475 B.R. 720
Bankr. E.D. Cal.2012Background
- Stockton filed a Chapter 9 petition and moved to lift confidentiality under Cal. Gov’t Code § 53760.3(q) to reveal pre-filing neutral-evaluation details for eligibility purposes.
- California law requires confidentiality of the neutral-evaluation process unless narrowly disclosed under § 53760.3(q)(1) or (2).
- The court will permit limited disclosure only to determine eligibility under § 109(c)(2), and otherwise apply federal evidentiary law for remaining § 109(c) elements.
- The five statutory § 109(c) eligibility elements are evaluated under federal law, with the burden on the municipality to prove eligibility by a preponderance of the evidence.
- The court adopts an incremental approach: protect confidential materials via a protective order while permitting some nonconfidential disclosures; no blanket disclosure of all pre-filing discussions is required.
- The court ultimately denies the broad § 53760.3(q) request for disclosure of all neutral-evaluation content but allows certain items (e.g., meeting counts/participants/issues as of petition date) to be disclosed to establish prima facie § 109(c)(2) eligibility; a separate protective order will govern remaining materials.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of California confidentiality in §109(c)(2) eligibility | City seeks broad disclosure to prove §109(c)(2). | State confidentiality applies only to §109(c)(2) and not to federal questions. | Confidentiality applies only to §109(c)(2); other issues remain federal and not controlled by the state provision. |
| What neutral-evaluation information may be disclosed | City argues all pre-petition discussions should be disclosed to prove eligibility. | Only enumerated items post-AB 506 and during proceedings may be disclosed; many items remain protected. | Number/length of meetings, participants, types of issues, and status of negotiations as of petition date may be disclosed for §109(c)(2); statements/information/documents remain protected; protective order governs the rest. |
| Role of privilege and protective order; use of mediation | Settlement discussions should be accessible to asset §109(c)(2) proof. | No federal settlement privilege; use protective order and optional mediator to preserve confidentiality. | No federal settlement-privilege recognized; protective order authorized; appoint judicial mediator; incremental disclosure permitted under protective order. |
Key Cases Cited
- In re Vallejo, 408 B.R. 280 (9th Cir. BAP 2009) (establishes preponderance standard and relates to good-faith/§109(c) analysis)
- In re Valley Health Sys., 383 B.R. 156 (Bankr.C.D. Cal. 2008) (discusses burden and eligibility standards in Chapter 9)
- In re County of Orange, 183 B.R. 594 (Bankr.C.D. Cal. 1995) (guides burden and procedural posture in Chapter 9)
- In re N.Y.C. Off-Track Betting Corp., 427 B.R. 256 (S.D.N.Y. 2010) (state-law gatekeeping under §109(c)(2) discussed)
- In re Suffolk Regional Off-Track Betting Corp., 462 B.R. 397 (Bankr.E.D.N.Y. 2011) (authority on state law gating and federal questions)
- In re MSTG, Inc., 675 F.3d 1337 (Fed.Cir. 2012) (no federal-settlement-privilege; use protective orders to preserve confidentiality)