In the first hearing since Stockton’s June 28, 2012 filing of a bankruptcy petition, Judge Christopher M. Klein established firm control over the proceedings. This initial hearing focused on motions brought by the City of Stockton to lift the statutory confidentiality of its pre-bankruptcy negotiations under A.B. 506, notice to creditors, and scheduling deadlines for anticipated challenges to Stockton’s eligibility to file bankruptcy.
After a thoughtful discussion of competing interests, Judge Klein denied Stockton’s request for permission to disclose confidential communications made during the A.B. 506 pre-bankruptcy process. The California statute provides that negotiations during the 506 process cannot be disclosed except by court order if necessary to challenge the City’s bankruptcy eligibility. Judge Klein followed federal evidence rules providing for confidentiality of settlement negotiations with similar exceptions for information needed to determine eligibility for bankruptcy. The court explained the issue could be revisited if the information becomes necessary to determine eligibility. The Court did authorize the disclosure of the number and length of 506 meetings, the participant, the subject matters discussed, and the City’s “Ask” (the requested plan of adjustment).
Challenges to eligibility typically involve disputes over insolvency and/or the requirement that the City negotiated with creditors in good faith during the 60-90 days of the AB 506 period. Good faith negotiations are also required under federal bankruptcy law. A representative from the capital market indicated that it may challenge the City’s method of claiming insolvency on a budgetary basis as opposed a cash flow basis (an inability to pay obligations as they come due). Assured Guaranty, which insured $161.4 million of Stockton’s bonds, publicly stated it intends to vigorously enforce its rights as a creditor in any Chapter 9 proceeding, including the right to contest eligibility and confirmation of any plan of adjustment proposed by the city.
Judge Klein modified the City’s proposed timelines, setting a deadline of July 20th was set for the City to submit all its evidence of eligibility for bankruptcy and August 9th for filing objections to the City’s eligibility. A status conference before the Judge will be heard on August 23, 2012 at 10:00 a.m. for discussing discovery, motions, pretrial and trial setting for challenges to eligibility. Judge Klein also authorized the Stockton Police Officers Association (SPOA) to set a noticed motion to lift the stay over disciplinary appeals. After filing the Petition on June 28th, the City has taken the position that it will not proceed with appeals of disciplinary actions imposed against police officers. The City argues that because the appeals involve potential back-pay they are automatically stayed by the bankruptcy. While evaluating potential challenges to the City’s eligibility, the SPOA continues to negotiate with the City over its plan of adjustment.
Chapter 9 requires as a condition of confirmation that a majority of each classes of claims impaired accept the plan. Although Chapter 9 also includes “cramdown” provisions requiring only acceptance of one class of claims, the court informed the City that it did not intend to simply confirm the City’s plan of adjustment. Rather Judge Klein told the City it would have to negotiate a plan of adjustment with its creditors, likely requiring further mediation.
