Good news for unionized healthcare facilities in bankruptcy

Two court cases – including one concerning a famous casino – could have a huge impact on the healthcare industry. As a matter of fact, they could spell financial life or death for some financially troubled hospitals, nursing homes, assisted living facility owners and operators.

The issue is whether a facility must maintain an expensive collective bargaining agreement, or whether bankruptcy offers a way out.

Although private sector unionization in the United States has generally declined over the years, that is not the case in healthcare. According to the Bureau of Labor Statistics, approximately 11.1 percent of healthcare workers – people in healthcare practitioner, technical and support occupations – were members of a union in 2013. This number is nearly double the nationwide private sector union membership rate of 6.7 percent.

Unions can be quite costly for healthcare facilities for many reasons, including the level of difficulty involved in negotiating new terms under a collective bargaining agreement (CBA) in the face of changing economic times. In fact, onerous CBAs have, in part, led to the filing of bankruptcy by some healthcare facilities.

As the economy slowed and consumers tightened their belt buckles on expenditures, businesses felt the financial repercussions. Unionized companies across business sectors began looking for ways to reduce the financial burdens. Often times, an onerous CBA would lead a financially strapped business owner into bankruptcy.

Where CBAs have already expired, the employer is required to bargain to a good faith impasse before it can implement any unilateral changes to the expired CBA. However, unions and their members are reluctant, and in many cases lack any incentive at all, to meet the employer in the middle when it comes to negotiating away the financial comforts they had become used to and due to the economic downturn, knew they could not find elsewhere.

Onerous CBAs have, in part, led to the filing of bankruptcy by some healthcare facilities.

Interestingly, when a unionized business files for bankruptcy, the Bankruptcy Code allows a bankruptcy judge to reject an existing CBA under section 1113(c) if certain conditions are met (i.e., the debtor submits a proposal to the union based on complete and reliable information, containing only modifications necessary for reorganization and ensures that all affected parties are treated fairly and equitably).

However, in situations where a CBA has already expired, there was, at least until recently, a split of opinions amongst the courts as to the powers of a bankruptcy court to reject an expired CBA.  Unions argue in such scenarios that the debtor’s obligations under an expired CBA are statutory in nature and not contractual, because they arose pursuant to the status quo obligations under the National Labor Relations Act (NLRA.) Therefore, the unions claim that the bankruptcy court does not have authority to reject the expired CBA because it is no longer an executory contract.

Debtors liken the bankruptcy court’s powers to reject an expired CBA to that of its power to reject an ongoing CBA.

In the two most recent decisions relating to whether a bankruptcy court judge can reject an expired CBA, the United States Bankruptcy Courts for the District of New Jersey and the District of Delaware held that the debtors could reject and modify an expired CBA. In In re 710 Long Ridge Road Operating Company II, LLC, the New Jersey Bankruptcy Court found, in part, that the terms of the CBA were so onerous that absent modification the nursing homes would not be able to successfully emerge from bankruptcy and that hundreds of elderly patients would be forced to move, potentially compromising their health and well-being.

In October, the Delaware Bankruptcy Court allowed Trump Entertainment Resorts, Inc. and its affiliated debtors, (including Trump Taj Mahal Associates, LLC), to reject the CBA between Trump Taj Mahal Associates, LLC and the union, UNITE HERE. The court also allowed the debtors to implement the modified CBA they proposed.

The Court in the Trump Taj Mahal case relied on the 710 Long Ridge decision noting, “the modification is essential to the continuation of the debtor’s business or to avoid irreparable damage to the estate.” The Court reasoned that there was “no logic” in the “congressional intent” to distinguish between expired and unexpired CBAs.

The unions in both of cases have appealed. As of the writing of this article, the appeal in 710 Long Ridge is still pending before the District Court for the District of New Jersey but the union is seeking to get the appeal certified directly to the Third Circuit. On the other hand, the parties in Trump have agreed to have the appeal go directly to the Third Circuit. Although it is unclear what the Third Circuit will decide, one thing is for sure – debtors and other financially troubled businesses with a unionized workforce will be paying close attention.

Whether a bankruptcy court finds that it has jurisdiction to allow a debtor to reject an expired CBA is a very important issue to hospitals, nursing homes and assisted living facility owners and operators as well as their secured lenders. Without this relief, it is likely that many debtors in this situation will face liquidation and the secured lenders will be forced to foreclose on the properties securing their loans.

Although it remains to be seen how other courts will handle this issue, a main takeaway is the importance of presenting credible and convincing evidence that the reorganization will not be financially feasible with the terms of the expired CBA still in place.

Bonnie Hochman Rothell is a partner in the Litigation Practice of Morris, Manning & Martin, LLP law firm in Washington. Jessica Pillars is an associate in the firm’s Real Estate Litigation practice.