## Facts

- Carey Transportation, Inc. operated airport commuter bus service between New York City and JFK and LaGuardia and experienced escalating operating losses from at least 1981 through 1985.
- Local 807 was the exclusive bargaining representative for Carey’s drivers and station employees; the parties had two CBAs executed in 1982 after a 64-day strike, set to expire in 1986.
- Carey implemented cost-cutting measures before bankruptcy, including layoffs of station workers and concessions from a separate mechanics’ union, but continued to report substantial annual losses.
- In March 1985, Carey sought concessions from Local 807; union membership rejected the proposal.
- Carey filed a voluntary Chapter 11 petition in April 1985 and continued operating as debtor-in-possession.
- Post-petition, Carey proposed CBA modifications aimed at reducing labor costs by about $1.8 million annually for three years, including wage freezes/reductions and benefit cutbacks, based on projections showing continued losses without substantial relief.
- Local 807 leadership advanced a counterproposal projecting materially lower savings; Carey rejected it as insufficient to reach break-even.
- Internal union conflict escalated when a Drivers Committee formed and declined to participate in much of the bargaining.
- Carey moved under 11 U.S.C. § 1113 to reject the CBAs; the bankruptcy court approved rejection, and the district court affirmed.

## Issues

1. Whether Carey met the requirements of 11 U.S.C. § 1113 to reject its CBAs by proving its proposed modifications were necessary to reorganization and fair and equitable.
2. Whether Local 807 refused Carey’s proposal without good cause within the meaning of § 1113.
3. Whether the balance of the equities clearly favored rejection of the CBAs.

## Decision

- The Second Circuit affirmed the district court’s judgment upholding the bankruptcy court’s order authorizing rejection of the CBAs under § 1113.
- The court agreed that Carey’s proposed modifications were necessary to permit reorganization, not merely desirable, given sustained losses and break-even requirements.
- The court upheld findings that the proposal was fair and equitable because Carey had pursued savings from other employee groups and the changes sought aligned compensation more closely with market conditions.
- The court upheld the determination that Local 807 refused the proposal without good cause, where the union’s counterproposal did not meet the savings needed for reorganization and internal union dissension did not justify refusal.
- The court agreed the equities favored rejection because failure to obtain labor cost reductions risked liquidation and loss of all jobs, while rejection offered a chance to preserve employment through reorganization.

## Legal Principles

- Under 11 U.S.C. § 1113, a debtor seeking to reject a collective bargaining agreement must show, among other requirements, that it made a proposal to modify the agreement and that the proposed modifications are necessary to permit reorganization.
- The debtor must also prove the proposal is fair and equitable to affected parties and that the union refused the proposal without good cause.
- Even if the statutory prerequisites are met, rejection requires a further showing that the balance of the equities clearly favors rejection.
- “Necessary” under § 1113 requires changes tied to enabling reorganization (such as achieving break-even), not simply improving profitability; “good cause” may be lacking where the union rejects a necessary and adequately supported proposal while offering insufficient alternatives.

## Conclusion

The Second Circuit held that Carey satisfied § 1113’s requirements and could reject its CBAs because its proposed wage and benefit modifications were supported by severe financial conditions, were structured to reach break-even in a manner not unfairly singling out Local 807, the union’s refusal lacked good cause given inadequate alternative savings, and the equities favored rejection to avoid liquidation.


Truck Drivers Loc. 807, Int’l Bhd. of Teamsters v. Carey Transp., Inc., 816 F.2d 82 (2d Cir. 1987)