Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

companies thinking about closing a worksite or laying off employees should consider WARNAct issues.Another issue the debtor should consider is treatment of employee wages earned prior to theChapter 11 case. Employee claims for ―wages, salaries, or commissions, including vacation,severance, and sick leave pay‖ earned within 180 days before the bankruptcy filing have fourthpriority status up to $12,475. Practically speaking, these wages will get paid, however, to theextent the debtor seeks to exceed the cap, it would be seeking to pay unsecured employeeclaims before general unsecured claims, which some courts may be reluctant to authorize.Additionally, if the debtor lacks unencumbered cash to pay employee claims, it will have toseek court permission to use cash collateral or obtain debtor-in-possession financing.Therefore, the debtor should attempt to pay these claims prepetition, or, if that is impracticable,seek court authorization to pay the prepetition amounts owing employees.Finally, on a more granular, practical level, the debtor may pay its employees by check beforethe bankruptcy filing, but the check may not clear until after the filing. Assuming the debtor’sfinancial institution puts a hold on the debtor’s accounts in the early stages of a bankruptcy case(most do), the check will bounce and the employee will therefore be left with a claim in thebankruptcy case that cannot be paid absent court approval. In this case, in anticipation of afiling, the debtor could pay employees by direct deposit or wire transfer to ensure that thefunds are received before the Chapter 11 filing.Collective Bargaining Agreements and UnionsConsider a simple example of Company and Union, who have signed a collective bargainingagreement (―CBA‖) in the ordinary course of business providing for wages at $15/hour andsubstantial healthcare benefits. Now assume that, after the agreement is signed but has notexpired by its terms, market wages in Company’s industry have shrunk to $10/hour, benefitshave been substantially reduced, and the market has forced Company into Chapter 11protection. May Company start paying the employees $10/hour and cut benefits, now thatCompany is in bankruptcy?The answer is no. Enacted after a Supreme Court holding widely seen as unfavorable to unions,Section 1113 establishes procedural and substantive hoops through which the debtor must jumpbefore it can alter or reject a CBA.Procedurally, Section 1113 commands the debtor to engage in extensive negotiations with theapplicable union before it files a motion to reject the CBA between the debtor and said union. Ifthe debtor jumps through the following nine hoops, it may file a motion to reject the CBA:(1) The debtor must ―make a proposal‖ to the union to modify the CBA;(2) The proposal must be ―based on the most complete and reliable informationavailable at the time‖ of the proposal;(3) The proposal must provide for modifications that are ―necessary to permit thereorganization of the debtor;‖48