Distinguishing Bildisco in Municipal Bankruptcy: Why the Business Judgment Standard Should Apply to CBA Rejection in Chapter 9

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Courts and scholars analyzing Chapter 9 of the Bankruptcy Code have been erroneously applying the Supreme Court’s opinion in NLRB v. Bildisco & Bildisco, asserting that this opinion sets the legal standards by which a bankrupt city may reject its union contracts. This Case Note takes a different view and argues that the traditional business judgment standard rather than Bildisco should govern a bankrupt city’s rejection of labor contracts

Cities have made national headlines in recent years by filing for bankruptcy, and one of the biggest issues in this wave of municipal bankruptcies is labor debt. By filing a petition under Chapter 9 of the Bankruptcy Code (Code), cities may use 11 U.S.C. § 365(a) to reject labor contracts with public sector employees, subject to the “approval” of a bankruptcy court. The Code, however, does not establish what approval standard a bankruptcy court should apply. Courts that have addressed this issue hold that the appropriate rejection standard is Bildisco, a 1984 Supreme Court opinion that dealt with the rejection of private sector labor contracts in Chapter 11 cases. Commentators generally agree that this approach is correct. To the extent that commentators disagree with this approach, they argue that state law should provide the standard for rejecting labor contracts. This Case Note disagrees with all of these courts and commentators, arguing instead for the traditional business judgment standard.

In Part I, this Case Note examines the background of the Bildisco rejection standard and its erroneous application in Chapter 9 cases. Arguing that the Bildisco standard is not controlling in a Chapter 9 case, Part II explains why it is limited to labor contracts regulated by federal labor law and subject to rejection in Chapter 11 cases. In Part III, this Case Note analyzes Chapter 9 of the Bankruptcy Code and shows why the business judgment standard should control collective bargaining agreement (CBA) rejection.

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