SAN FRANCISCO — In an action that stands to drag out Vallejo, Calif.’s already 16-month-old bankruptcy proceedings, the International Brotherhood of Electrical Workers plans to appeal a court ruling allowing the city to reject its collective bargaining agreements.
Michael McManus, chief judge of U.S. Bankruptcy Court for the Eastern District of California, earlier this week allowed the city to reject the union contract. A lawyer for the IBEW, which represents frontline non-public safety workers, said the union plans to appeal the ruling to the Ninth Circuit Court of Appeals.
“This is the first time a court has ever really rejected a public employee collective bargaining agreement,” said union bankruptcy attorney Dean Gloster, of Farella Braun + Martel LLP in San Francisco.
He said the precedent is bad for public workers across the country, unfair to Vallejo’s lowest-paid workers, and based on an incorrect interpretation of the U.S. bankruptcy code.
The union’s legal team can appeal to the Ninth Circuit or the Bankruptcy Appellate Panel in Pasadena, Calif. Gloster said he plans to file with the Ninth Circuit because its judges are more accustomed to dealing with labor law and may be more willing to question the idea of throwing out a contract than bankruptcy judges.
McManus subjected the city’s motion to reject the labor contracts to a three-part test defined in the U.S. Supreme Court’s 1984 case National Labor Relations Board v. Bildisco & Bildisco.
The Bildisco standard required the city to prove that the contract was burdensome; rejection of the contract was equitable to the parties to the bankruptcy; and the parties had tried to negotiate a solution and were unlikely to reach an agreement.
McManus this week said Vallejo met that standard. If his ruling stands, the IBEW will have to renegotiate its contract, which was good through June 30, 2010.
The city is pushing for new contracts because it believes overly generous labor agreements bankrupted it. Labor costs account for about three-fourths of the Vallejo general fund, or about $60 million a year.
By contrast, the city’s general fund municipal market debt is small. It has just over $50 million of certificates of participation outstanding.
Gloster said the U.S. Congress overturned the Bildisco precedent when it enacted Section 1113 of the Bankruptcy Code, which says a company can void labor contracts only if that action is necessary to prevent liquidation of the business. Gloster also argued that the bankruptcy court couldn’t simply allow the city to ignore California’s public sector labor laws.
McManus rejected those arguments in a legal memorandum he issued in March. At the time, he wrote that the Congress had declined to incorporate the changes into the Chapter 9 municipal bankruptcy law. He also said the state had waived local labor law when it authorized its municipalities to file for Chapter 9 protection.
The March memo was his interpretation of the law. He applied it to the Vallejo case by rejecting the IBEW’s contract earlier this week after forcing the parties into mediation with a bankruptcy judge for several months.
Vallejo, which has four public employee unions, reached voluntary agreements on new contracts with the Vallejo Police Officers Association and the Confidential, Administrative, Managerial, and Professional Association.
The International Association of Firefighters last month agreed to rejection of their contracts and to begin an expedited schedule of negotiations that will either yield a new contract agreement or a contract that’s imposed in binding arbitration within several months.
Vallejo, a city of 117,000 people, sought Chapter 9 bankruptcy protection in May 2008. It’s the biggest municipal bankruptcy since Orange County, Calif.’s in 1994.
“There aren’t many municipal bankruptcies, and I think Vallejo is one of the first — if not the first — to really concentrate on employment contracts,” said James Spiotto, head of the head of the special litigation, bankruptcy, and workout group at Chapman and Cutler LLP in Chicago. He agrees with McManus’ interpretation of the law.
He said the judge’s ruling is “unusual, but not unanticipated” because of the law and the economic conditions of local governments.
Spiotto said he hopes the ruling and Vallejo’s experience will show public officials and public employee unions that they need to negotiate seriously to avoid bankruptcy.
Vallejo’s lawyer, Marc Levinson of Orrick. Herrington & Sutcliffe LLP, said the IBEW’s appeal is a waste of time and money for both the city and its workers. He said the city has already spent millions on legal fees that could have been put to better use paying firefighters and IBEW members.
“If they’re going to appeal it, which is their right, it’s just more time, more money, more delay,” he said.
Levinson said it’s better to start negotiating a plan to adjust Vallejo’s debts. A “plan of adjustment” is a legal term for a schedule of payments that the economically battered city can actually afford to pay after the bankruptcy. It’s the last stage in a bankruptcy, and requires the parties to come to an agreement on the damages that unions and bondholders will be paid for their losses under the bankruptcy.
“We still have to fight about damages, which could be substantial, but at least we’re at the point now where we really have to move forward on the formulation and negotiation of a plan,” Levinson said.
Bankruptcy damages are generally paid at pennies on the dollar from the leftover funds in a bankruptcy. The payments are often stretched out over years or decades.
Gloster said the IBEW will continue to negotiate on a new labor contract, even as it appeals McManus’ ruling to higher courts. He said the city could end the case now if it would offer its front-line workers the same sort of terms as it offered managers.
His comments suggest the union’s appeal may be both a principled stance on the sanctity of its contracts and a way of keeping pressure on the city to offer the IBEW the best deal possible.
Gloster said he couldn’t discuss the precise details of the labor negotiations, but said the main point of contention for the IBEW is that its workers — Vallejo’s lowest paid — are being offered less generous health benefits than police, firefighters, and management employees.
