Bankruptcy as an Escape Hatch

The high court permits troubled firms to cancel union pacts

In most dictionaries, bankruptcy is a polite word for going belly up. But the Supreme Court handed down a decision last week that will enable corporations to use bankruptcy as a way to avoid going belly up. In a 9-to-0 opinion, the court ruled that a company that has filed for bankruptcy can cancel a union contract, cut wages and lay off workers without having to prove that the pact would cause the company to go completely broke. Declared AFL-CIO Special Counsel Laurence Gold: "The ruling obviously enhances the opportunity for union busting."

The decision grew out of a filing by Bildisco & Bildisco, a small New Jersey window and door wholesaler. In January 1981, nine months after Bildisco requested reorganization under Chapter 11 of the Bankruptcy Code, the company received permission from a bankruptcy court to revoke a three-year labor contract it had negotiated in 1979 with a Teamsters Union local. Reagan's Justice Department, interestingly, argued on the side of the union that this was not permissible.

Federal bankruptcy law, designed in part to buy time for financially troubled companies to rearrange their affairs, has always permitted routine cancellation of business agreements to purchase pencils, paper clips, telephones, window-washing services and the like. Traditionally, lower courts have afforded labor contracts various degrees of deference. But in their decision last week, the Justices made it clear that such protection is limited. The goal of Chapter 11, wrote Justice William H. Rehnquist, is to permit a company's "successful rehabilitation." Consequently, a business need not prove that it is in danger of imminent collapse in order to obtain the bankruptcy court's permission to cancel a union pact. What it must show is that the labor contract unduly "burdens" its prospects for recovery and that it has made "reasonable" attempts to bargain with the union for deferred or smaller wage increases or other money saving measures. Only then can it be altogether freed by the court from its labor obligations. The court also ruled, 5 to 4, that a company may cancel its union contracts the moment it files for bankruptcy, rather than waiting for a court to rule on its reorganization plan.

The decision drew predictable protests from organized labor. "It's outrageous," fumed William Winpisinger, president of the International Association of Machinists. "This was never Congress's intent." U.A.W. President Owen Bieber forecast more strikes and less conciliation. Said he: "It won't make sense for a union to grant adjustments to an ailing employer on Monday, merely to have that revised agreement torn up on Tuesday."

Legal scholars feared that the ruling might give apparently healthy companies bottom-line reasons to use the bankruptcy law as an escape hatch from high-priced labor agreements. Indeed, when Continental Air Lines and Wilson Foods Corp. filed for bankruptcy last year, they were accused of trying to rid themselves of unwanted labor contracts. "In itself, the decision will not cause companies to file for bankruptcy," said New York University Law Professor Lawrence King, a bankruptcy expert. "But it will make bankruptcy more attractive." Bildisco President Sal Valente disagreed: "Going into Chapter 11 is debilitating. Doing it just to solve a union problem would be like cutting off your nose to spite your face."

That may be true. But whatever the drawbacks, bankruptcies are multiplying. In fiscal 1980, 5,765 firms filed for bankruptcy. By 1983 that figure had ballooned to 17,608. The causes: the recession and its aftermath, and a 1978 overhaul of the Bankruptcy Code that permits troubled, but not insolvent, firms to declare bankruptcy. The 1978 change has made bankruptcy both a shield and a sword. Robert Miller, executive vice president of Congress Financial Corp., a commercial lending institution, supports the Bildisco decision but finds the growth of bankruptcies disturbing. Says he: "Any time a company makes a bad business deal, whether it's a union contract or a lease, it can resort to Chapter 11."

That possibility seems short-lived. The ink was barely dry on the court's decision when Democratic Congressman Peter Rodino of New Jersey introduced a bill to reverse it. In anticipation of the Bildisco ruling, Democratic Congressman Paul Simon of Illinois in early February submitted legislation to amend the National Labor Relations Act. "The court's decision was so total," said Captain Henry Duffy, president of the Air Line Pilots Association, "if this doesn't gear up organized labor for a massive blitz on Congress, nothing will." qed