493 B.R. 772
Bankr. E.D. Cal.2013Background
- Stockton sought Chapter 9 relief, asserting eligibility under 11 U.S.C. §§ 109(c) and 921(c).
- California authorized municipalities to pursue neutral evaluation or fiscal emergency under Gov’t Code § 53760, preconditions to filing.
- City initiated California neutral evaluation in 2012 amid deep structural deficits and labor costs comprising ~two-thirds of expenditures.
- City implemented pendency plan reductions and halted certain bond payments to balance the budget, triggering creditor objections.
- Neutral evaluation produced partial agreements with unions; capital market creditors largely abstained from negotiations.
- Trial addressed pre-filing obligations and good-faith negotiations, distinct from plan-confirmation issues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Stockton qualifies as a municipality authorized to file | Stockton is authorized by California law. | State law undermines City’s authority to file. | Stockton established authorization under California law. |
| Whether Stockton was solvent under § 109(c)(3) | City was insolvent as of filing, cash/budget/service delivery insolvencies shown. | Solvency questioned; some creditors argue maneuvering. | City proved insolvency under § 101(32)(C). |
| Whether Stockton desires to effect a plan under § 109(c)(4) | Pendency actions and unilateral impairments show plan-desiring conduct. | Desire could be speculative without a plan. | Court found a desire to effect a plan under § 109(c)(4). |
| Whether Stockton negotiated in good faith with impaired creditors under § 109(c)(5)(B)/(C) | Good-faith negotiations occurred with unions; capital markets engaged but remained non-responsive. | Capital markets lacked genuine negotiation; stone-wall posture. | Good-faith negotiations satisfied for unions; impracticability shown for retirees/capital markets. |
| Whether § 921(c) good faith is satisfied; presumption applies | Strong presumption in favor of good faith due to § 109(c) compliance. | Objectors challenge good faith with focus on strategy. | § 921(c) presumption of good faith applied; City carried burden. |
Key Cases Cited
- In re City of Vallejo, 408 B.R. 280 (9th Cir. BAP 2009) (desire to effect a plan evaluated by circumstantial evidence)
- In re City of Bridgeport, 129 B.R. 332 (Bankr.D. Conn. 1991) (insolvency temporal definition; debts as due)
- In re City of Stockton, Cal., 475 B.R. 720 (Bankr.E.D. Cal. 2012) (Stockton I; gateway and eligibility discussions)
- In re Town of Mammoth Lakes, Order Dismissing Case, No. 12-32463 (Bankr.E.D. Cal. 2012) (de facto plan via creditor agreements; dismissal without discharge)
- United States v. Memphis Cotton Oil Co., 288 U.S. 62 (1933) (variable meanings of 'cause of action' in different contexts)