Bankruptcies, defaults, and other local government financial emergencies Page: 41
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court would not be able to prohibit a strike and, in the
San Jose case, the judge specifically recognized the right
of the unions to strike. Under many state laws, however,
strikes are prohibited. It is also unclear whether the action
of a federal bankruptcy court in recognizing the
right of unions to strike would supersede a state prohibition
In regard to labor contracts, it is apparent from both
the way Chapter 9 is written, and the way the bankruptcy
act has been applied in the San Jose case, that a
clarification is needed. Such clarification should specify
whether the provision on rejecting executory contracts
includes labor contracts. If it does, then better
standards for rejecting such contracts should be provided.
And finally, the procedure after rejection and the
relationship of state labor laws to such rejections should
be made clear.
The Ability of the Bankruptcy Court to
Supercede State Tax and Debt Limits
The 1976 amendments permit the court to authorize a
government to issue certificates of indebtedness, and
thereby imply that the court has power independent of
state laws to authorize debt and, by further implication,
to levy taxes sufficient to pay the debt service. In Bay St.
Louis the city alleged that the court could order it to levy
taxes in excess of state tax limitations and thus provide
funds to pay the judgment without damaging its budget.
The court itself ruled that it could order borrowing
through certificates of indebtedness regardless of state
law. However, the state bond counsel issued an opinion
that the city could not borrow without state authorization.
Instead of testing the bankruptcy court's ability to
issue such order, the city solved the problem by going to
the state legislature for permission to issue bonds and
levy additional taxes.
In the other three cases certificates of indebtedness
were not discussed as a solution. In the San Jose case,
there apparently has been no attempt to have the bankruptcy
court order a tax levy beyond the state constitutional
Thus the potentially powerful tool of certificates of
indebtedness for resolving bankruptcy cases, especially
in cases requiring payment of large judgments, remains
untested and unclear as to its applicability.
'One exception to this rule is the bankruptcy of The Management
Institute located in Alameda County, CA. As a "governmental
instrumentality," its case is much different. For a
discussion of this case, see Chapter 2.
2U.S. House of Representatives, Committee on the Judiciary,
Report No, 95-595 on the Bankruptcy Reform Act of 1978 (PL
95-598), September 8, 1977, p. 263.
3Ibid., p. 264.
4For example, "Executing Contracts and Municipal Bankruptcy,"
Yale Law Journal 85,1976, p. 965, suggests, "Unless a city
can reject its labor contracts, lack of funds may force cutbacks
in police, fire, sanitation, and welfare services, imposing hardships
on many citizens."
5This contention is supported by ibid., note, p. 959, that suggests,
"a municipality desiring to reject a collective bargaining
agreement must reject the entire contract and do so explicitly.
The city cannot retain the advantageous features of a contract
and cast off the rest."
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United States. Advisory Commission on Intergovernmental Relations. Bankruptcies, defaults, and other local government financial emergencies, book, March 1985; Washington, D.C.. (digital.library.unt.edu/ark:/67531/metadc1317/m1/51/: accessed January 22, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.