US SUPREME COURT DECISIONS

Section 365(a) of the Bankruptcy Code (Code) provides that, with certain exceptions, the trustee, subject to the Bankruptcy Court's approval, may assume or reject "any executory contract" of the debtor. In April, 1980, respondent debtor (hereafter respondent), a building supplies distributor, filed a voluntary petition in bankruptcy for reorganization under Chapter 11 of the Code, and was subsequently authorized by the Bankruptcy Court to operate the business as a debtor-in-possession. At the time the petition was filed, some of respondent's employees were represented by petitioner Union with whom respondent had negotiated a collective bargaining agreement that was to expire in April, 1982. Beginning in January, 1980, respondent failed to meet some of its obligations under the agreement, including the payment of health and pension benefits and the remittance to the Union of dues collected, and in May, 1980, respondent refused to pay wage increases called for in the agreement. Thereafter, respondent requested and received permission from the Bankruptcy Court to reject the agreement, and the Union was allowed 30 days in which to file a claim for damages stemming from the rejection. The District Court upheld the order. In the summer of 1980, the Union filed unfair labor practice charges with the National Labor Relations Board (Board), which found that respondent had violated §§ 8(a)(5) and 8(a)(1) of the National Labor Relations Act (NLRA) by unilaterally changing the terms of the collective bargaining agreement and by refusing to negotiate with the Union, and ordered respondent to make the pension and health contributions and to remit dues to the Union. Consolidating the Union's appeal from the District Court's order and the Board's petition for enforcement of its order, the Court of Appeals held that a collective bargaining agreement is an executory contract subject to rejection by a debtor-in-possession under § 365(a) of the Code; that the debtor-in-possession's authority to seek rejection of the chanrobles.com-red

Page 465 U. S. 514

agreement was not qualified by § 8(d) of the NLRA; but that to obtain rejection, a debtor-in-possession must show not only that the agreement burdens the estate but also that the equities balance in favor of rejection. The case was remanded for the Bankruptcy Court's reconsideration in light of these standards. The Court of Appeals refused to enforce the Board's order, rejecting the Board's conclusion that respondent, as a debtor-in-possession, was the alter ego of the pre-petition employer, and holding that, under the Code, a debtor-in-possession was deemed a "new entity" not bound by the debtor's prior collective bargaining agreement.

Held:

1. The language "executory contract" in § 365(a) of the Code includes collective bargaining agreements subject to the NLRA, and the Bankruptcy Court should permit rejection of such an agreement under § 365(a) if the debtor can show that the agreement burdens the estate and that the equities balance in favor of rejection. Pp. 465 U. S. 521-527.

(a) Any inference that collective bargaining agreements are not included within the general scope of § 365(a) because they differ for some purposes from ordinary contracts is rebutted by § 365(a)'s statutory design and by the language of § 1167 of the Code expressly exempting from § 365(a) collective bargaining agreements subject to the Railway Labor Act. The failure to grant a similar exemption to agreements subject to the NLRA indicates that Congress intended § 365(a) to apply to all collective bargaining agreements covered by the NLRA. Pp. 465 U. S. 521-523.

(b) Because of the special nature of a collective bargaining agreement, and the consequent "law of the shop" that it creates, a somewhat stricter standard than the "business judgment" standard applied to authorize rejection of an ordinary executory contract should govern the Bankruptcy Court's decision to allow rejection of a collective bargaining agreement. But a standard that would require respondent to demonstrate that its reorganization will fail unless rejection is permitted is at odds with the flexibility and equity built into Chapter 11 and subordinates the multiple, competing considerations underlying a Chapter 11 reorganization to the issue of whether rejection of the agreement is necessary to prevent the debtor from going into liquidation. Pp. 465 U. S. 523-526.

(c) Before acting on a petition to modify or reject a collective bargaining agreement, the Bankruptcy Court should be persuaded that reasonable efforts to negotiate a voluntary modification have been made and are not likely to produce a prompt and satisfactory solution. If the parties are unable to agree, a decision on the rejection of the agreement may become necessary to the reorganization process. But since the policy of Chapter 11 is to permit successful rehabilitation of debtors, rejection should not be permitted without a finding that that policy would be chanrobles.com-red

Page 465 U. S. 515

served by such action. Determining what would constitute a successful rehabilitation involves balancing the interests of the debtor, creditors, and employees, and in striking the balance the court must consider not only the degree of hardship faced by each party, but also any qualitative differences between the types of hardship each may face. Pp. 465 U. S. 526-527.

2. A debtor-in-possession does not commit an unfair labor practice when it unilaterally rejects or modifies a collective bargaining agreement before formal rejection is approved by the Bankruptcy Court. Pp. 465 U. S. 527-534.

(a) To hold that the debtor commits an unfair labor practice under such circumstances would undermine whatever benefit the debtor otherwise obtains by its authority to request rejection of the agreement. The difference between a Chapter 11 reorganization, wherein the debtor-in-possession has until a reorganization plan is confirmed to decide whether to accept or reject an executory contract, and a Chapter 7 liquidation, wherein the trustee has only 60 days from the order for relief in which to make such a decision, reflects Congress' considered judgment that a debtor-in-possession seeking to reorganize should be granted more latitude in making the decision than should a trustee in liquidation. Pp. 465 U. S. 528-529.

(b) Since recovery on a claim arising from a debtor-in-possession's rejection of an executory collective bargaining agreement after the filing of a petition in bankruptcy may be had only through administration of the claim in bankruptcy, and not by a suit against the debtor-in-possession under the agreement, the Board is necessarily precluded from, in effect, enforcing the agreement by filing an unfair labor practice charge against the debtor-in-possession for violating § 8(d) of the NLRA. Such enforcement would run directly counter to the Code's express provisions and to its overall effort to give a debtor-in-possession some flexibility and breathing space. From the filing of the bankruptcy petition until formal acceptance, the collective bargaining agreement is not an enforceable contract within the meaning of § 8(d). Accordingly, the debtor-in-possession need not comply with § 8(d) prior to seeking the Bankruptcy Court's permission to reject the agreement. It necessarily follows that any corresponding duty to bargain to impasse under § 8(a)(5) and § 8(d) before seeking rejection must also be subordinated to the exigencies of bankruptcy. Pp. 465 U. S. 529-534.

682 F.2d 72, affirmed.

REHNQUIST, J., delivered the opinion of the Court, in Parts I and II of which all other Members joined, and in Part III of which BURGER, C.J.,and POWELL, STEVENS, and O'CONNOR, JJ., joined. BRENNAN, J., filed an opinion concurring in part and dissenting in part, in which WHITE, MARSHALL, and BLACKMUN, JJ., joined, post, p. 465 U. S. 535. chanrobles.com-red

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