Vallejo Uses Bankruptcy to Void Union Contracts

July 12, 2009 by Beeson Tayer & Bodine

The City of Vallejo bankruptcy case is the first significant example of a city attempting to use a Chapter 9 bankruptcy to void Union contracts. In May 2008 the City filed its petition in federal Bankruptcy Court, and then filed a motion to reject all of the City’s collective bargaining agreements. The unions representing the City’s employees responded by objecting to the City’s eligibility for Chapter 9 relief.

The Bankruptcy Judge overruled the unions’ objection and determined that the City had satisfied the requirements for rejection of the union contracts: the City was insolvent on the date of the filing of the bankruptcy petition, the petition was filed in good faith, and the City negotiated in good faith with the unions prior to filing for bankruptcy relief.

The unions appealed, but on June 26, 2009, the 9th Circuit’s Bankruptcy Appellate Panel affirmed the Bankruptcy Judge’s ruling.

Meanwhile, in March 2009, the Bankruptcy Judge ruled that the City may reject its collective bargaining agreements with the unions with whom the City had not reached settlement, but only if certain factors were satisfied. The Judge declined to determine whether the City had satisfied those factors in order to give the parties every opportunity to settle the motion. In April the Judge issued an order compelling the City and the unions to mediate their disputes over whether the contracts should be rejected, the damages that would flow from rejection, and the terms of any new agreements in the event of rejection. The Court chose another bankruptcy judge to serve as mediator. If the mediation does not result in a settlement, the Judge will rule on the rejection motion. As of press time, the case was still pending with the court.

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