Court Rules Bankrupt Municipality Can Void Union Contracts

In a first which will be watched by states and municipalities around the country which have grossly underfunded their pension and benefit programs for their emloyees, a judge ruled that Vallejo California's bankruptcy permits it to void the contracts it had with its unions. Pamela A. MacLean writes in
In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.

Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers' union contracts

U.S. Bankruptcy Judge Michael McManus held March 13 that when Congress enacted
11 U.S.C. sec. 1113 to limit companies from outright rejection of union contracts it limited it to Chapter 11 bankruptcies. By failing to extend the limits to Chapter 9, which covers municipal bankruptcy, McManus said cities have broader latitude to break existing union pacts, In re City of Vallejo, 08-26813-A-9 (E. Dist. Calif.)

"This will have a huge effect nationwide if it is upheld," said Kelly Woodruff, of
Farella, Braun & Martel in San Francisco, representing the firefighters and electrical workers unions. Woodruff said the unions would certainly appeal if the city ultimately voids the existing contracts with the two unions. "And I think we have a good chance of success," she said.