Chapter 9 Forcing Post-Filing Negotiations Again?


It appears officials and legal representatives from a California community recently deemed eligible to file for municipal bankruptcy protection under tough California mandates may have forced previously uninterested creditors back to the negotiating table with its most recent legal victory.

It was reported this week that the city of Stockton and key creditors in its Chapter 9 bankruptcy case, the largest on record from a U.S. city, have told a judge they are willing to resume negotiations that previously failed. Stockton essentially wants concessions from some creditors to which they owe. Similarly, the community of Central Falls, RI also forced stakeholders to yield and take a “haircut” – in that case, public employees and retirees over pensions benefits – after its Chapter 9 began moving successfully through the courts there.

About a month ago, U.S. Bankruptcy Judge Christopher Klein ruled Stockton did meet the threshold to officially enter into municipal bankruptcy. The key pieces to the decision was that Stockton is, in fact, insolvent and that it went through the good-faith negotiation processes mandated by the 2011 California law designed to slow the number of such filings. While the judge didn’t dismiss the bondholders’ problem with creditors taking a haircut while Stockton continued to make full contributions to the state pension program (CALPERS), Klein did determine that an eligibility proceeding wasn’t the right time for such arguments to be made.

Stockton is among many U.S. cities, including several others in California, struggling to get out of crushing debt wrought by factors including expensive union contacts, pension payments and tax base shrinkage caused by the real estate collapse, for which Stockton once boasted the nation’s second-highest foreclosure rate.

-Brian Shappell, CBA, NACM staff writer

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