FRANK J. BAILEY, Bankruptcy Judge.
This adversary proceeding arises in the bankruptcy case of the City of Central Falls, Rhode Island (the "City"), a proceeding for adjustment of debts of a municipality under chapter 9 of the Bankruptcy Code. The plaintiff is Robert G. Flanders, Jr. (the "Receiver") in his capacity as the state-appointed receiver of the City. The principal defendants are two labor unions, the Central Falls Teachers Union, Local 1657 of the American Federation of Teachers (the "Teachers' Union") and Local 1627, Rhode Island Council 94, AFSCME, AFL-CIO ("Council 94") (jointly, the "Unions"). Each is party to a collective bargaining agreement with the Central Falls School District (the "School District"), which—suffice it to say for now—runs the public schools in Central Falls. As part of his efforts to fashion a feasible and comprehensive plan of debt adjustment in this bankruptcy case, the Receiver has been renegotiating the CBAs with the Unions, but his efforts have been impeded by uncertainty over two issues: (i) whether the School District is part of the City, such that the debts and contract obligations of the School District are obligations of the City and therefore subject to adjustment in this bankruptcy case; and (ii) whether the Receiver, acting on behalf of the City, has the power under Rhode Island's Fiscal Stability Act, the statute defining his powers as receiver, to collectively bargain with the Unions. By his complaint in this adversary proceeding, the Receiver seeks a declaratory judgment resolving both issues in the affirmative, and he has now moved for summary judgment to that effect. In response, the Teachers' Union has moved to dismiss for lack of subject matter jurisdiction or to abstain; and, on the merits, both Unions have opposed summary judgment and urged resolution of the Receiver's issues in the negative. In view of the need to avoid significant delays in the reorganization process, the Court heard both motions on an expedited basis and now addresses them in this memorandum of decision.
On August 1, 2011, the City, by and through the Receiver, filed a voluntary petition under Chapter 9 of the Bankruptcy Code, commencing the Chapter 9 case in which this adversary proceeding arises. On December 1, 2011, the Court entered an Order for Relief in the Chapter 9 case. In the first five months of the case, the Receiver negotiated agreements with three unions with whom the City had collective bargaining agreements and a further agreement with the City's retirees.
On December 30, 2011, the Receiver filed the complaint commencing this adversary proceeding, a complaint seeking only declaratory relief and naming only the Teachers' Union as a defendant. It requested two declarations: in Count One, "that the School District is part of the City and therefore, ipso facto, the collective bargaining process is within the Bankruptcy Court's subject-matter jurisdiction"; and in Count Two, "that the Receiver has the power under the Fiscal Stability Act to act on behalf of the City relative to collective bargaining with the Union." By a first amendment to the complaint, the Receiver added Council 94 as a defendant. By a second amendment, the Receiver added numerous related governmental parties (the "Governmental Defendants") as nominal defendants, the court having determined that these were necessary parties.
Before the time to answer the Second Amended Complaint, the Receiver filed the present motion for summary judgment. The Teachers' Union filed an opposition to the motion for summary judgment and a "cross-motion" to dismiss for lack of subject matter jurisdiction or to abstain.
By order of August 5, 2011 in the Chapter 9 case, the court established October 4, 2011 as the deadline for filing proofs of claim, but the order also provided that "a claim arising from the rejection of an executory contract ... of the debtor may be filed within such time as the court later directs." The Teachers' Union has not filed a proof of claim. On October 3, 2011, Council 94 filed a proof of claim in an amount stated as "unknown," in part on the basis of its collective bargaining agreement with the School District.
As of the date of the hearing on the present motions, negotiations between the Receiver and the Unions were continuing but remained in preliminary stages. In a recent status report in the Chapter 9 case, the Receiver indicated that he expects to make a financial offer to the Unions on or before March 21, 2012, and that he expects to know within three weeks thereafter whether he will have reached new and modified collective bargaining agreements with the Unions. In his complaint in this adversary proceeding, the Receiver stated that if he is unable to negotiate collective bargaining agreements with the Unions that would enable the City to operate with balanced budgets for a period of five years, he will move to reject their collective bargaining agreements. He has not yet moved to reject either agreement. The Receiver maintains that before he can file a confirmable plan in this case, the court must resolve the issues as to which he now seeks declaratory relief.
The Court must first determine its subject matter jurisdiction and therefore will address the Motion to Dismiss or Abstain before the Motion for Summary Judgment. However, in order to address the issues of jurisdiction, authority, and abstention that are presented by the former motion, it would help first to clarify the relief being demanded and establish whether declaratory relief is appropriate and warranted.
The Declaratory Judgment Act states that "[i]n a case of actual controversy within its jurisdiction ... any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought."
The Receiver contends without elaboration that there exists an actual controversy as to both issues on which he seeks declaratory relief, and the Unions neither contend otherwise nor expressly address the issue. Though the Unions oppose summary judgment, neither has done so on the basis that there does not exist an actual controversy or that declaratory relief is not otherwise appropriate. And, although the Teachers' Union has moved to dismiss for lack of subject matter jurisdiction, and lack of an actual controversy would be a defect in subject matter jurisdiction, the Teachers Union does not contend in its motion to dismiss that this adversary proceeding suffers from that particular jurisdictional defect.
Still, the court must satisfy itself that there exists an actual controversy with respect to each question presented and not merely a difference of opinion over hypothetical facts. This in turn requires an understanding of precisely what each question asks and how it affects the rights and legal relations between the Receiver and each Union.
In his first count, the Receiver seeks a declaration "that the School District is part of the City and therefore, ipso facto, the collective bargaining process is within the Bankruptcy Court's subject-matter jurisdiction." By this language, I understand the Receiver to seek a determination in two parts: (i) that the School District is not a separate entity from the City but merely a part or department of the City, and (ii) that because the School District is a part of the City, the debts and contractual obligations of the School District to the Unions are debts and contractual obligations of the City and therefore subject to possible adjustment, especially by rejection, in the City's bankruptcy case. The powers of a municipality in a Chapter 9 case include the power to reject executory contracts.
The Receiver's first count is no broader than this. The Receiver does not in this proceeding move to reject the collective bargaining agreement of either Union; he indicates that he may in the near future move to reject one or both, but in view of the early stage of negotiations with the Unions, he believes that a motion to reject would at present be premature, and the Teachers' Union concurs. (Council 94 has voiced no position on the issue.) Nor does the Receiver seek a declaration that either agreement is executory within the meaning of § 365(a). His interest in this proceeding is simply in establishing that rejection is a possibility, because the Unions' agreements are with the debtor City.
As to both Unions, this controversy and that presented by Count Two are purely legal. The material "facts" are almost all of a legislative nature, and the few remaining material facts that are not of this nature are neither controverted nor developing.
With respect to Council 94, the first count presents an actual controversy for three reasons. First, it will determine the possibility of rejection. Council 94's collective bargaining agreement is unexpired and appears to be an executory contract.
As against the Teachers' Union, the existence of an actual controversy is for two reasons less certain: its contract may not be executory, and it has not filed a proof of claim. There is a dispute as to whether the Teachers' contract remains executory—on the one hand the contract has expired, on the other it continues to govern, and the issue has not been raised or briefed. And the Teachers' Union has not filed a proof of claim. Still, there exists at least a reasonable possibility that the contract, if it is deemed a contract with the City, would be deemed executory and subject to rejection. And the Teachers' Union may yet file a proof of claim if the School District is part of the City and its collective bargaining agreement is executory and ultimately rejected. With respect to budgetary concerns, the existence of an actual controversy is more certain: the Receiver's need to move ahead on the Teachers' Union's contract is even more urgent than on Council 94's contract. As the Teachers' Union explained at the hearing, its budget is by far the larger of the two and the most significant item in the School District budget. In addition, where the court has already determined that an actual controversy exists as to Council 94, there is good cause to consider the same issue as to the Teachers' Union at the same time—the Teachers' Union has shown every indication of wanting to be heard on the issue. The Court therefore concludes that the first count presents an actual controversy with the Unions that warrants declaratory relief.
By his second count, the Receiver seeks a declaration "that the Receiver has the power under the Fiscal Stability Act to act on behalf of the City relative to collective bargaining with the Unions." As the Receiver himself states, the need for this declaration is contingent on the court's first declaring that the School District is part of the City.
The court concludes that this count presents an actual controversy as to both Unions. If the School District is part of the City, then both contracts will require renegotiation. Indeed the expiration of the Teachers' Union contract last August would require negotiation of a new agreement
The Declaratory Judgment Act does not itself confer subject-matter jurisdiction. Rather, it makes available a declaratory remedy for disputes that come within the court's jurisdiction on some other basis.
In that motion, the Teachers' Union makes the following four arguments. First, the court's subject-matter jurisdiction is limited to core proceedings, but the Receiver's requests for declaratory relief are not core proceedings within the meaning of 28 U.S.C. § 157(b) (enumerating core proceedings and authorizing bankruptcy judges to hear and determine and enter appropriate orders and judgments in them). Second, even if they are core proceedings, they arise under state law and therefore are not matters on which a bankruptcy judge, lacking life tenure and protection against reduction of salary, may constitutionally enter judgment, a proposition for which the Teachers' Union relies on Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Third, even if the court does have subject-matter jurisdiction, the court must, under 28 U.S.C. § 1334(c)(2), abstain from adjudicating the adversary proceeding because it arises under state law and can be timely adjudicated in a state forum. And fourth, even if § 1334(c)(2) does not mandate abstention, the court may and should abstain under § 1334(c)(1) out of respect for state law and for the numerous state parties and state interests in this matter. The Receiver opposes the Union's position at each turn. The court will address the arguments in order.
The Teachers' first argument has two parts: (i) the court's subject-matter jurisdiction is limited to core proceedings, (ii) but the Receiver's requests for declaratory relief are not core proceedings. For the reasons set forth below, the court agrees that the Receiver's requests are not core and that this renders the bankruptcy court unable to enter a final judgment in the matter but not that subject-matter jurisdiction is lacking.
I begin with the argument that the bankruptcy court's subject-matter jurisdiction is limited to core proceedings. The Teachers' argue without elaboration: "[t]he Court's subject-matter jurisdiction in an adversary proceeding is limited to `core proceedings arising under title 11, or arising in a case under title 11....' 28 U.S.C. § 157(b)(1)." The Receiver does not answer this part of the Union's argument.
Bankruptcy jurisdiction is vested in the first instance in the district courts.
The next issue is whether the Receiver's requests for declaratory relief are core. The Court must make this determination for each request for declaratory relief. The Teachers' Union argues that the requests for declaratory relief are not core because they are not among the core proceedings that are enumerated in 28 U.S.C. § 157(b)(2), do not invoke a substantive right created by federal bankruptcy law, arise entirely under state law, could exist independently outside of bankruptcy, and could proceed in another court in the absence of a bankruptcy case. The Receiver contends that both declaratory requests are core for the following reasons: they fall within two of the enumerated categories of core proceedings—"matters concerning the administration of the estate" § 157(b)(2)(A), and "other proceedings affecting ... the adjustment of the debtor-creditor ... relationship," § 157(b)(2)(O)—because they are related to the rejection of executory contracts; they will "determine who the debtor is"
The term "core proceeding" is used in 28 U.S.C. § 157(b) to refer to those matters a bankruptcy judge may hear, determine, and dispose of by appropriate orders and judgments, subject only to appellate review. Subsection 157(b) provides a nonexhaustive list of core proceedings, including two catch-all categories on which the Receiver relies: "matters concerning the administration of the estate," § 157(b)(2)(A), and "other proceedings affecting... the adjustment of the debtor-creditor... relationship," § 157(b)(2)(O). The first of these, "matters concerning the administration of the estate," cannot apply in a Chapter 9 case because Chapter 9 cases involve no estate.
As the Teachers' Union rightly points out, however, the Receiver's demands for relief include no motion under § 365(a) of the Bankruptcy Code to reject an executory contract. Nor do they seek a determination that the Unions' collective bargaining agreements are executory or even that they are contracts with the City. The Receiver's first count—for a declaration that the School District is part of the City—stops short of putting the Unions' collective bargaining agreements in controversy at all. It follows that, however useful the requested declaration may be, both in structuring negotiations and possibly in narrowing issues in future litigation, this adversary proceeding cannot itself definitively determine any consequence of the requested declaration for the relationship
The Receiver has characterized his first count as one to determine who is the debtor and, consequently, to determine the extent of the bankruptcy court's subject matter jurisdiction. This characterization is not quite apt. The debtor in this case is the City of Central Falls, and "the court's jurisdiction"—by which the Receiver means the City's power in bankruptcy, subject to court approval, to adjust debts and contractual obligations— extends to all contractual obligations and other debts of the City. That much is clear and undisputed. The real issue in dispute, which Count One bears upon but would not actually determine, is whether the Unions' collective bargaining agreements are executory contracts with the City, in which case those contracts would be subject to adjustment under § 365. Were this a proceeding to determine that the contractual obligations of the School District to the Unions are obligations of the City under executory contracts, it would have a much stronger claim to core status. This would then be a proceeding to determine that certain obligations are subject to adjustment in the bankruptcy case. But the Receiver's first count stops short of this and therefore is non-core. It is merely "related to" this bankruptcy case within the meaning of 28 U.S.C. § 157(c)(1), and the bankruptcy judge's authority over it is therefore limited to that in § 157(c)(1).
The second count's claim to core status is no stronger than the first's. The second count seeks a determination of the authority of the Receiver under the Fiscal Recovery Act, the state statute that delimits his authority. Like the first it arises entirely under state law and, though it arises in this bankruptcy case, could have arisen and been brought elsewhere had the City not sought bankruptcy relief. It too is related to this case, and its determination is important to the progress of this case, but it is not core.
The Teachers' Union next argues that even if the declaratory judgment counts are core, the Supreme Court's recent decision in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), precludes the bankruptcy court from entering final judgment on them. In Stern, the Supreme Court held that Congress violated Article III of the United States Constitution in 28 U.S.C. § 157(b) by assigning to bankruptcy judges—judges lacking life tenure and protection against diminution of salary—for final adjudication as a core proceeding a counterclaim by the bankruptcy estate against a creditor who asserted a claim against the estate where
I understand the Teachers' Union to be arguing that Stern somehow invalidates the procedure prescribed in 28 U.S.C. § 157(c)(1) for a matter that is not a core proceeding but that is otherwise related to a bankruptcy case and that arises entirely under state law. Stern provides no support for this reading. Stern concerned only the authority of a bankruptcy court, as a court whose judges lack the full protections of Article III, to enter certain final judgments, and it rested exclusively on a separation-of-powers rationale. It did not address the validity of a judgment entered by the district court, whose Article III credentials the Teachers' Union does not dispute, pursuant to the process set forth in 28 U.S.C. § 157(c)(1). Nor did it address concerns of federalism; although the counterclaim at issue in Stern arose under state law, the determinative feature of that counterclaim was that it did not arise under the Bankruptcy Code. The operative dichotomy was not federal versus state, but bankruptcy versus nonbankruptcy. The Teachers' Union has offered no reason why Stern should affect the validity of § 157(c)(1) procedures and judgments. In Stern itself, the Supreme Court indicated that the fault it found was limited to "one isolated respect" of the bankruptcy jurisdictional scheme in § 157
In the alternative, the Teachers' Union argues that 28 U.S.C. § 1334(c)(2)
This subsection applies by its terms to a district court exercising bankruptcy jurisdiction under § 1334 and, by operation of 28 U.S.C. §§ 151 and 157(a), to a bankruptcy court acting upon a bankruptcy matter by reference under § 157(a).
Two of the five conditions appear to be satisfied here: the proceeding is based on a state law claim or cause of action—it seeks a declaration of rights and relations under Rhode Island law; and the federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case. However, at least one other, timely adjudication, is not satisfied, and therefore abstention is not mandatory.
The matters cannot be "timely" adjudicated in a state forum of appropriate jurisdiction. What constitutes "timely" adjudication is a function of the needs of the reorganization process. Here, the Receiver expects to be in a position to complete negotiations with the Unions before mid-April. The completion of these negotiations, and the resolution of the status of the City's obligations to the Unions (if any), are the last matters he must address before submitting an amended plan of reorganization on which the Receiver hopes to proceed to confirmation. The Receiver's goals, shared by the court, are to resolve the bankruptcy process and then complete his receivership in a much shorter time than the usual span of litigation outside of bankruptcy and, indeed, in other Chapter 9 adjustment cases. This goal is driven in part by the cost of the reorganization process, which increases with its length and at some point jeopardizes the reorganization itself. It is also driven by the need to complete the receivership process and return the City to municipal normalcy. The Rhode Island Supreme Court
The matter would not likely be adjudicated in the state courts within the time that this bankruptcy case requires. The bankruptcy courts are designed and intended to handle all matters in a bankruptcy case precisely to make reorganization more feasible and to advance matters whose adjudication is critical to the progress of the case. A state court would be receiving this matter without the bankruptcy court's sense of the whole case in which it is situated, on a docket already crowded with other matters. And it takes nothing away from the state courts to observe that the usual course of civil litigation is vastly longer in duration than this matter requires: weeks, not months or years.
I am mindful that the bankruptcy court itself cannot finally decide this matter. Under § 157(c)(1), further process will be required in the district court before final judgment can enter. Even so, I find and conclude that adjudication of this matter in the bankruptcy court pursuant § 157(c)(1) is the option most likely to result in a timely adjudication. For these reasons, abstention is not mandatory.
In the alternative, the Teachers' Union argues that the bankruptcy court may and should, in the interest of respect for state law, abstain under § 1334(c)(1) from adjudicating this matter. The Union argues that the court should abstain because the issues presented arise entirely under state law and are of particular importance to the state but will have little or no consequence in this bankruptcy case. The Receiver opposes discretionary abstention, arguing that abstention is disfavored and would impede the efficient administration of the case, that the issue presented is important to the bankruptcy case, and that although the questions arise under state law, established Rhode Island law already answers the questions.
Where abstention is not mandatory under § 1334(c)(2), subsection (c)(1) nonetheless permits a court to abstain from hearing a matter related to a bankruptcy case in the "interest of justice" or "in the interest of comity with State courts or respect for State law." 28 U.S.C.
"Courts should apply these factors flexibly, for their relevance and importance will vary with the particular circumstances of each case, and no one factor is necessarily determinative."
Several of these factors undisputedly weigh heavily in favor of abstention. First, the state issues predominate; both parties do also advance arguments under federal law, but at bottom both declaratory requests are about state law. Second, unlike many state law issues that are routinely litigated in bankruptcy court—regarding contracts, security interests, exemptions, property rights, and the like— the issues presented here are unusual and not well-trodden. Third, the issues concern the structure of state and municipal government and its financing and are thus of special concern to the State of Rhode Island, its municipalities, and its various authorities. And fourth, those authorities are necessary parties in this proceeding. Respect for state law is therefore of greater than usual importance here, a significant concern.
The force of this concern is blunted by other factors. Though the state issues are not well-settled, they do not come to this court without determinative signposts in state law; this court would not be making state law out of whole cloth. In addition, answers to declaratory requests can and would be framed narrowly. And, though the Governmental Defendants are present in this proceeding as necessary third parties, they have taken no position on the substantive issues and have not requested dismissal or abstention but rather, in each of their answers, have requested the judgment of this court.
Moreover, there are two countervailing concerns. The first is the importance of these issues to the bankruptcy case. If the School District is part of the City, then its contracts may be subject to adjustment in this case. The Teachers' Union argues that "the City is not a party to the Unions' contracts and cannot reject them," and
The second countervailing concern is the need for expedition. For reasons explained above, sending this matter to state court would likely delay this case for much longer than the reorganization effort can tolerate or, more likely, force the Receiver to proceed without a resolution of this issue, which would effectively compromise some or all of his legitimate objectives in this case, or both.
Summary judgment is appropriate when there is no genuine issue of material fact and, on the uncontroverted facts, the moving party is entitled to judgment as a matter of law.
The court adjudicates this motion for summary judgment in a proceeding in which it must make "proposed findings of fact." To be clear, a motion for summary judgment involves no findings of fact, merely (insofar as facts are concerned) rulings of law as to whether there exist genuine issues as to the material facts. The following facts are not findings of the court.
The facts as the court must construe them are as follows. Except where otherwise indicated, they are either admitted or otherwise uncontroverted.
1. The plaintiff City is a municipality of the State of Rhode Island (the "State") and a political subdivision thereof.
2. On August 1, 2011, the City filed a voluntary petition under Chapter 9 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Rhode Island, commencing the Chapter 9 case in which this adversary proceeding arises.
3. On December 1, 2011, the Court entered an order for relief in the Chapter 9 case.
4. Defendant Central Falls Teachers' Union (the "Teachers' Union") is a labor
5. Defendant Rhode Island Council 94, AFSCME, AFL-CIO Local 1627 ("Council 94"), a labor union, is the bargaining unit for certain Central Falls non-teacher, non-certified school employees. Its principal place of business is in North Providence, Rhode Island.
6. The Council 94 employees participate in the Rhode Island Municipal Employees' Retirement System.
7. All state employees and teachers are required under Rhode Island law, R.I. Gen. Laws § 36-9-2, to participate in the Employees Retirement System of the State of Rhode Island ("ERSRI").
8. Non-state employees and non-teachers are not permitted to be members of the ERSRI.
9. In 1952, the City adopted a home-rule charter that designated the City's school committee as one of the independent boards and commissions responsible for performing the executive and administrative work of the city.
10. On March 26, 1991, the governor of Rhode Island and the State commissioner of elementary and secondary education entered into a Memorandum of Understanding with the mayor of Central Falls and the chairmen of the Central Falls City Council, the Central Falls School Committee, and the Central Falls Review Commission. The Memorandum of Understanding contemplated a full state administrative and financial takeover of the Central Falls school system, beginning on July 1, 1992.
11. The Memorandum of Understanding set forth that the Proposed Agreement was expressly subject to certain terms and conditions, one of which was General Assembly approval.
12. In 1991, the Rhode Island General Assembly (the "General Assembly") passed legislation, 1991 R.I. Pub. Laws ch. 312 (the "1991 Act"). The 1991 Act provided for (i) shared funding of the School District by the State and the City for fiscal year ending June 30, 1992, and (ii) a shifting of the administration of the City's schools to a state administrator who was granted the same powers and duties afforded to the school committee. Specifically, the 1991 Act provided as follows:
12.1 The School District has been overseen by the Rhode Island Department of Education since July 1, 1991.
14. Section 4 of the 1991 Act set forth an administrative plan for the School District for the period of July 1, 1991, to June 30, 1992. It stated that "the city of Central Falls shall continue to be the fiscal agent for the Central Falls school district, except that a separate interest-bearing checking account shall be established for the school district." 1991 R.I. Pub. Laws ch. 312, § 4(e).
15. In 2002, the General Assembly passed an act, 2002 R.I. Pub. Laws ch. 204 (the "2002 Act"), codified at R.I. Gen. Laws § 16-2-34. The 2002 Act replaced the state administrator created by the 1991 Act with a board of trustees appointed by the commissioner of the department of elementary and secondary education, subject to the approval of the Rhode Island board of regents for elementary and secondary education. In part, § 16-2-34 states:
R.I. Gen. Laws § 16-2-34(a), (b), (f), and (j).
15.2 Whereas, under the revised City Charter currently in effect, the Mayor and the City Council members must be legal residents of the City "for at least two years" § 16-2-34(b) as amended by the 2002 Act requires that only four of the seven members of the Board of Trustees must be City residents. Of the six current members of the Board of Trustees, only three are City residents.
15.3 The Teachers' Union states that it is established and uncontroverted that § 16-2-34, as amended by the 2002 Act, was not repealed by the 2007 amendment to the City Charter and has not been subsequently repealed.
15.4 The Board of Trustees continues to operate the School District pursuant to § 16-2-34.
15.5 The Teachers' Union states that there is evidence that the School Committee has ceased to exist since 1991, but the evidence is a statement in the affidavit of Jane Sessums, who makes the statement on the basis of the 1991 Act, and therefore this is merely a legal conclusion, and a disputed one.
16. The 2002 Act did not alter the provisions of P.L. 1991, ch. 312 regarding the City's obligation to pay debt service on bonds or the City's status as fiscal agent.
17. The City remains obligated to pay debt service on bonds for school buildings. There is evidence in the record that the State reimburses the City for 97 percent of the principal and interest the City must pay on school bonds and school construction bonds. There is also evidence in the record that the amount the Receiver expects the City to pay in connection with principal and interest on bonds from fiscal year 2012 to fiscal year 2016 will be offset by between 70% and 80% per year by State reimbursement.
18. Payments for the debt service on bonds for school buildings were accounted for in the City's initial Plan of Debt Adjustment filed with the bankruptcy court on September 22, 2011.
19. In November 2006, the electors of the City approved amendments to its home-rule charter that had been proposed by the City Council.
20. In 2007, the General Assembly ratified the city charter as amended.
21. The General Assembly has never authorized the Central Falls Board of Trustees or the state administrator to exercise any sovereign power in the areas of taxation, eminent domain, or the police power other than the enforcement of compulsory
22. From 1991 to the present, the City has provided services to the School District without invoicing or otherwise charging the School District for said services, including, but not limited to, police programs in the schools, fire department safety programs in the schools, maintenance of school athletic facilities, purchasing of sports equipment, maintenance of school parking lots, trash removal for the schools, fire alarm and sprinkler systems in the schools, and maintenance, repairs, and upgrades to various school buildings. There is evidence that "historically, the City has not budgeted funds specifically for the purpose of maintaining the school buildings."
22.1 Since 1991, the operational costs for the Central Falls public schools have been paid for by the State of Rhode Island. Between fiscal year 1992 and fiscal year 2011, the State provided $604 million for the operation of the School District.
23. The Rhode Island Department of Elementary and Secondary Education ("RIDE") completed a full program and finance review of the School District on October 31, 2011 and issued a Final Program Review Determination Letter on November 14, 2011. RIDE anticipates a $256,432 deficit in the School District Unrestricted Fund at the conclusion of fiscal year ending June 30, 2012.
24. In 2010, the General Assembly passed legislation which provided for a new funding formula for public education in Rhode Island (the "Funding Formula").
25. In support of the legislation, Deborah Gist, the Commissioner of the Department of Elementary and Secondary Education, submitted a report to the General Assembly on the Funding Formula, dated November 15, 2010.
26. Under the Funding Formula, commencing Fiscal Year ending June 30, 2013, the City will be required to make contributions to the cost of operating the City's schools by paying funds into the Central Falls Stabilization Fund. There is evidence that the City would be required to fund barely five percent of the School District's total operating costs, while the remaining funding required will continue to come from the State, and that the State has acknowledged that "it is unlikely that the city will be able to fund education in the immediate future" and has begun to explore possible ways it could "allow for 100% funding if the city cannot afford to pay its local contribution."
27. The City's contribution to the Central Falls Stabilization Fund was included in the City's initial Plan of Debt Adjustment filed with the bankruptcy court on September 22, 2011.
28. Under a proposed legislative change to R.I. Gen. Laws § 16-7.2-6, the City's contribution to the Central Falls Stabilization Fund would be increased. There is evidence that the City would be required to fund barely five percent of the School District's total operating costs, while the remaining funding required will continue to come from the State, and that the State has acknowledged that "it is unlikely that the city will be able to fund education in the immediate future" and has begun to explore possible ways it could
29. The Funding Formula funds state-run schools, such as charter public schools, the William M. Davies, Jr. Career and Technical High School, and the Metropolitan Regional Career and Technical Center, differently from its funding of local school districts.
30. Given changes in the school Funding Formula based, in part, on declining enrollments, RIDE forecasts a decline in the School District's state revenue, unrestricted state aid, of $1,688,271 each year for eight years starting in fiscal year ending 2014. The cumulative impact of this decrease over the five-year period from fiscal year ending 2012 to fiscal year ending 2016 is $4,783,465. There is evidence that the State has acknowledged that "it is unlikely that the city will be able to fund education in the immediate future" and has begun to explore possible ways it could "allow for 100% funding if the city cannot afford to pay its local contribution."
31. In addition, the School District received over $10 million in federal grant fund revenues from the 2009 American Recovery and Reinvestment Act ("ARRA"). These monies, used to support school programming and other initiatives, will not be replaced once spent: $4.3 million in ending fiscal year 2012, $2.9 million in fiscal year ending 2013, $.9 million in fiscal year ending 2014, $.1 million in fiscal year ending 2015, and no funds in fiscal year ending 2016. The cumulative impact of this decrease over the five-year period from fiscal year ending 2012 to fiscal year ending 2016 is $4,324,259.
32. Additionally, RIDE estimates that the School District will face slight declines in non-ARRA federal grant fund revenues over the five-year period. The cumulative impact of this decrease over the five-year period from fiscal year ending 2012 to fiscal year ending 2016 is $555,122.
33. At the time the City filed its initial Plan of Debt Adjustment, the School District's operating costs were fully funded by the State, and the financial information available at the time indicated that the School District had a funding surplus for Fiscal Year ending June 30, 2012.
34. Based upon the RIDE forecasts, the School District is facing a significant drop in revenue sources of approximately $8.5 million over the five-year period. Given the starting deficit at the end of fiscal year ending 2012 and increasing cost trends, without significant cuts to expenses, the School District will have a cumulative deficit well in excess of $10 million by the end of fiscal year ending 2016.
35. As a result of the RIDE Program Review and RIDE revenue forecasts, the City needs to develop an amended Plan of Debt Adjustment to fund the Fiscal Year ending 2012 deficit as well as the projected deficits for the remaining years of the five-year term of the Plan of Debt Adjustment.
37. Negotiations on a new collective bargaining agreement were conducted between negotiating teams from the School District and the Teachers' Union prior to the filing of the bankruptcy petition. These negotiations did not yield a new collective bargaining agreement.
38. Soon after the commencement of the bankruptcy case, the Receiver replaced the negotiating team that had been acting on behalf of the School District and continued negotiating a collective bargaining agreement between the City and the Teachers' Union. The Teachers' Union reserved its right to argue that the School District is not subject to the City's bankruptcy proceeding and that the Receiver is without authority to execute a collective bargaining agreement.
39. On July 29, 2011, the Receiver issued an order to the School District directing that the Board of Trustees not to enter into or to amend any collective bargaining agreements or to approve expenditures or contracts in excess of $25,000 without the Receiver's prior written approval.
40. The City and Council 94 have a collective bargaining agreement which expires on June 30, 2013.
41. The City and Council 94 began discussions to open up and amend their collective bargaining agreement in December 2011.
42. R.I. Gen. Laws § 16-1-11 states:
43. Based upon preliminary financial model projections prepared by the City, and in particular the sharp decrease in projected revenues from state and federal sources over the term of the City's fiveyear plan of debt adjustment, without substantial changes to the structure and delivery of educational services within the School District, the City will not be able to propose a plan with balanced budgets in the absence of a substantial infusion of state or federal funds.
44. The Rhode Island State Fiscal Year 2012 Supplemental Appropriations Act, Article 1, has a separate line item for the School District. No other school district in Rhode Island has a similar line item entry in this document. The only other schools to have such separate State budget allocations are State schools such as Rhode Island School for the Deaf and Davies Vocational.
45. Rhode Island Education Aid, an October 2010 report of the Rhode Island House Fiscal Advisory Staff, shows State aid to Central Falls as a separate budgetary line item.
46. The Fiscal Year 2010, 2009, and 2008 Personnel Supplements for the State Department for Elementary and Secondary Education show State aid to the School District as a separate budget line item. No other school district has a similar line item entity in these documents.
47. Except insofar as (i) the School District is part of the City (which is a question of law to be decided in this case) and (ii) members of the Board of Trustees are residents of Central Falls, the School District establishes its annual budget with no City involvement.
48. Under § 16-2-34, the Superintendent must "prepare a budget and otherwise participate in budget development as
49. The historic practice has been for the superintendent to prepare the budget. Except insofar as the School District is a part of the City, in which case the superintendent would be a City official, no City official has had responsibility for preparing or approving the School District's budget since 2005.
50. The City and the School District issue separate annual financial statements. In each year starting with the year ending June 30, 2003, the financial statements prepared for the City were prepared by different auditors than the financial statements prepared for the School District.
51. In each year starting with the year ended June 30, 2002, Note 1 to the City's financial statements state:
52. The covers of the eight annual financial statements for the School District for the years ended June 30, 2003 through June 30, 2010, describe the School District as "a component unit of the State of Rhode Island."
53. The School District has its own bank accounts that are maintained for the benefit of the School District. It is the responsibility of the Superintendent to maintain those accounts; the Superintendent has authority over those accounts and uses them for "school related purposes." Except insofar as the School District may be deemed a unit of the City (a contested issue of law which it is the purpose of this adversary proceeding to decide), and therefore the Superintendent a City official, no City official has authority over those accounts.
54. School District employees currently receive paychecks issued by the School District payroll department.
55. To obtain insurance, the School District participates in "a non-profit, public entity risk pool (Rhode Island Inter-Local Risk Management Trust, Inc.), which provides coverage for property/liability claims and workers compensation claims." The City, too, participates in the risk pool, but it signed a participation agreement with the risk pool separate and apart from the participation agreement the School District executed with the risk pool. The School District pays its own premiums to the risk pool for coverage, separate from any premiums paid by the City for coverage for the City.
56. The Superintendent answers to the Board of Trustees, and the Board of Trustees answers to the Board of Regents and the Commissioner. The School District has its own Finance Department, HR Department, Building and Maintenance Department, and IT system separate from the City.
57. The School District maintains its own business records, which the Superintendent is responsible for maintaining.
58. The School District enters into ordinary course commercial contracts in its own name, including on at least one occasion with the City itself (through the Receiver).
60. Section 16-2-34 provides that the superintendent, along with the chair of the Board of Trustees, must "negotiate ... all district employment contracts, which contract shall be subject to the approval of the commissioner of elementary and secondary education with the concurrence of the board of regents." R.I. Gen. Laws § 16-2-34(h)(10).
61. The Chair of the Board of Trustees and the Superintendent, along with additional designees, have negotiated collective bargaining agreements on behalf of the School District. Since the advent of the Board of Trustees in 2002, all School District contracts with the Teachers' Union have been approved by the Board of Trustees with the concurrence of the Commissioner and Board of Regents. The Superintendent and the Chair of the Board of Trustees submitted the most recent collective bargaining agreement between the Teachers' Union and the School District to the Commissioner and the Board of Regents for their approval. The Commissioner approved the agreement and the Board of Regents concurred with the Commissioner's approval.
62. Since 1992, no City official (except for the Superintendent and the Board of Trustees to the extent they are deemed City officials) has participated in negotiations between the School District and its unions.
63. The School District enters into collective bargaining agreements its own name and has done so since 1992.
64. The School District has its own formal personnel policies, set by the Superintendent in consultation with and subject to the approval of the Board of Trustees. Except to the extent that the School District is part of the City and the Superintendent is therefore a City official, no City official has any role in setting these policies.
65. The Superintendent is ultimately responsible for hiring and firing employees (except that there is a question of law as to whether terminated employees have a right of appeal to the Board of Trustees).
66. Elected City officials have had no input on employment decisions that were made by Superintendent Gallo or any other superintendent from 2005 to the present.
67. The pay of most School District employees is set by their collective bargaining agreements, which are negotiated by the Superintendent and subject to the approval of the Commissioner of Education and the Board of Regents. R.I. Gen. Laws § 16-2-34(h)(10). Except to
The parties' arguments are numerous and extensive. I summarize here only their overall structure.
The Receiver's position is as follows. Rhode Island law governs the question of whether the School District is part of the City. Case law in Rhode Island recognizes that education is in the first instance a state-level concern, but one that the General Assembly has delegated to or vested in the school committees of the various municipalities. The Central Falls home rule charter of 1952 created a school committee and gave to it the basic governance of the City's schools, collectively known as the School District. The School District is not a separate entity from the City: it lacks incidents of municipal sovereignty, such as police powers and powers of taxation and eminent domain; it cannot hold property in its own name; though it may contract in its own name, the City is liable for its contracts; it cannot be sued in its own name; and prior to 1991, it was controlled by the City's school committee.
The 1991 and 2002 Acts did not change the School District's status as a department of the City. The plain language of those acts confirms that the City remained the fiscal agent for the School District, that governing case law was not abrogated, that the City remained liable for debt service on school bonds, and that the City continued to own and maintain the school buildings and adjacent property. More importantly, the Acts cannot have divested the City of the School District because that would have altered the City's form of government, which, by the State constitution, would have required passage by the City's electorate. Though the City has no active school committee, the City Charter, amended in 2007, continues to provide for the election of a school committee.
Nor does the extent of the School District's reliance on State funding change its status. Many municipalities receive State funding to aid the operation of their schools. Central Falls differs only in degree and has continued to fund the schools, albeit minimally. And the State, by recent legislation, is requiring the City to fund a larger portion of the School District's budget in coming years.
The Teachers' Union responds in the first instance with arguments under federal law. The School District is not a debtor in this Chapter 9 case. It is a separate and distinct governmental entity. Under federal law, the School District must be treated as a separate entity for Chapter 9 purposes and is not authorized to be a debtor in its own right. The exercise of bankruptcy jurisdiction over it would violate the Tenth Amendment.
In the alternative, the Teachers' Union argues that, under Rhode Island law, the School District is not part of the City. Before 1991, it fit the paradigm of a municipally-run
In its reply brief and at oral argument, the Receiver added a further argument, this one under federal law: that under the definition of municipality in the Bankruptcy Code, the School District would not qualify as a municipality in its own right, and therefore it should not now be viewed as a separate entity.
The debtor in this chapter 9 case is the City of Central Falls, and the question presented by Count One is simply whether, under Rhode Island law, the School District is part of the City.
For jurisdictional purposes, the Teachers' Union insisted that the issues presented in this proceeding were exclusively of state law, yet it now leads with three arguments under federal law: (i) the
Only a "municipality," as that term is defined in the Bankruptcy Code, may be a debtor under Chapter 9 of the Bankruptcy Code.
In Count One, the Receiver seeks only a determination that the School District is part of the City. A judgment in his favor on this count would not add a debtor to this case but merely define the scope of the existing debtor. That debtor, the City, has voluntarily petitioned the court for bankruptcy relief and has done so with proper state authorization; the Teachers' Union does not contend otherwise. Consequently, the resulting exercise of bankruptcy jurisdiction over the City, whether it includes the School District or not, would not offend the Tenth Amendment. The Teachers' Union appears to concede this, too, because it argues that the offense against the Tenth Amendment would occur if (i) the court exercised jurisdiction over the School District (ii) notwithstanding that it is a separate entity from the City. But this cannot occur. If the School District is deemed a separate entity, there will be no exercise of jurisdiction over it, either as part of the debtor or as a separate debtor. The Tenth Amendment argument is therefore moot, of no consequence.
This leaves only the Teachers' Union's third argument: that the School District would qualify as a municipality under the Bankruptcy Code and therefore, even if under state law it is part of the City, it must be treated as a separate and distinct entity for purposes of Chapter 9. In restated form, the Union is arguing that
In the interest of completeness, however, I address the merits here. The Union rests this argument on five cases in which a school district, utility district, water district, or housing authority has been deemed a municipality that is eligible to be chapter 9 debtor in its own right, separate from the municipality in which it is located. I need not parse the cases in any depth; at best, they stand for the proposition that a school district may, in some instances, be a municipality and an eligible Chapter 9 debtor.
This is very different from saying that Chapter 9 authorizes a bankruptcy court to exclude from bankruptcy relief a school district or other portion of an eligible debtor municipality, notwithstanding that the school district is, under the law of the state of which it is a creature, part of the debtor municipality. I am aware of no authority for that practice and find none in Chapter 9. "[A]n entity may be a debtor under chapter 9 ... if ... such entity is a municipality."
In addition, it would be antithetical to the principles of the Bankruptcy Code, which is informed by an intent to bring all of a debtor's debts and contracts into the case, in order to provide the most comprehensive relief possible.
This leaves only Count One as framed by the Receiver. It asks not whether the School District is a municipality but whether it is part of the City of Central Falls. As the City is a creature of Rhode Island law, so must the answer to this question be.
Municipalities are creatures of state law and subject to the power of the State, as limited by its constitution, to create, divide, and even abolish them.
In this instance, the originating act— that is, the act by which the School District was formed—is the adoption by the City and ratification by the State of the City's home-rule charter of 1952. The parties have cited to the court no other act of the State by which the School District was established,
In relevant part, § 3-100 of the 1952 charter specified the authorities through which the executive and administrative work of the City would be performed and also created certain of those authorities, including a school committee. It stated: "The executive and administrative work of the city shall be performed by: ... (c) The following independent boards and commissions which are hereby created: ... School committee."
On the basis of this delegation, the Rhode Island Supreme Court has held, in Cummings v. Godin and repeatedly thereafter, that school committees are "agencies of the state" in that they carry out by delegation the educational mission that resides in the first instance in the General Assembly; but in the same cases the court has further held that school committees "are not `state agencies' because their duties are limited to matters of local rather than statewide concern."
In view of (i) the creation of the Central Falls school committee by the 1952 city charter, (ii) the General Assembly's delegation of authority over education to the various school committees, and (iii) the
Have subsequent events changed this essentially constitutional relationship of the City to its school district? The Receiver argues that notwithstanding the 1991 and 2002 Acts, which removed control of the School District from the Central Falls School Committee and placed it first in a state administrator and then in the state-appointed Board of Trustees that continues to govern the School District, the essential relation of the City to the School District remains unaffected. It must remain unaffected, the Receiver argues, because the 1991 and 2002 Acts were both unilateral acts of the General Assembly, but a permanent modification of the City's form of government would have required an amendment to its charter, and, by constitutional requirement, R.I. Const. Art. 13, § 8 (procedure for amendments to charters), that in turn would have required a vote of the City's electorate.
The Teachers' Union disagrees. I need not set forth its arguments in full. It suffices to note the Union's position on the 2007 amendment to the city charter, which is that the amendment terminated the City's school committee altogether.
The court agrees. The critical amendment was the deletion of the words "school committee" from § 3-100(c) of the City's charter.
It is true, as the Receiver points out, that the charter appears to have retained provisions for election of a school committee, §§ 6-107 and 6-108. It is also true that the deletion of §§ 3-608(1) and 3-608(2) is, in itself, inconsequential, those sections having been essentially duplicative of retained sections 6-107 and 6-108. Likewise, the deletion of § 3-608(3) is in itself of no real relevance, as it only removed certain limitations on school committee membership. Still, it is undisputed (i) that the school committee itself was deleted from the list in § 3-100 of the independent boards and commissions by which the City's executive and administrative work would be performed and (ii) that Chapter 14 of Article IV, which had set forth the powers and duties of the school committee, was also deleted. The deletions of §§ 3-608(1), 3-608(2), and 3-608(3) are consistent with and confirmatory of the deletion of school committee in § 3-100. The deletion of the school committee from § 3-100 must be given effect no less than the inclusion of "school committee" in § 3-100(c) was given effect before the deletion.
In view of this change to the charter and the resulting disestablishment of the Central Falls school committee, it is unnecessary to determine whether the 1991 Act or the 2002 Act effectively removed the School District from the City. The deed has in any event been done by other, more fundamental, means.
As it stands, the Central Falls School District has been assigned by the 2002 Act and R.I. Gen. Laws § 16-2-34 to the control of the state-appointed Board of Trustees. The Board has been given "the powers and duties of a school committee." The Board is independent of the City and not mentioned in the City's charter. Its members are not elected by City voters, appointed by City officials, or answerable
I do not suggest that this state of affairs is not temporary or provisional. Still, the court cannot know the future and, in any event, must judge this controversy according to present circumstances, not circumstances as they may yet develop.
In making this determination, the court has deemed certain facts to be of little or no relevance, and these should be dealt with expressly. First is the fact that the City has been wholly dependent on outside sources, mostly the State, for the funding of its operating budget for over twenty years. This fact is irrelevant because there is no state law that makes it a factor of significance to the continued relation of this school district to this city. Municipalities routinely receive state funding, some more than others. The Unions have cited to me no feature of state law that might alter the relation of a municipality to its school district on the basis of the extent or duration of its state funding. Much less have they specified a legal tipping point.
Second is the duration of the period in which the City has not had control of its schools. Again, nothing in the governing law states that after a certain number of years in the care of a state administrator or board of trustees, a city's school district ceases to be its school district. It is possible for the state to have stepped in as caretaker for the City, even on an extended basis.
Third is the fact that state law may require the City to contribute to the funding of its schools. Again, the court is aware of no provision in the City's charter or in any state law that makes the School District's status—as part of the City or not—dependent on the presence or absence of an obligation to fund.
Fourth, the Receiver has emphasized that the School District lacks many of the attributes of municipal sovereignty, such as powers of taxation and eminent domain, and therefore should not be deemed a separate entity from the City. Under this theory, the School District must be a dependency of some sort. Again, nothing in the City's charter or in any other state law
Fifth, the Receiver emphasizes that the 1991 Act, which replaced the City's school committee with a state administrator, nonetheless expressly reserved for the City the status of "fiscal agent." It said: "The city of Central Falls shall continue to be the fiscal agent for the Central Falls school district, except that a separate interest-bearing checking account shall be established for the school district."
Sixth, the labels and classifications in the City's and School District's financial statements to the effect that the School District is not a component unit of the City and is a component unit of the State
Seventh, the evidence of the operational independence of the School District from the City—that it maintains separate bank accounts and financial records, pays its own payroll, purchases its own insurance, enters into contracts, makes its own personnel policies and decisions, all independent of the City—is of little significance for two reasons. First, it has no significance under Rhode Island law for the charter-based relationship of the City to the School District. Second, the Unions have adduced no evidence that this practice differs from the practices of school districts that are parts of their respective municipalities.
The material facts are not in controversy, but on the factual record established by this motion, the Receiver is not entitled to judgment as a matter of law. Rather, on the governing law, it appears that judgment should enter against the Receiver with a declaration that the School District is not part of the City. Rule 56(f)(1) now expressly permits a court to grant summary judgment for a nonmovant, but only "after giving notice and a reasonable time to respond."
For the reasons set forth above, the court hereby ORDERS as follows:
1. The Cross-Motion of the Teachers' Union to Dismiss or Abstain is DENIED.
2. The two counts in this proceeding are non-core matters that are otherwise related to the City's bankruptcy case. Under 28 U.S.C. § 157(c)(1), this court will hear the adversary proceeding and, at the conclusion, enter proposed findings of fact and conclusions of law, subject to review and entry of final judgment by the district court as specified in § 157(c)(1) and related rules.
3. As to Count One, the Receiver's Motion for Summary Judgment is DENIED, and the court will schedule a hearing to determine whether, under Fed.R.Civ.P. 56(f)(1), the court should grant summary judgment for the Unions.
4. As to Count Two, decision on the Motion for Summary Judgment is deferred.
5. Pursuant to Fed. R. Civ. P. 56(h), the court hereby determines that the facts in the Facts section of this memorandum, except those enumerated below, are not genuinely in dispute and are established in this adversary proceeding. (This is not a conclusion that every fact so established is material.) The exceptions are the facts appearing in (i) the footnote to ¶ 15, (ii) ¶ 15.3, (iii) ¶ 15.5, (iv) the second and third sentences of ¶ 17, (v) the last sentence of ¶ 22, (vi) the last sentence of ¶ 26, (vii) the last sentence of ¶ 28, (viii) the last sentence of ¶ 30, and (ix) the footnote to ¶ 57.
Stern v. Marshall, 131 S.Ct. at 2620 (internal citations omitted).
In the language of the amended charter, this section is modified only by the replacement of "the 1st day of February" each time it occurs with "February 1."
In the amended charter, the language of this section is identical.
