Class 7
Bankruptcy, Spring, 2009
Executory Contracts
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2005-09 Randal C. Picker. All Rights
Rejection

What does it mean to reject an executory
contract?
Rescind
the contract?
Breach the contract?
Something else?

Consult 365(g)
July 28, 2017
Copyright © 2005-09 Randal C. Picker
2
365 (cont.)

Executory contracts and unexpired leases (cont.)

(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 
July 28, 2017
(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
Copyright © 2005-09 Randal C. Picker
3
365 (cont.)

Executory contracts and unexpired leases (cont.)

(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  (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
 (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.
July 28, 2017
Copyright © 2005-09 Randal C. Picker
4
Leasing Services

The Question
Does
security interest that arises in
connection with lease transaction to secure
debtor’s payments under the lease survive
the rejection of the lease?
July 28, 2017
Copyright © 2005-09 Randal C. Picker
5
The Deal in Leasing
Services
Chatham
2: Assigns
leases to
LSC; LSC
perfects SI
3: B lends
secured to M
Bank
LSC
July 28, 2017
1:C leases two cranes
to M; lease contains
SI in favor of C
Metler
M files for Ch7 and rejects leases:
what happens to LSC’s SI?
Copyright © 2000-08 Randal C. Picker
6
Register

Core Facts
The
Registers execute franchise agreement
with Silk Plants
Agreement contains covenant not to
compete
Registers file Ch 13 case, reject franchise
agreement
Establish competing buiness
July 28, 2017
Copyright © 2005-09 Randal C. Picker
7
Question

Does the covenant not to compete survive
the rejection?
July 28, 2017
Copyright © 2005-09 Randal C. Picker
8
Section 1113. Rejection of
collective bargaining
agreeements

(a)
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.
July 28, 2017
Copyright © 2005-09 Randal C. Picker
9
Section 1113

(b)(1)
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—
July 28, 2017
Copyright © 2005-09 Randal C. Picker
10
Section 1113

July 28, 2017
(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
Copyright © 2005-09 Randal C. Picker
11
Section 1113

July 28, 2017
(B) provide, subject to subsection (d)(3), the
representative of the employees with such
relevant information as is necessary to
evaluate the proposal.
Copyright © 2005-09 Randal C. Picker
12
Section 1113
(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.
July 28, 2017
Copyright © 2005-09 Randal C. Picker
13
Section 1113

(c)
The
court shall approve an application for
rejection of a collective bargaining
agreement only if the court finds that—
(1) the trustee has, prior to the hearing,
made a proposal that fulfills the
requirements of subsection (b)(1);
 (2) the authorized representative of the
employees has refused to accept such
proposal without good cause; and

July 28, 2017
Copyright © 2005-09 Randal C. Picker
14
Section 1113

July 28, 2017
(3) the balance of the equities clearly favors
rejection of such agreement.
Copyright © 2005-09 Randal C. Picker
15
Section 1113

(e)
 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
July 28, 2017rejection moot. Copyright © 2005-09 Randal C. Picker
16
Section 1113

(f)
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.
July 28, 2017
Copyright © 2005-09 Randal C. Picker
17
Northwest Airlines


What does rejection mean in Section 1113?
Core Facts
NWA
seeks modifications of flight attendant
CBA
Negotiates and then does so within
framework of National Mediation Board
9/05: NWA files Chapter 11
July 28, 2017
Copyright © 2005-09 Randal C. Picker
18
Northwest Airlines
11/05:
Interim modifications granted
[1113(e)]
03/06: NWA seeks to reject CBA; granted;
NWA implements new terms and conditions
Flight attendants plan work action; NWA
seeks to enjoin that
District court grants preliminary injunction
July 28, 2017
Copyright © 2005-09 Randal C. Picker
19
Relevant Labor Law
Framework

Try Three Sources of Obligations
The

“We the union agree not to strike”
The

CBA Itself
Railway Labor Act
“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
July 28, 2017
Copyright © 2005-09 Randal C. Picker
20
Relevant Labor Law
Framework
The
Railway Labor Act Again
Even if there is no CBA in place, certain
obligations arise
 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.
July 28, 2017
Copyright © 2005-09 Randal C. Picker
21
Relevant Labor Law
Framework

Norris LaGuardia Act
Limits
power of federal courts to issue
injunctions relating to labor law
29 USC 108

July 28, 2017
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.
Copyright © 2005-09 Randal C. Picker
22
Issue on Appeal

What does a rejection under Section 1113
do to all of that?
July 28, 2017
Copyright © 2005-09 Randal C. Picker
23