Why Section 1113 instead of Section 365
Collective bargaining agreements are technically executory contracts. Before 1984 they were rejectable under the ordinary § 365 business-judgment standard. The Supreme Court confirmed that authority in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), but also held that a Chapter 11 debtor that unilaterally modified a CBA after filing did not commit an unfair labor practice under the NLRA — the bankruptcy filing changed the analytic baseline.
Organized labor reacted strongly. Within months Congress enacted § 1113 (1984), pulling CBA rejection out of § 365 entirely and substituting a much more demanding procedure. The objective was to ensure that the Bankruptcy Code did not become a quiet route around the National Labor Relations Act and the duty to bargain in good faith. Section 1113 is now the exclusive vehicle for rejection or modification of a CBA in a Chapter 11 case.
Official citation: 11 U.S.C. § 1113 (rejection of collective bargaining agreements).
The codified Bildisco standard
Section 1113 codifies the substantive standard the Supreme Court articulated in Bildisco — that a CBA may be rejected only if it "burdens the estate" and the "equities balance in favor" of rejection — but layers on top of that substantive test a strict procedural pre-rejection process designed to force the debtor to genuinely bargain before going to the court.
The two key procedural pieces are § 1113(b) (the proposal-and-bargaining process the debtor must complete before it can even file a rejection motion) and § 1113(c) (the nine-element showing the debtor must make to obtain a rejection order). Section 1113(e) provides a separate procedure for interim relief during the negotiation period.
Section 1113(b): the pre-rejection bargaining process
Before a debtor can move to reject a CBA, § 1113(b)(1) requires the debtor to:
- Make a proposal to the authorized representative of the employees (the union) that is "based on the most complete and reliable information available at the time of such proposal" and that "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";
- Provide the authorized representative with "such relevant information as is necessary to evaluate the proposal."
Section 1113(b)(2) then requires the debtor to "meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications" of the CBA. The bargaining is to take place between the date of the proposal and the rejection hearing.
Procedural shortcuts fail. Courts have rejected motions where the debtor's "proposal" was made simultaneously with or only days before the rejection motion, where the debtor refused to share underlying financial information sufficient for the union to evaluate the proposal, or where the debtor's bargaining behavior amounted to a take-it-or-leave-it ultimatum. Section 1113(b) is not satisfied by going through the motions.
The nine-element Section 1113(c) test
If the bargaining process under § 1113(b) does not produce agreement, the debtor may move to reject. Section 1113(c) provides that the court "shall approve" rejection only if it finds three things, each of which is typically broken down further to produce a nine-element checklist:
- The debtor made a proposal that fulfilled the requirements of subsection (b)(1). Courts typically break this down into four sub-elements:
- (a) The debtor made a proposal to the authorized representative;
- (b) The proposal was based on the most complete and reliable information available at the time;
- (c) The proposed modifications were "necessary" to permit reorganization;
- (d) The proposal assured that all creditors, the debtor, and all affected parties were treated fairly and equitably.
- The authorized representative refused to accept the proposal without good cause. Two sub-elements:
- (e) The representative actually refused; and
- (f) The refusal lacked good cause — i.e., the proposal was reasonable in light of the debtor's circumstances and the union had no legitimate basis to reject it.
- The balance of the equities clearly favors rejection. Three sub-elements:
- (g) The likelihood and consequences of reorganization failure if relief is not granted;
- (h) The likely effect on creditors, employees, and the public if rejection is or is not granted;
- (i) The "good faith" efforts the debtor undertook to negotiate a voluntary modification with the union.
Each of the nine elements must be carried by the debtor by a preponderance of the evidence. The failure of any one element defeats the motion. In practice, the litigation almost always centers on element (c) — whether the proposed modifications are "necessary" — and that is where the circuit split lives.
Wheeling-Pittsburgh Steel and the “necessary” circuit split
The Third Circuit's decision in In re Wheeling-Pittsburgh Steel Corp., 791 F.2d 1074 (3d Cir. 1986), construes "necessary" narrowly. Under Wheeling-Pittsburgh, the debtor's proposal must include only those modifications strictly necessary to permit the debtor's reorganization — meaning the minimum bargained-for concessions that will keep the debtor afloat. Modifications that go beyond bare necessity to provide a margin of safety, to give the post-confirmation entity competitive labor costs, or to align with industry benchmarks are not "necessary" within the meaning of the statute. The Third Circuit explicitly disclaimed reading "necessary" as a synonym for "useful," "desirable," or "important to long-term viability."
The Second Circuit, in Truck Drivers Local 807 v. Carey Transportation, Inc., 816 F.2d 82 (2d Cir. 1987), took the opposite view. Under the Carey Transportation approach, "necessary" includes modifications that contribute to the debtor's long-term viability, not just modifications strictly required to avoid immediate liquidation. The debtor need not propose the minimum — it need only propose modifications that are necessary in the broader sense of being needed for the reorganization to succeed.
Why the split matters operationally. Debtors in the Third Circuit face a real risk that an "ambitious" CBA-modification proposal will be denied because it goes beyond bare necessity, even where the modifications would clearly help the post-confirmation entity. Debtors in the Second Circuit have more room to propose modifications keyed to long-term competitive labor cost. Other circuits have aligned variously with one approach or the other, and the venue choice for major labor-dependent Chapter 11 cases routinely turns on this distinction.
Section 1113(e): interim relief
If the debtor can show that, during the § 1113(b) bargaining period, "interim changes in the terms, conditions, wages, benefits, or work rules provided by a collective bargaining agreement are essential to the continuation of the debtor's business, or in order to avoid irreparable damage to the estate," § 1113(e) permits the court to enter an interim order authorizing those changes. The standard is high — "essential" rather than merely useful — but it gives a debtor in genuine cash crisis a mechanism to obtain immediate relief without waiting out the entire pre-rejection bargaining process.