The anticipated bankruptcy of trucking giant Yellow Corp. stands to have a major impact on collective bargaining agreements that cover roughly 22,000 workers, offering a chance to test when union contracts can survive insolvency proceedings.
Bankruptcy law contains provisions that arguably give unions more leverage to fight to keep their contracts in place as the company decides how to pay creditors, reorganize, or wind-down. Businesses, for example, generally face a higher bar to reject a bargaining agreement during a Chapter 11 proceeding than some other types of contracts.
Those measures will likely come into play between Yellow and the Teamsters, which represents a large swath of the company’s 30,000 workers. The union threatened to go on strike last month after the company initially failed to make a $50 million payment for employee benefits.
On Monday, the union said it was served with a legal notice that the Nashville, Tenn.-based company is ceasing operations and liquidating.
Teamsters General President Sean M. O’Brien called the news “unfortunate but not surprising.”
“Yellow has historically proven that it could not manage itself despite billions of dollars in worker concessions and hundreds of millions in bailout funding from the federal government,” O’Brien said.
In June, the company said a modernization effort opposed by the Teamsters leadership was critical to its “ability to survive” because of its need to refinance $1.3 billion in debt, including a $729.4 million US Treasury loan due to mature in September 2024.
A Yellow spokeswoman on Monday afternoon told Bloomberg Law it had no announcements.
Chapter 11 Path?
Yellow may be contemplating a Chapter 11 filing that could still ultimately lead to the company’s liquidation.
Bruce Chan, a transportation and logistics analyst at investment banking firm Stifel, said he believes a liquidation is far more likely than a reorganization. In recent years, notable liquidations in the industry include New England Motor Freight Inc., Celadon Group Inc., and Comcar Industries Inc.
There’s usually a small pool of potential buyers within the industry, and those outside the industry may be reluctant to pick up associated labor contracts for a variety of reasons, Chan said.
“These are extremely difficult businesses to run and manage,” Chan said. “Yellow has already been through two out-of-court restructurings and it hasn’t really done much obviously—the company is still struggling significantly.”
In Chapter 11, it often falls to creditors or the Department of Justice’s bankruptcy watchdog, known as the US Trustee, to try hold the debtor’s management accountable, said Tristan Axelrod, a partner at Brown Rudnick LLP’s bankruptcy and corporate restructuring practice group.
Large companies rarely file for Chapter 7—the bankruptcy statute meant for businesses closing up shop—even when their only option is to liquidate. That’s because under Chapter 7, a trustee is appointed who could look into litigation claims against the managers responsible for the company’s downfall, Axelrod said.
“All that to say—liquidation is always likely and, just observing what’s been publicly reported, seems likely here as a matter of procedure,” Axelrod said. “More important is whether any assets (eg trucks) or operations (eg entire shipping contracts or business lines) can be sold off intact first. If so, maybe some jobs are saved and new CBAs negotiated.”
Unions Amid Bankruptcy
Bankrupt companies often sell off assets using a competitive process called a “363 sale” that has the benefit of stripping liens and other baggage.
But collective bargaining agreements are generally dealt with under Section 1113 of the bankruptcy code, which was designed to give unions more leverage. Congress added the provision in 1984 after a series of cases where businesses used the bankruptcy code to subvert union contracts.
“The showing must be particularly high for the court to reject the CBA,” said Marshall Babson, a Seyfarth Shaw attorney who held a Democratic seat on the National Labor Relations Board at the time.
In Chapter 11, a debtor can often choose to reject, continue, or hand over various contracts. Under Section 1113, a bankrupt business must first have to make a reasonable proposal to change a CBA before rejecting it, Axelrod said.
That process sometimes plays out with the bankrupt business starting a competitive sale process for all or parts of its assets, Axelrod said. A debtor may promise to try to find a buyer who will try take up the CBA and give preference to those bids by giving them extra value at an auction, he said.
One of the more recent high-profile conflicts involved the bankruptcy of the Trump Taj Mahal casino in Atlantic City, N.J. The US Court of Appeals for the Third Circuit ruled in 2016 that then-candidate
The Third Circuit sought to resolve a conflict between Section 1113 and the National Labor Relations Act, the 1935 law that gives union rights to private sector workers. The bankruptcy code allows businesses to reject labor contracts under certain circumstances, while the federal labor law prevents employers from unilaterally changing labor agreements, even if those agreements have expired.
The court sided with the bankruptcy law. Section 1113, the court noted, made no mention of the employer maintaining the status quo after an agreement expires.
‘Slim Pickings’
Unions often find themselves in the back of the line, fighting for scraps after banks and other creditors have already picked the corpse clean, said Seth Goldstein, an attorney for the Amazon Labor Union in New York. “There’s slim pickings,” he said.
Axelrod said he was hard-pressed to find an example of a Chapter 11 sale process that resulted in a buyer taking up the CBA in recent years. One of the biggest reasons is that the contracts almost always require employers to contribute to a union’s pension fund and incur “withdrawal” liability calculated in connection with the funding levels of the funds, Axelrod said.
“The Teamsters’ multi-employer pension funds are, very generally and notwithstanding some assistance under the 2021 stimulus bill, severely underfunded,” Axelrod said. “Pensions are generally underfunded, so the withdrawal liability can be enormous—it can go over a million dollars per union employee.”
The issue has already attracted government attention. The Pension Benefit Guaranty Corporation, the US agency meant to protect private-sector pension plans, told Bloomberg Law it’s “closely monitoring the situation” at Yellow Corp.
Yellow said last week it was discussing with several parties the sale of Yellow Logistics Inc., its non-union, third-party logistics subsidiary. The fate of Yellow’s $137 million lawsuit against the union in June for “unjustifiably blocking” integration of its trucking divisions isn’t yet clear. The company has criticized O’Brien’s “militant approach” to opposing the changes.
CBA Rejection
Potential buyers may place bids for assets under the condition that Yellow reject the CBA, allowing a winner to pick them up without the legacy liabilities, Axelrod said. That would give Yellow the ability to tell a court that rejecting the CBA is reasonable because they can’t sell the assets, he said.
Chan said Yellow’s assets are probably worth close to peak. He pointed to a good industrial real estate market and recent upgrades to Yellow’s truck and trailer assets stemming in part from a controversial $700 million Cares Act loan to buy new equipment.
“The sooner you can get rid of those assets, the sooner you can put them on the market,” Chan said.
The Teamsters can’t afford to give up ground because it would undermine their other contracts with other trucking companies—especially the tentative agreement with UPS covering 340,000 workers, said Michael Belzer, a Wayne State University economics professor who studies freight trucking.
If Yellow rejects its union contract in bankruptcy, generally the withdrawal liability is triggered and the bankruptcy estate pays it—but likely at only pennies on the dollar, Axelrod said.
Employers and their lawyers and other professionals have become “very, very savvy at playing ‘hardball’ against creditors in bankruptcy (unions and otherwise),” he said.
“It is a very, very common playbook seen in many recent cases involving Teamsters, mine workers, and many other unions and CBAs,” Axelrod noted.
But that process isn’t required, Axelrod noted. Yellow can still negotiate with its union, and try to file a plan that doesn’t sell its assets by stripping contracts, he said.
