542 B.R. 261
9th Cir. BAP2015Background
- City of Stockton filed chapter 9 in 2012 after severe revenue declines and fiscal mismanagement (large pension/benefit promises, declining tax base). Mediated settlements were reached with most creditor groups except Franklin funds.
- Franklin held secured bonds (collateral: two golf courses, community center, ice rink) and an unsecured claim; bankruptcy court valued Franklin’s secured collateral at $4,052,000 (not appealed).
- The City’s confirmed Plan paid Franklin’s allowed secured claim in full, gave Franklin ~$2.07M from a reserve fund, and treated Franklin’s unsecured claim in Class 12 with other general unsecureds (resulting in a small unsecured recovery; Franklin’s overall recovery ≈17.5%).
- The Plan incorporated mediated settlements with unions, retirees, CalPERS and other bond insurers; it required a voter-approved sales-tax increase (which passed) and was substantially consummated before appeal.
- Franklin appealed confirmation, arguing lack of good faith, improper classification (unfair discrimination), failure of the chapter 9 “best interests” test, and that retiree health claims should be discounted to present value. The City moved to dismiss the appeal as equitably moot.
Issues
| Issue | Plaintiff's Argument (Franklin) | Defendant's Argument (City) | Held |
|---|---|---|---|
| Equitable mootness of appeal | Appeal should proceed because monetary relief to Franklin could be fashioned without unraveling plan | Plan substantially consummated; reversal would upset many third-party reliance interests and settlements | Appeal as to confirmation generally dismissed as equitably moot; but monetary claim relief retained for consideration |
| Good faith of plan (§1129(a)(3)) | Plan wasn't proposed in good faith because pensions weren’t reduced while Franklin’s unsecured recovery was minimal | Plan resulted from extensive, arms-length negotiations; employees/retirees shared burdens indirectly via wage/benefit concessions | Bankruptcy court’s finding of good faith affirmed (no clear error) |
| Classification / unfair discrimination (§§1122, 1123(a)(4)) | Franklin’s unsecured claim improperly classified / out‑voted within Class 12; allegedly gerrymandered | Other capital-market creditors had distinct legal rights, collateral and bespoke settlements justifying separate classes; Class 12 treatment was uniform | Court upheld classification and equal treatment within Class 12; no clear error |
| Discounting retiree health claims (§502(b)) | Retiree health claims (future cash flows) must be discounted to present value, reducing aggregate claim and altering Class 12 distributions | §502(b) fixes the amount “as of” petition date and does not unambiguously require present-value discounting; courts differ | Court followed Third Circuit reasoning (Oakwood Homes) and held bankruptcy court did not err in declining to discount; affirmed |
Key Cases Cited
- In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) (articulates four-factor equitable‑mootness test for plan‑confirmation appeals)
- Rev Op Group v. ML Manager LLC (In re Mortgages Ltd.), 771 F.3d 1211 (9th Cir. 2014) (appellate motion to dismiss as equitably moot is available)
- JPMCC 2007‑C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161 (9th Cir. 2015) (third‑party reliance and feasibility of crafting relief bear on equitable mootness)
- In re Oakwood Homes Corp., 449 F.3d 588 (3d Cir. 2006) (§502(b) "amount as of" language does not clearly require discounting to present value)
- In re Sylmar Plaza, L.P., 314 F.3d 1070 (9th Cir. 2002) (good‑faith standard for plan proposal reviewed under totality of circumstances)