Thursday, August 9, 2012

Stockton’s Eligibility for Bankruptcy Protection Challenged

On August 8, 2012, National Public Finance Guarantee Corporation filed an objection to the City of Stockton’s qualifications for bankruptcy under Section 109(c) of the Bankruptcy Code. National issued over $93,000,000.00 in lease revenue bonds, lease revenue refunding bonds, and revenue bonds. Today, August 9th, is the deadline for creditors to object to Stockton's eligibility for bankrupcty.

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. Federal bankruptcy law also requires good faith negotiations with creditors.

National argues the City did not negotiate in good faith with its creditors and did not file its bankruptcy petition in good faith. National accuses the City of “sheltering” its CalPERS pension obligations and not treating creditors equitably. National frames its objections as failing to negotiate in good faith with CalPERS, but argues that the pendency plan does not treat creditors equitably.

National’s claim of inequitable treatment appears premature as the Court must determine the City’s eligibility for bankruptcy, before considering the fairness of the plan of adjustment. In denying retirees facing the complete elimination of retiree medical benefits next year, Judge Klien an August 6, 2012 Opinion holding that “[s]ettled bankruptcy law permits the City to implement interim contractual modification before the confirmation of a chapter 9 plan of adjustment but such revisions do not, as a matter of law, become permanent unless and until made part of a confirmed plan of adjustment or otherwise voluntarily agreed.” Judge Klein noted that the remedy for addressing objections to the pendency plan is negotiating their treatment under a chapter 9 plan. The same reasoning would seem to apply to National’s objection to the treatment of CalPERS.

National’s argument also fails to account for the tens of millions of dollars in wages and benefits withheld from employee since 2010 through purported emergency actions unconstitutionally impairing labor contracts. These additional cuts reduced pension benefits, required employees to contribute up to 9% of their pay towards their pensions, drastically reduced medical coverage. The effect of these cuts is directly reflected in the City’s record breaking homicide rates and inability to retain or recruit police officers.

A status conference before the Judge will be heard on August 23, 2012 at 10:00 a.m. for trial setting for challenges to eligibility.