Hostess unable to get out of union contracts

by Eric Schroeder
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NEW YORK — Hostess Brands Inc., which has been mired in Chapter 11 bankruptcy reorganization since January, cannot use its Chapter 11 reorganization to modify wages and benefits under union contracts that expired by their terms, according to a June 22 ruling by U.S. Bankruptcy Judge Robert Drain.

The modification of union contracts has been among the main sticking points for Hostess as it has attempted to reorganize. In mid-May, Judge Drain denied a request by Hostess to reject its contract with its biggest union, the Teamsters. The news came a week after Judge Drain said Hostess could reject agreements with its second biggest union, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.

In his June 22 ruling, Judge Drain said there was no power for the bankruptcy court to modify contracts that already expired. And as it pertains to contracts that ended on their own, he ruled that Hostess must use procedures required by non-bankruptcy labor law to modify the terms of employment and benefits for workers covered by expired contracts.

He said the company and the union must “contemplate bargaining in good faith to impasse along with additional requirements going to the reorganization and the equities.” He noted that the requirements, at least the bargaining in good faith to impasse, are in complete overlap with the National Labor Relations Board (N.L.R.B.) process.

“I find it hard to believe that, as a legal matter, the N.L.R.B. and any reviewing court would not take into account the context in which the debtors and the bakers’ locals find themselves, including the effect of uncertainty and the need for a quick resolution in order to obtain exit financing for an acquirer’s agreement to preserve the debtors as a going concern as opposed to having a liquidation,” Judge Drain wrote.

Hostess has argued that the bankruptcy court retains power to modify terms of employment on expired union contracts because the company remains obligated under labor law to abide by the requirements of the expired contracts. But Judge Drain disagreed, saying that although there was “considerable merit to each position,” he didn’t believe that Congress intended “to impose the rejection process on parties to an already expired agreement.”

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