Judge Orders Vallejo, Two Unions Into Mediation

SAN FRANCISCO - U.S. District Bankruptcy Judge Michael McManus ordered Vallejo, Calif., and two labor unions into mediation, delaying a ruling on the city's bankruptcy court motion to reject its union contracts in a final effort to force the sides to come to an agreement.

McManus ordered the two sides into mediation - officially a settlement conference - with Chief Judge Elizabeth L. Perris of the U.S. Bankruptcy Court for the District of Oregon, who hasn't previously been involved in the case.

"The parties shall attempt to resolve the city's motion to reject the collective bargaining agreements and the unions' objections to such motion, as well as all related matters, including without limitation, rejection damages and claims and the terms of new or modified collective bargaining agreements," McManus wrote in an order filed late Monday.

Vallejo, a working-class city of about 120,000 people in the San Francisco Bay Area, sought Chapter 9 bankruptcy protection in May 2008, saying it could no longer afford labor contracts that offered its public workers some of the region's most generous pay packages. It was the biggest municipal bankruptcy filing since Orange County, Calif.'s 1994 bankruptcy.

Two of the city's four unions - representing police officers and professional employees - have agreed to new contracts that the city believes it can afford. Two other unions,the International Brotherhood of Electrical Workers and the International Association of Firefighters,remain at loggerheads with city negotiators and continue to appeal McManus' September 2008 ruling that Vallejo was eligible for bankruptcy.

The city has been pushing McManus for a ruling on its motion to reject the remaining labor contracts, and the judge has previously said the law allows municipalities to reject collective bargaining agreements under certain conditions. But McManus has pushed the sides to continue negotiations.

"We are very happy with this order, and both unions sincerely hope to reach a resolution with the city," said union attorney Kelly Woodruff, of Farella Braun + Martell LLP in San Francisco. She contends that there are "very few remaining issues of dispute" between the city and its workers.

Vallejo, which is represented by Orrick Herrington & Sutcliffe LLP, sees less chance that the two sides will reach an agreement after many months of stalemate, but it did applaud the choice of a bankruptcy judge as mediator.

While mediators generally offer guidance and suggestions to nudge negotiators toward agreements, they don't have the power to impose resolutions like arbitrators. Still, the appointment of a senior bankruptcy judge may force the sides to take mediation seriously.

"While the city would have preferred a ruling on the merits [of the motion to reject the contracts], it is pleased that Judge McManus chose a bankruptcy judge to serve as the mediator, as suggested by the unions," the city said in a statement. The city said it is open to a settlement whether it comes through mediation or a judicial ruling.

Woodruff acknowledged that a bankruptcy judge will have particular clout in guiding negotiations. She said Perris would understand the context of the bankruptcy labor negotiations, including arguments over bankruptcy damage claims.

Vallejo would owe workers at least $16 million in bankruptcy damages if their contracts were rejected, according to Woodruff. The city would probably argue for a lesser sum and would seek to pay just pennies on the dollar for any claims when it exits bankruptcy.

"A bankruptcy judge as a mediator should be good at getting both sides to understand that particular aspect of the dispute," Woodruff said. "Although our preference was for a labor mediator, having a bankruptcy judge from outofstate serve in the role could be very useful."

For reprint and licensing requests for this article, click here.
Bankruptcy
MORE FROM BOND BUYER