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Bankruptcy and contracts

February 24, 1984



In significantly broadening the ability of the US business community to abrogate existing contracts with labor unions in situations where firms are facing bankruptcy, the Supreme Court of the United States has drawn sharp criticism from union leaders and some congressional lawmakers. Until such time as the issue is more clearly resolved - either through subsequent court action or by Congress - it is imperative that both management and labor make every possible good-faith effort to reach mutually satisfactory agreements where existing contracts could be terminated.

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The high court, in effect, announced two crucial rulings:

* By a unanimous vote, the Supreme Court said that a bankruptcy court could abrogate an existing labor contract if the contract ''burdens the estate.'' The court could allow the company to abrogate the contract without a need to show that it would otherwise face imminent failure.

* By a much closer 5-to-4 vote the court ruled that once a firm files a bankruptcy petition, it may unilaterally breach its union agreements while awaiting a formal permission from a bankruptcy court that it may do so. Often months elapse between the time a firm files for bankruptcy and the time when a bankruptcy court rules on the request.

Union leaders maintain that the ruling will encourage the use of bankruptcy proceedings to end labor contracts.

Several congressmen plan to push legislation to overturn the two aspects of the ruling.

Such rulings should not be allowed to be used for union-busting purposes. Unfortunately, many firms in recent years have faced particularly challenging circumstances because of adverse national and global economic conditions. Bankruptcy has been one of the ways by which firms have sought to survive.

Finally, if workers are to give up major benefits - taking a wage cut, for example - then they should receive something in return. Employees of Eastern Airlines, for example, recently agreed to accept stock in the company in return for making wage cuts. The Eastern situation did not involve a bankruptcy proceeding. But it is a good precedent. Employees should be assured that if their company does survive, in part because of their sacrifices, they will have a tangible stake in the future prosperity of the firm.