Now It Gets Interesting - Stockton, CA Found Eligible to Remain in Chapter 9

Now It Gets Interesting - Stockton, CA Found Eligible to Remain in Chapter 9

Nearly nine months after it filed for protection under Chapter 9 of the Bankruptcy Code, a federal bankruptcy judge last week determined that the city of Stockton, California has satisfied the requirements of Section 109(c) of the Bankruptcy Code and may proceed with its efforts to adjust its massive bond, pension and employee obligations. Section 109(c) of the Bankruptcy Code mandates, among other things, that a municipality seeking protection under Chapter 9 must show either that it has negotiated in good faith with its creditors, or that such negotiations were "impractical". Stockton's bondholders had contended that the city's failure to engage in negotiations with Calpers, the California public employee pension system, prior to filing its petition required the dismissal of Stockton's bankruptcy case under Section 109(c).  

Judge Christopher Klein disagreed, and ruled that the fact that Stockton had sought major concessions from its bondholders but none from Calpers (even though Calpers is its single largest creditor) would not serve to disqualify Stockton from continuing its Chapter 9 case. He noted that that city was unequivocally insolvent, and determined that it had done everything it feasibly could to avoid resorting to Chapter 9 bankruptcy.  

While this might appear on the surface to be a defeat for the bondholders, it could turn out to be a loss worth experiencing. Stockton contends that negotiations with Calpers were impractical, given the strong public employee pension liability protections under California law. Judge Klein agreed, but only for the immediate purpose of determining whether Stockton was eligible to enter bankruptcy. Exiting bankruptcy will entail a completely different analysis. 

Read this article in its entirety at Kelley Drye & Warren LLP's Bankruptcy Law Insights blog

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