20 August 2014

Pushing the Envelope in San Bernardino

What's an executory contract and why should I care? Executory contracts are an important species of assets in the world of bankruptcy law. Any contract on which both parties still owe duties to the other are classified as "executory." Thus, if you sell your car to me in return for my promise to pay the purchase price in installments we have an executory contract. As soon as you deliver the car to me, however, the contract is no longer executory because you no longer have any duties, only I do (the duty to pay).

All of this is a long way to explain why collective bargaining agreements are executory contracts. Both the employer and the bargaining unit of employees owe the duties described in the CBA to each other.

And the conclusion that CBA's are executory is a big deal in bankruptcy, especially municipal bankruptcy, because the Bankruptcy Code permits a debtor like the city of San Bernardino, to reject its CBA with, let's say, its firefighters union. Which is precisely what San Bernardino has proposed to do. Read about it here.

But note the reason why San Bernardino is making this move: to cut benefits. The explosive growth in public employee benefits in California occupies a chunk of my article, Municipal Bankruptcy: When Doing Less Is Doing Best (download here). San Bernardino is not seeking to cut accrued benefits because that would incur the wrath of CalPERS, which would be something akin to a death wish. Even seeking to cut future benefits will provoke strong union opposition but the city should prevail. ... which suggests that it's time for the union and the city to make a deal.

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