Court Denies AMR Union’s Rejection Damages Claims After Abrogation of Collective Bargaining Agreements

In November 2011, AMR Corporation, the parent of American Airlines, filed chapter 11 in the United States Bankruptcy Court for the Southern District of New York.  Through the bankruptcy, which was hugely successful, AMR was able to shed billions of dollars in operating expenses and become the largest airline in the United States.  Part of the substantial savings came from AMR’s ability to restructure its collective bargaining agreements with its unions.

The Bankruptcy Court in AMR’s case was eventually asked to review certain challenged claims brought by unions, on behalf of their members, relating to their restructured collective bargaining agreements.  On December 10, 2018, the Bankruptcy Court denied certain union claims that asserted that the abrogation of AMR’s old CBAs resulted in a loss of benefits that entitled union employees to rejection damages claims.  In re AMR Corporation, Case No. 11-15463 (Bankr. S.D.N.Y. Dec. 10, 2018).  The opinion teaches several things about the CBA rejection process under section 1113 of the Bankruptcy Code.

Section 1113 permits a chapter 11 debtor to reject a CBA if it meets a certain set of conditions in the statute.  See AMR Corp., 477 B.R. 384 (Bankr. S.D.N.Y 2012).  Among other things, before rejection, the debtor must make a proposal to its union (or authorized representative) that “provides for those necessary modifications in the employees benefits and protections that are necessary to permit the reorganization of the debtor . . .”  11 U.S.C. § 1113(b)(1)(A).  The Bankruptcy Code thus envisions a collaborative process in connection with the termination or restructuring of a prepetition CBA.  Indeed, many chapter 11 debtors begin this lengthy process prior to filing bankruptcy.

At primary issue in this recent opinion was AMR’s abrogation of the collective bargaining agreement with the Transport Workers Union (“TWU”).  Transport Workers Union, Local 514 (“Local 514”) argued that AMR’s abrogation lead to the termination of a stock option program, implemented by AMR two years prior to its bankruptcy, that granted eligible employees options to purchase shares of AMR’s common stock during a ten-year period, ending on April 17, 2013.  Local 514 asserted a claim on behalf of its members who were unable to exercise their stock options because of the alleged termination of the program prior to its expiration.

AMR countered that the program was independent of TWU’s CBA and that employees were able to exercise their rights under the program until its expiration in April 2013.

The Bankruptcy Court agreed with AMR and denied Local 514’s claims for three reasons.  First, from a factual standpoint, the Court found that TWU’s CBA was not terminated under section 1113 and instead AMR and TWU reached a consensual agreement on a new CBA to replace the old CBA. As such, any termination of rights under the old CBA was the subject of a bargaining process and not a unilateral decision to reject under section 1113.

Second, the Court found that Local 514’s position was legally flawed, because, even if the stock option program had been abrogated with the CBA under section 1113, it is well- established in the Second Circuit that such abrogation does not create rejection damages claims.  See Northwest Airlines Corp. v. Ass’n of Flight Attendants-CWA (In re Northwest Airlines Corp.), 483 F.3d 160, 172 (2d Cir. 2007); In re Northwest Airlines Corp., 366 B.R. 270, 275-76 (Bankr. S.D.N.Y. 2007).

Third, the Court found that, based on the evidence, the stock option program was independent of TWU’s CBA, was not impacted by the CBA process and naturally expired in April 2013.  While two non-union employees separately alleged that they were prevented from exercising their options under the program postpetition, the Court found that there was no evidence that TWU’s members were similarly denied their rights and, in fact, AMR had provided advance notice postpetition to eligible employees about the expiration of the program.

Accordingly, the Court dismissed the union’s claim based on the stock option program.

Based on similar grounds, the Court also dismissed Local 514’s (and another union’s) claim for damages for the termination of a medical prefunding program for retirement, which program allowed employees to prepay for medical expenses before retirement.  The Court, again, found that any lost benefits were the result of a mutual agreement with the unions to enter into replacement CBAs and, in any instance, a unilateral rejection under section 1113 did not give rise to rejection damages claims.

The Court finally rejected claims (a) for company matching funds related to a medical prefunding program and (b) reimbursement of premiums paid by employees towards a supplemental medical plan that was discontinued post-bankruptcy.  Both claims were dismissed on factual grounds.  In respect of the company matching funds, the Court found that certain conditions–i.e., the successful resolution of a section 1114 (retiree) process–had not been met and so the employees were not entitled to this benefit.   In respect of reimbursement of premiums, AMR convinced the Court that the premiums had already been earned by the insurance company, as they provided coverage during a specific period, and therefore they were not refundable.

Takeaway-in complex chapter 11 cases, the manner in which CBAs and retiree benefits are restructured, replaced or rejected is generally not boilerplate.  Union employees potentially affected need to closely monitor how their rights are being restructured during this process.  This can be particularly difficult, as negotiations and exchanges of information between unions and the debtor are often confidential.  Nonetheless, as demonstrated in AMR’s case, in many instances employee benefits can be eliminated during the negotiation process and without resort to sections 1113 and 1114.  If employees would like to protect specific benefits then, their unions might need to (a) clarify (ahead of time) what benefits are being impacted by negotiations or (b) establish carve-outs during this negotiation process to preserve specific benefits.  Otherwise, union employees might be surprised when their benefits have been terminated and they have no recourse.