County May Have Law on Its Side in Voiding Contracts

Orange County appeared to have the law on its side as the Board of Supervisors tore up collective bargaining agreements with county employee groups Thursday in order to rescind pay raises and make it easier to lay off hundreds of workers in coming weeks.

The job cuts are part of an emergency effort to trim $40.2 million from the county budget. Orange County filed for bankruptcy protection Dec. 6 after disclosing that the investment pool run by the county treasurer had lost $2.02 billion from risky bond investments.

The board’s unanimous decision Thursday to rewrite seniority-based layoff policies that have been central to labor agreements is not going to be accepted gracefully.

John H. Sawyer, head of the Orange County Employees Assn., which represents nearly 70% of the county work force, expressed outrage at the board’s vote to allow department heads to order layoffs based on productivity. He said his group would consider a court challenge.

The move could “violate the vested constitutional rights of county employees” and is “predicated on a crude and ill-thought-out application of Chapter 11 to a Chapter 9 proceeding,” said John Sawyer Jr., the employee group’s attorney and son of its general manager.

“Eliminating seniority seems to be designed to replace the merit system with favoritism,” he said.

Some bankruptcy law specialists say an oddity of municipal bankruptcy law allows the board action.

In revoking sections of their collective bargaining agreements with nearly 16,000 county employees, the supervisors and the county’s attorney cited a 1984 Supreme Court decision that says a company in bankruptcy can unilaterally abandon a collective bargaining agreement if revisions cannot be agreed upon.

That case involved the Continental Airlines bankruptcy in 1983, when then-Chairman Frank Lorenzo took the airline into Chapter 11 bankruptcy specifically to break its union contracts during a protracted labor dispute.

Acting at the behest of labor unions outraged by the airline’s bankruptcy, Congress in 1984 added a section to the federal Bankruptcy Code that overrode the Supreme Court decision and prohibited employers from canceling labor agreements.

Although that new provision was incorporated into Chapter 11, which regulates business reorganizations, Congress overlooked the little-used municipal bankruptcy rules of Chapter 9.

“They probably would have added it to Chapter 9 if they had they thought about it, but they didn’t, and so the law (for government bankruptcies) gets thrown back” to the 1984 Supreme Court ruling, said Daniel J. Bussel, a UCLA law professor specializing in bankruptcy.

Kenneth N. Klee, a Los Angeles attorney who was minority counsel to the House Judiciary Committee when Chapter 9 was revised and updated in 1975, said there is a history of Congress exempting governments in bankruptcy from the rules that bind private parties.

“In 1975, when New York City was considering a Chapter 9 filing, it was considering abrogating its union contracts and the unions were very opposed,” Klee said. “But when Chapter 9 was revised (later that same year), there were no special provisions put in to protect unions and their collective bargaining agreements.”

He said that because Chapter 9 does not include special protections for labor agreements, a municipal bankruptcy is governed by an older provision of bankruptcy law that allows a debtor to void any contract if it determines that honoring it would be financially harmful.

Klee, whose law firm is advising Orange County in its bankruptcy, declined to comment on the appropriateness of the county’s action Thursday.

But Rich Reuben, a labor law specialist with the Newport Beach office of Pillsbury Madison & Sutro, said the county seems to be supported by current law.

“Of course, there haven’t been very many Chapter 9 filings, so there probably isn’t anyone who really knows how a court would treat this,” he said. “This case is going to set ground rules for handling a host of issues in the Chapter 9 arena, and this issue of collective bargaining definitely will be one of them.”

Labor attorneys and representatives were reluctant to lash out at the county without seeing first just how far supervisors are willing to go to slash personnel costs.

“We definitely have a different view of the law from that which the county apparently has,” said John Sawyer Jr.