Yes. Back in the 1970s. A lot of litigation ensured, but it all occurred
outside of bankruptcy. I know next to nothing about what occurred. I think
Westinghouse argued that the uranium suppliers had conspired to raise
prices, while had the effect of screwing Westinghouse, which had obligations
to supply uranium to various utlities at much lower prices.
But again generally, the ability to reject executory contracts, whether they
be supply contracts, extended leases, or any other type of contract with
future obligations, are a major incentive for companies to file chapter 11.
David Shemano
-----Original Message-----
From: [EMAIL PROTECTED]
[mailto:[EMAIL PROTECTED]]On Behalf Of Michael Perelman
Sent: Monday, January 15, 2001 2:06 PM
To: [EMAIL PROTECTED]
Subject: [PEN-L:6990] Re: RE: Bankruptcy Question
Thank you very much. Wasn't there a case some time ago in which
Westinghouse reneged on its contract for uranium purchases because the
price had gone up too much?
On Mon, Jan 15, 2001 at 01:10:49PM -0800, David Shemano wrote:
> <<I asked David earlier if he would teach us about bankruptcy. Here is my
> question. As Doug Orr has written discussed, bankruptcy is often used
> as a strategic act to eliminate obligations -- such as to break union
> contracts. How common is that sort of bankruptcy?>>
>
> ------------------------------
>
> Happy to answer, but first you have to learn some bankuptcy law.
>
> One of the most important tools a reorganizing debtor has is the ability
to
> "reject executory contracts." To simplify a rather complex area of
> bankruptcy law, an executory contract is a contract in which both parties
> have remaining material obligations. For instance, if I enter into a
> contract with you in which I agree to paint your house on Saturday, and
you
> promise to pay me $100 when I do it, that is an executory contract (i.e. I
> have to paint your house and you have to pay me $100). Once I paint your
> house on Saturday, and you owe me $100, the contract is no longer
executory,
> because I no longer have any material obligations under the contract.
>
> Anyway, a reorganizing debtor can "reject" executory contracts if they are
> "burdensome". Think of it this way. Imagine that Pacific Gas & Electric
> has a supply contract to purchase X number of kilowatts of electricity
from
> a supplier each month at $.50 a kilowatt. Imagine that the current market
> rate was $.10. The supply contract is an executory contract, because both
> parties have remaining material obligations (supplier has to supply the
> electricity and PGW has to pay for it). If PGW filed for bankruptcy, it
> could "reject" the contract. This means that PGW no longer has an
> obligation to perform under the contract, and all that the supplier will
> have is a pre-bankruptcy claim for damages. This is of critical
importance
> to PGE, because PGE can now go in the marketplace and pay for electricity
at
> $.10 per kilowatt. The supplier may have a large claim for damages, but
PGE
> doesn't care, because the claim simply goes into the pot with other
> pre-bankruptcy unsecured claims and will be dealt with later as part of
the
> negotiation of a plan of reorganization. The important fact is that, on a
> going forward basis, PGE is not bound by the uneconomical contract.
>
> Back in the early 1980s, a number of corporations had the bright idea to
> treat collective bargaining agreements as executory contracts (most
famously
> by Frank Lorenzo of Continental and Eastern Airlines). In effect, the
> corporations argued that the bargaining agreements were burdensome and
> should be rejected, so that the corporations would not be bound on a going
> forward basis.
>
> Initially, the tactic worked, and a number of agreements were rejected.
> However, the unions mobilized politically and in 1984 were able to
> successfully amend the Bankruptcy Code to obtain special treatment for
union
> contracts. In summary, before a bargaining agreement can be rejected, the
> corporation must propose a modification of the agreement to the union
based
> upon the most complete and reliable information available, which
information
> must be provided to the union. If the union reject the modification and
> negotiations are unsuccessful, the corporation can then request that the
> Bankruptcy Court order the contract rejected. If the Bankruptcy Court
finds
> that "the balance of the equities clearly favors rejection of such
> agreement," then the Bankruptcy Court may approve the rejection of the
> bargaining agreement.
>
> My sense is that the amendment to the Bankruptcy Code has worked as
> intended. Rarely, if ever, do corporations file bankruptcy merely to
reject
> collective bargaining agreements. Any such attempt would likely be
> unsuccessful, because it would be almost impossible to prove to a Judge
that
> the proposed rejection was in good faith. On the other hand, where
> corporations are suffering severe financial problems, and labor costs are
a
> major contributor to the problem, unions are willing to enter into
> negotiations and to modify existing agreements. Rarely are the parties so
> far apart that the negotiations fail completely and the corporation
actually
> requests that the agreement be rejected entirely.
>
> There probably are empirical studies of the issue. But the fact that the
> amendment has remained unchanged since 1984 is fairly good evidence that
> both the corporate and union communities are satisfied with the status
quo.
>
> David Shemano
>
>
>
>
>
> --
>
> Michael Perelman
> Economics Department
> California State University
> Chico, CA 95929
>
> Tel. 530-898-5321
> E-Mail [EMAIL PROTECTED]
>
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 530-898-5321
E-Mail [EMAIL PROTECTED]
