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labor "Capital is the Superior of Labor" Bankruptcy and the Primacy of Corporate Law Over Workers Rights

This article outlines some of the basics of U.S. bankruptcy law and how it relates to worker rights. I will review the current law and some history, and then go into detail about how bankruptcy affects unions. I then offer some ideas of what workers and unions can do to protect themselves under bankruptcy.

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Members of the Detroit Fire Department hold signs while protesting in front of the Theodore Levin Courthouse in Detroit, Michigan, July 24, 2013. , Jeff Kowalsky/Bloomberg/Getty Images

"Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. " Abe Lincoln, December 3, 1861

"Capital is the Superior of Labor" Bankruptcy and the Primacy of Corporate Law Over Workers Rights

On Thursday July 18, 2013 the "emergency manager" of Detroit, Kenneth Orr declared the city was bankrupt and filed for protection under Chapter 9 of the Federal Bankruptcy Code. One of Orr's main goals was to void the City's labor contracts and cut retirement benefits for both current and future retirees.1

This did not come out of the blue. In  2011 the Republican controlled legislature passed an emergency manager law which gave the Governor powers to by-pass elected municipal officials and appoint emergency managers if it was deemed the City or School District was in financial crisis. This law, PA4, contained stronger gubernatorial powers then the existing emergency manager law, which was enacted in 1990. The voters in Michigan overwhelmingly overturned this law in a referendum in 2012. The Republican legislature quickly voted in another law, PA436, which gave the Governor even greater powers, including the right to abrogate labor contracts, dismiss elected officials, sell off public property, and enact new taxes.  There are six cities in Michigan, with 49% of the state's African-American population, that are now under the control of emergency managers.2   Orr was one of those managers, appointed by the Republican Governor.

The Detroit bankruptcy filing ran into problems when a county judge agreed with AFSCME that using bankruptcy to cut pensions violated the State Constitution. According to the ruling, "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby."

The Detroit bankruptcy case is not an anomaly, as other cities have run into similar problems and more may do so in the future, given the continued fiscal crisis facing cities and states. But bankruptcy is also an issue for the private sector. The Detroit case raises questions about what legal rights workers have to protect their negotiated union contracts when their employer - public or private -  files for bankruptcy. This article outlines some of the basics of U.S. bankruptcy law and how it relates to worker rights. I will review the current law and some history, and then go into detail about how bankruptcy affects unions. I then offer some ideas of what workers and unions can do to protect themselves under bankruptcy.

Bankruptcy and Worker Rights

There are four basic types of bankruptcy under the Federal Bankruptcy Code.  Chapter 7 covers a business liquidating with no plans to reorganize. Chapter 11 covers a business reorganizing itself, with the main purpose of Chapter 11 being to provide relief for the business by voiding contracts and debts it owes. Chapter 9 covers the bankruptcy and reorganization of municipalities and Chapter 13 covers the bankruptcy of individuals.

Under Chapter 11, Section 1113 outlines the steps a corporation must go through before they can terminate a labor agreement with a union, thus differentiating a business-to- business contract from a business-to-labor contract. This section of the bankruptcy code was added by Congress in 1984 in response to a Supreme Court decision in "National Labor Relations Board v. Bildisco & Bildisco."

In 1980 Bildisco Co. began to fail to pay workers their scheduled wage increase and  to make payments into their health & pension fund. Bildisco then filed for bankruptcy under Chapter 11 and received the Courts permission to terminate the union contract. The Union filed charges with the National Labor Relations Board (NLRB), which soon issued a complaint against the Company.  The NLRB ruled that under the NLRA a company could not unilaterally terminate a labor contract and ordered the Company to make the required health and pension payments, and to give the workers their negotiated pay raise.  Bidesco appealed this decision to the Supreme Court.

This set up the confrontation. On the one side was the NLRA, which despite its flaws (especially the Taft-Hartley Amendments) designed to take power away from corporations and give workers some rights to fight collectively against the greater corporate power, and which restrained some corporate rights over workers. On the other side was corporate law, designed to help corporations.

The Supreme Court ruled in the Bildesco case that Corporate law takes precedent over workers law. They ruled that the rights of the bankruptcy law to void contracts superceded the special protections that the NLRA gave to labor contracts. Part of their rationale was that the Federal Bankruptcy Code contained a section that removed Railroad labor contracts from it's jurisdiction, but did not contain an exemption for all labor contracts, therefore all other labor contracts were to be treated under the Bankruptcy Code. They could have used this same logic to rule that since the NLRA did not include a deferment to the bankruptcy Code, none existed.

Reading parts of the Court's decision clearly shows the bias of the Judges in favor of Corporate rights over worker rights.

"2. A debtor-in-possession does not commit an unfair labor practice when it unilaterally rejects or modifies a collective bargaining agreement before formal rejection is approved by the Bankruptcy Court. Pp. 465 U. S. 527-534.

(a) To hold that the debtor commits an unfair labor practice under such circumstances would undermine whatever benefit the debtor otherwise obtains by its authority to request rejection of the agreement....

(b) Since recovery on a claim arising from a debtor-in-possession's rejection of an executory collective bargaining agreement after the filing of a petition in bankruptcy may be had only through administration of the claim in bankruptcy, and not by a suit against the debtor-in-possession under the agreement, the Board is necessarily precluded from, in effect, enforcing the agreement by filing an unfair labor practice charge against the debtor-in-possession for violating S 8(d) of the NLRA. Such enforcement would run directly counter to the Code's express provisions and to its overall effort to give a debtor-in-possession some flexibility and breathing space."

The NLRA which clearly gives workers equal legal standing with the corporation in terms of when and how an existing contract between them is to be terminated, cannot be allowed to prevail, according to the decision, because it interferes with the Bankruptcy Code which is designed to give a debtor in possession (the company) "some flexibility and breathing space."

This case became one of many in which the Supreme Court stood Lincoln's declaration on it's head and ruled, "Capital is the superior of labor, and deserves much the higher consideration."  Ellen Dannin offers one explanation of why Judges so often rule in favor of corporate law over workers law:

"The NLRA was intended to fundamentally alter the roles of employers and the employed. However all workplace litigation takes place under the influences of the pre-NLRA worldview as expressed in the common law. Judges' - and all lawyers - common-law training leaves judges ill equipped to understand labor law. The parts of common law that most affect interpretations of the NLRA are property law, at-will employment, and concepts of master and servant. These construct the idea that employers have "reserved rights" that give them ultimate power over the workplace."3

James Pope offers a quote from Supreme Court member William Rehnquist (Republican, appointed by Richard Nixon).

"From its earliest cases construing the National Labor Relations Act the Court has recognized the weight of an employer's property rights, rights which are explicitly protected from federal interference by the Fifth Amendment to the Constitution. The Court has not been quick to conclude in a given instance that Congress has authorized the displacement of those rights by the federally created rights of the employee."4

Freed from the longstanding NLRB rules that corporations cannot unilaterally void labor agreements, a rash of "bankruptcies" broke out as corporations demanded the right to void union contracts.  Although the Supreme Court decision also counseled that voiding of labor contracts should not be done without proof that the contract was a prime cause of the corporation's problems, this caution was swept aside. The labor movement demanded action by Congress to remedy this wrong decision.

The result was the passage of Section 1113, which states that before filing an application to terminate the union contract a company must do three things:

1. The company must make a proposal to the union as to "necessary" modifications to the contract, including benefits and other protections.

2. The Company must provide the Union with all necessary information to evaluate the proposal.

3. The Company must meet at reasonable times and bargain in good faith.

Some of the information a union can request includes the following:

Rates of pay for all non-union employees and any changes in their wages and benefits that the company plans to effect.

The company's plan for reorganization. This usually takes some time to prepare since banks and the courts demand a very detailed plan.

Expected savings from any cuts they are proposing from the union.

Explanation of how any cuts or other concessions will effect the viability of the company or allow it to continue to operate.

Any specific information about money that is owed to workers, including the reason for the liability, the amount, and the calculations for each individual worker.

After making the initial proposal and providing the relevant information, the company can file an application for rejection of the union contract. The court must schedule a hearing within 14 days, unless it is extended an additional 7 days in the interest of justice or longer by mutual consent.

Rejection of a Union Contract by the Court

The court can approve the rejection of a contract only when the company's proposal satisfies the following three requirements:  (Section 1113 of the Code)

1. That "...based on the most complete and reliable information available at the time of such proposal...it 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 equally..."

This requirement gives the Union some protection. The employer must show that the cuts in workers wages and benefits are "necessary to permit reorganization of the debtor."  This means they cannot just want cuts because they want the cuts. The union can try to argue that there are many other approaches the company can take to achieve the same savings (like cutting bosses salaries, eliminating bonuses given to bosses, etc.)

"...all of the effected parties are treated fairly and equitably..."

This section implies that the employer cannot just look to the Union to make concessions. All employees, salaried and management must make equal concessions. We must point out that in some cases the bankruptcy court (being set up to help businesses) will allow bosses to be given bonuses so that they don't jump ship during the bankruptcy.

2.  The Union rejected the company's proposal without good cause.

We must make sure that we don't fall into the trap of getting mad at the company and rejecting their proposals without negotiating over them, this gives the court an excuse to reject our contract.

3.  The balance of equities clearly favors rejection of the agreement.

In many cases, it is very hard to prove that it is wages and benefits that are causing the company's problem.

What Happens if the Judge Allows the voiding of a union contract?

When a court rejects the Union contract, the entire contract is voided but the only provisions that can be changed unilaterally are those that the employer proposed. On the other hand, a rejection of the contract means that the Union now has the right to strike, because the no strike clause has been voided. In my experience, that threat of striking, while the company is trying to reorganize, is powerful leverage for the union in bargaining against concessions.

Benefits or another blow against workers rights?

The passage of Section 1113 appears to be positive, as it stayed the unilateral right of an employer to terminate a contract. But we must also realize that its passage was another blow against the NLRA.  Remember, prior to the Bildesco decision the rule of the NLRB was that there could be no unilateral termination or modification of a labor agreement without the unions consent. In reality we know that a corporation would threaten to close or have massive layoffs to force the union into bargaining, but still, they did not have the unilateral right to modify or terminate the contract.

Congress could have passed a law restating the NLRB's position, that under the NLRA it is an unfair labor practice for an employer to unilaterally void a contract even when the employer is in bankruptcy.  They did not do that, and by putting some safeguards into the Bankruptcy Code, they asserted the primacy of corporate law over workers law.

What about protections for Municipal workers?

The provisions of Section 1113 only apply to bankruptcies filed under Chapter 11. Municipal bankruptcies are filed under Chapter 9, which has no provisions for protecting union contracts. Chapter 9 also only applies to municipalities in states that have enacted  legislation stating that Chapter 9 may be used by municipalities. In twelve states municipalities can directly file for bankruptcy under Chapter 9.  In sixteen other states there are other procedures cities must go through before they are allowed to file for bankruptcy either under Chapter 9 or under a State law. In 22 states access to Chapter 9 bankruptcy is not allowed. Georgia is the only state that does not allow municipalities to file for bankruptcy.

In the case in Detroit, in 1964, the State Constitution was amended to offer the protection cited above to the pensions of public sector workers.  However, recently there have been Court decisions again asserting the primacy of corporate law in the form of bankruptcy law, over workers rights.5

In 2008, the city of Vallejo, Ca. filed for bankruptcy under Chapter 9. California is one of the states that allows municipalities to file under Chapter 9. The City strove to cancel retiree health benefits and to void the union contracts. The unions challenged this saying it was not allowed under California labor law. According to the IBEW:

"Bankruptcy Judge Michael S. McManus found that under bankruptcy law, the city could impair such rights, and US District Judge John A. Mendez affirmed. On appeal, Judge Mendez determined if a state permits its municipalities to opt into chapter 9 federal law in the first place the state cannot impose other state provisions that later conflict with the federal law. According to Judge Mendez, "[i]f California had desired to restrict the ability of its municipalities to reject public employee contracts in light of state labor law, it could have done so as a pre-condition to seeking relief under Chapter 9." IBEW, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262, 270 (E.D. Cal. 2010).6

A major issue was dodged in Vallejo, because the City did not seek to void its obligations to CALPERS, the State wide pension system that it paid into for employees pensions.

In a more recent case involving the City of Stockton, CA,, the bankruptcy Judge made comments that could open the door for including pensions and CALPERS in the bankruptcy proceedings. Since in most municipal bankruptcies involve restructuring the debt the City owes bonding companies, we can be sure that the bonding companies will push for the cutting of employees pensions as an alternative way for the City to save money.

What can be done?

In the case of Municipal Unions it seems clear that one way to go is to make sure that municipal bankruptcies are kept out of the Federal Bankruptcy Courts and to fight for State laws that protect pension benefits and health benefits of retirees. That's easy to say but harder to get done. In this fight, public sector unions need the support of the public, and by public I mean the working class that is paying for the services. To get this, public sector unions must be in the lead of the forces in the fight for services to the working class and must be out front in exposing corruption in the pubic sector along with exposing bloated salaries of supervisors, managers and some workers, for example police officers.

Private sector unions must agressively use the protections (however limited) that exist in Section 1113 to protect their wages and benefits.  They must also assert in whatever forum is available that bankruptcy laws do not, and should not preempt the rights workers have under the National Labor Relations Act.

Beyond the Immediate Struggle

A 2013 Gallup poll found that only 35% of the public is "very or somewhat satisfied with the size and influence of major corporations."   This is an indication that strong anti-corporate feeling exist among the American people.   We cannot say the same for the legislative and especially the judicial structure of the US, which favors or actively promotes a pro-business ideology.

So here we have an huge contradiction between the feelings of the public and the  prevailing ideology of the governmental structure.  What is lacking to put the "feelings" of the majority, of the working class, into effect?  Most basically, it is the lack of political organization that can or could make a challenge for power.

I believe it is the role of the left, the labor movement, to actively and consciously work to turn these anti-corporate "feelings" into a prevailing, dominant anti-corporate ideology . This will take work and education on many levels, not just separate anti-corporate education, but education integrated into the work of all progressive movements.

What is the connection between corporations and the public sector? It is not just a coincidence that the right wing groups (like ALEC, the American Legislative Exchange Council) that are actively promoting racist laws, attacks on public education, laws against women's rights, anti-immigrant rights, and laws to restrict voting rights, especially of African-Americans and other minorities, are backed and funded by billionaires and corporations. Sitting on the Board of Directors of ALEC are representatives of Bayer, Exxon-Mobil, ATT and many other corporations.    These same groups also back and fund anti-union efforts across the country.

ALEC has provided samples laws, which Republicans have enacted in many States, to curtail voting rights through the use of mandatory ID's, restricting voting hours, and redistricting. The Supreme Court weighed in on this attack on voting rights by removing the most effective sections of the Voting Rights Act.  It is not surprising that Corporations want to restrict voting rights, what better way to ensure the passage of laws that benefit corporations and their drive for profits. It is corporations that benefit from the privatization of public services, from schools to waste water treatment plants.

There are many existing groups and organizations that can be used to provide a wealth of data on the role and power of corporations, and the role of their right wing think tanks. We won't have to re-invent the wheel, just use what is out there more systematically with a goal in mind. We have to begin to think strategically on what we want to happen in this country, not just saying what we want, but constructing plans to win what we want.

Establishing a popular anti-corporate ideology will make it harder for Republicans, their appointed judges and many Democrats to continue to undermine pro worker laws, but that alone is not enough.

The working class in this country also needs more and more demonstrative actions like those on-going in Wisconsin and in North Carolina with "Moral Mondays." Just as in the 1960's anti-war and civil rights movements, people found that they had to demonstrate not just against Republicans but also against Democrats who they thought were their friends. We will have to do that also to Democrats that may be progressive on some social issues, but vote pro-corporate.

But that too is not enough. We must also begin to organize politically and to win elective offices with our own political party, otherwise our demonstrations are just begging our opponents to "do the right thing" which they have shown time and time again of being unwilling to do.

These three things, education, demonstrative action, and political organization must be treated as one and the same and linked with a strategy to achieve some goal.

Finally, I know some folks will say, "why do you have to quote Engels?," but just like the introductory quote by Lincoln, nobody has said it better than Engels did 130 years ago:

"...the democratic republic no longer officially recognizes differences of property. Wealth here employs its power indirectly, but all the more surely. It does this in two ways: by plain corruption of officials, of which America is the classic example, and by an alliance between the government and the stock exchange, which is effected all the more easily the higher the state debt mounts and the more the joint-stock companies concentrate in their hands not only transport but also production itself, and themselves have their own center in the stock exchange... And lastly the possessing class rules directly by means of universal suffrage. As long as the oppressed class - in our case, therefore, the proletariat - is not yet ripe for its self-liberation, so long will it, in its majority, recognize the existing order of society as the only possible one and remain politically the tail of the capitalist class, its extreme left wing. But in the measure in which it matures towards its self-emancipation, in the same measure it constitutes itself as its own party and votes for its own representatives, not those of the capitalists. Universal suffrage is thus the gauge of the maturity of the working class."7

Thanks to Judy Atkins and Stephanie Luce for their help and comments.

David Cohen Retired UE International Rep.

1 http://www.labornotes.org/2013/07/detroit-bankruptcy- takes-aim-pensions

2 http://www.huffingtonpost.com/2013/03/15/michigan- emergency-manager-law-cities_n_2876777.html

3  Ellen Dannin, “Taking Back the Workers Law” ILR Press , 2006  page 24

4  James Pope, “How Americans Lost the Right to Strike and Other Tales”http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id =328238  This site has several excellent papers by James Pope on corporate law vs. workers rights.

5 http://www.news10.net/news/pdf/State-Policies-on- Chapter-9-bankruptcy.pdf Latham & Watkins Client Alert Number 1496 April 5, 2013

6  Go tohttp://www.sourcewatch.org/index.php/ALEC_Corporations for a list of corporate sponsors of ALEC

7  Pg 231-232 “The Origin of the Family Private Property and the State”  Frederick Engels, International Pub. NY NY 1972