Ruling Will Be First on Workers’ Rights in Chapter 9 Filing : Court: Labor awaits decision on what protections public employees should be afforded. Wage and benefits claims, seniority rules, union contracts hang in balance.

SANTA ANA — The judge presiding over Orange County’s bankruptcy could set new legal precedent Friday when he rules on whether county employees should be covered by some of the same job protections that non-government employees have when corporations go under.

U.S. Bankruptcy Judge John E. Ryan will have no Supreme Court cases or federal laws to tell him whether the county can throw out major portions of 20 collective bargaining agreements, whether it can ignore seniority and layoff rules and if it can dismiss any employee it selects at any time.

“The judge is going to be writing on a pretty blank slate,” said New York City lawyer Bruce H. Simon, a bankruptcy expert who often represents the AFL-CIO.

And that should be cause for concern, lawyers say, because the issues are ripe for appeal.

“There’s no question that whatever is decided will be taken up to the Court of Appeals, and we’ll have a written decision in 1996 or 1997,” said lawyer Richard S. Ruben, a Newport Beach labor law specialist who represents employers. That won’t help either the employees or the county now, he said.

Just before Christmas, county supervisors, mired in a fiscal emergency from $1.69 billion in investment losses, unilaterally rewrote layoff and seniority provisions in its contracts with 10 bargaining units. The labor groups represent nearly 16,000 of the county’s 18,000 employees.

Two weeks ago, the county issued pink slips to 186 employees. The unions sued on Tuesday, accusing the county of violating state and federal laws and discriminating against older employees.

Ryan ordered a halt to any layoffs until he hears arguments Friday on whether to grant a temporary order that would force the county to follow its labor contracts in its effort to trim more than $40 million from its budget.

At its heart, the suit questions which obligations and laws Orange County must continue to follow even under the federal bankruptcy code’s rarely invoked Chapter 9, which is reserved for failures of municipalities and other public agencies.

Under Chapter 11, which corporations use to reorganize debts in an attempt to revive themselves, companies must follow sometimes cumbersome procedures--including seeking union acceptance and court approval of any contract changes--before they can lay off employees. Congress hasn’t provided such procedures under Chapter 9.

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No Chapter 9 has ever tackled the issue of what rights public workers have when their government employer goes bankrupt, said Los Angeles lawyer Charles D. Axelrod, who is spearheading the county’s effort to derail the unions’ suit.

The bargaining units want Ryan to read into Chapter 9 some protections for public employees. In particular, they want an order telling the county to follow a state law that requires it to meet and confer with the unions “in good faith” before taking any unilateral job-reducing action.

Axelrod contends that Congress in 1992 considered and rejected the idea of giving public employees the same protections that it gave private employees eight years earlier. But Simon believes the law will evolve and soon will dictate equal treatment. “Ultimately, it’s hard to see why public employees should be second-class citizens,” he said.

Bankruptcy and labor law experts across the country agree that no distinction should be made in how public and private employees are treated under bankruptcy laws, but many doubt that anything short of new federal legislation or a Supreme Court decision will change things.

Congressional action, after all, was needed in 1984 to enact the Chapter 11 protections for private employees. That law overturned a Supreme Court decision that had let bankrupt companies cancel all contracts, including labor agreements. Axelrod asserts, however, that the court’s ruling still applies to Chapter 9 bankruptcies.

Public employees get short shrift from Chapter 9 in other areas too, said James E. Spiotto, a Chicago lawyer who specializes in municipal bankruptcies.

Chapter 9, for instance, puts employees’ wage and benefit claims on the same level with debts owed to ordinary creditors, leaving the court to balance the interests of each group. Chapter 11 gives the claims of non-government employees priority over other creditors.

“I’ve heard people mouthing public policy concerns to say there should be no distinction,” said Daniel J. Bussell, a UCLA law professor and bankruptcy specialist. “But as a policy matter, it’s important to have flexibility too.”

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Other aspects of the county’s cost-cutting strategy also are expected to draw scrutiny from Ryan. Can the county, for instance, selectively choose the provisions of a contract that it will follow? Or must the county accept or reject entire contracts?

The law typically doesn’t permit such discretion, said lawyer Ronald Rus, whose Irvine law firm represents five of the 186 public entities that participated in the county-managed investment pool and that share in the huge loss.

The unions’ lawsuit alleges other wrongful acts by the county. They accuse the county of targeting older, more experienced employees, thereby violating even their own unilaterally imposed criteria based on performance and experience.

With half the employees interviewed, lawyers for the unions estimate that 80% of those laid off are over 40 years old, though the average age of all workers is about 41. The lawyers also estimate that 11% more women were fired than men, though women had held 56% of the county jobs.

Even under bankruptcy law, employers are subject to anti-discrimination statutes, lawyers on both sides said.

In the mid-1970s, when New York City was close to declaring bankruptcy, conservatives favored a petition so that the city could break its labor contracts, said Felix Royhatyn, who spearheaded the city’s revival. The city, however, decided to negotiate wage freezes and attrition rates, and those changes helped the city to recover.

Instead of waging a lengthy court fight, Orange County should learn from other cities that have coped with fiscal chaos to negotiate with employees and to get a recovery plan moving quickly, said Royhatyn and Spiotto.

“The sad thing is this situation is filled with lots of misery and not a lot of hope,” Spiotto said.