In re City of Vallejo, 403 B.R. 72; 2009 Bankr. LEXIS 705 (Bankr. E.D. Cal. Mar. 13, 2009)

In re City of Vallejo, 403 B.R. 72; 2009 Bankr. LEXIS 705 (Bankr. E.D. Cal. Mar. 13, 2009)

 
John Gallagher & Todd Duffield, of Paul, Hastings, Janofsky & Walker LLP, consider the ruling by a California bankruptcy court that a chapter 9 debtor is not bound by the requirements of Code section 1113 or any state law in rejecting a collective bargaining agreement. The decision, however, leaves some important issues unresolved, including whether a municipal debtor can unilaterally reject a CBA and subsequently seek bankruptcy court approval.
 
The authors write: In In re City of Vallejo, 403 B.R. 72, 2009 Bankr. LEXIS 705 (Bankr. E.D. Cal. Mar. 13, 2009), the Bankruptcy Court for the Eastern District of California ruled that a municipal debtor in chapter 9 reorganization proceedings is not required to comply with section 1113 of the Bankruptcy Code in order to reject a collective bargaining agreement. The decision leaves uncertain whether a municipal debtor can unilaterally reject such an agreement without prior judicial approval or without compliance with state law.

In deference to state sovereignty, when Congress extended the federal bankruptcy law to municipalities, it deferred to the states the right to decide whether to allow their municipalities to take advantage of the federal law. This ongoing role for state law has led to uncertainty about the interplay of state law with other provisions of the Bankruptcy Code. The recent City of Vallejo decision illustrates this uncertainty, disagreeing with a prior decision and finding state law completely preempted.

Congress enacted section 1113 in 1984, in response to a Supreme Court decision holding that (1) a collective bargaining agreement is an executory contract subject to rejection by a chapter 11 debtor under section 365 of the Bankruptcy Code and (2) the debtor does not commit an unfair labor practice when it unilaterally modifies or terminates the agreement after filing for bankruptcy but before the court approves rejection of it. Section 1113 creates certain procedural and substantive requirements which a chapter 11 debtor must satisfy prior to making unilateral changes to or rejecting a collective bargaining agreement. Congress, however, did not make section 1113 applicable to chapter 9.
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