Delphi to Present Case To Toss UAW Contract

When auto parts giant Delphi Corp. appears in bankruptcy court this week, it will swing the biggest cudgel it has to wrest significant concessions from workers: a request of the judge to tear up the United Auto Workers union contract.

Trying to dissolve union contracts has become the weapon of choice for troubled companies when workers resist cuts in wages and benefits. Struggling airlines recently resorted to the tactic as they sought to trim costs and dig themselves out of bankruptcy protection. Their acrimonious battles with their workers helped set the stage for the drama playing out at Delphi. If the airline industry is any measure, however, the warring parties often resolve their differences before a labor agreement is ripped up. The threat of scrapping a contract has a way of forcing a meeting of the minds and a settlement out of court.

In Delphi's case, it is tough to handicap whether either side will cave before the judge rules, possibly within a month. Delphi claims it would be forced to liquidate if the labor contract stands. The UAW says it would strike if the contract is tossed. Caught in the middle is General Motors Corp., Delphi's largest customer and the world's largest automaker. A strike at Delphi could cripple production at GM plants at a time when the automaker is trying to reverse the $10.6 billion loss it posted last year.

Enter Judge Robert D. Drain, who will hear arguments in the Delphi matter today and tomorrow at the U.S. Bankruptcy Court in the Southern District of New York. Because there is so much at stake, many expect Drain to resist ruling in the case and force the sides to "talk and talk and talk and talk and talk," as one financial analyst put it, until they settle out of sheer exhaustion, a strategy recently used with some success in the airline industry.

"Bankruptcy judges generally hate to issue this kind of decision," said William J. Rochelle III, a bankruptcy lawyer at Fulbright & Jaworski. "They understand it will have the effect of lowering the standard of living for hundreds of employees. It's probably the single most distasteful duty that a bankruptcy judge will have."

When the bankruptcy code took effect in 1978, debtors gained the right to reject or assume most contracts. Not too long after, companies began arguing that collective bargaining agreements should be treated like any other, nonunion contract.

Continental Airlines became the first in its industry to win the right to dissolve a union contract after it filed its first bankruptcy case in the early 1980s. The decision then triggered a strike after the carrier ditched the contract. A string of legal battles followed and later Congress changed the bankruptcy law so that courts must hold hearings like the one scheduled for Delphi.

Attempts to throw out union contracts also played a role in recent bankruptcies at Delta Airlines Inc., Northwest Airlines Corp., US Airways Group Inc. and UAL Corp.'s United Airlines.

Alan Gover, a lawyer who has represented lenders in the bankruptcies of Continental and other airlines, said the move is "done sparingly" and only when labor costs threaten a company's survival.

"You'd be crazy to do this if this was an inconsequential cost because you'd terribly damage labor relations and the court would likely rule against you in any case," said Gover, a partner at Dewey Ballantine LLP.

But as the airline industry's track record shows, once a major company gets permission to abrogate its contracts, its financially weak rivals often pursue a similar strategy in bankruptcy court, said Harley Shaiken, a professor at the University of California at Berkley who specializes in labor issues.

"It's the equivalent of the four-minute mile," Shaiken said. "Once somebody has done it, the psychological barrier is a lot lower for many other companies."