Section 1113(e) motion when after several days of hearings that included arguments from the Union, the court imposed a 21% pay cut in addition to a few other productivity modifications on all employee groups except the pilots who had reached a consensual agreement for permanent cuts through the Section 1113(c) process. The court also ruled that the emergency cuts remain in place for a period of four months while US Airways seeks permanent cuts through a Section 1113(c) process.

While the example of Section 1113 at US Airways helps us understand the Bankruptcy Code, it should be clear that the circumstances at US Airways are very different from those at United Airlines.

Do employees have any recourse in the event of imposed modifications or rejection of a collective bargaining agreement?

Employees can engage in a strike and other forms of self-help such as protests.

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