In re City of Stockton
526 B.R. 35
Bankr. E.D. Cal.2015Background
- City of Stockton filed chapter 9 and proposed a plan of adjustment that preserves CalPERS-administered pensions but achieves large net reductions in total compensation (salary cuts, elimination of retiree health benefit program ~ $300–$550M) to balance concessions among creditors and employees.
- Franklin Templeton (bondholder) objected, arguing (1) plan lacks good faith because pensions were not modified and (2) Franklin’s claim should be separately classified so the cramdown fairness (11 U.S.C. § 1129(b)) applies to it.
- CalPERS intervened vigorously, asserting (a) California law (PERL §§ 20487, 20574) forbids rejection of CalPERS contracts in chapter 9 and (b) CalPERS holds a $1.6 billion statutory termination lien that would block restructuring.
- The court addressed whether CalPERS’ state-law protections and lien withstand federal bankruptcy law (Supremacy Clause), whether CalPERS has standing, and whether pensions/CalPERS contract are subject to § 365 rejection or modification in chapter 9.
- Court held: (1) State statutes that shield CalPERS contracts from § 365 are preempted by federal bankruptcy law; (2) the PERL termination lien is a statutory lien avoidable under 11 U.S.C. § 545; (3) Contracts Clause and California vested-rights doctrine do not bar bankruptcy impairment; (4) Chapter 9 § 903/§ 904 do not protect these state statutory protections because they concern financial/contractual relations, not core political/governmental powers.
- On confirmation, court found the plan proposed in good faith, feasible, treats creditors (including Franklin) fairly in context of the overall concessions (employees/retirees give up more value than capital creditors), and thus confirmed the plan.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May CalPERS’ contract and pensions be rejected or modified under federal bankruptcy law (§ 365 / chapter 9)? | Franklin: Yes; pensions can be modified; plan lacks good faith if pensions untouched. | CalPERS: No; PERL § 20487 forbids rejection/assumption without CalPERS consent and pensions are inviolable under state law. | Court: Federal bankruptcy law preempts PERL protections; pension contracts and CalPERS servicing contract may be adjusted in chapter 9. |
| Is the PERL § 20574 termination lien enforceable in chapter 9 or avoidable as a statutory lien? | CalPERS: Lien (~$1.6B) protects pension claims and would block restructuring. | City/Franklin: Lien is a statutory lien that cannot have arisen/perfected prepetition and is avoidable under § 545. | Court: Termination lien is a statutory lien avoidable under § 545; thus not an insuperable obstacle. |
| Do § 903/§ 904 (state sovereignty / political or governmental powers) bar federal bankruptcy remedies against CalPERS protections? | CalPERS: State’s control over municipal pensions is a political/governmental power protected by § 903/904. | City: § 903/904 do not shield ordinary financial and contractual relations; Congress’s bankruptcy power and Supremacy Clause prevail. | Court: § 903/904 protect core governmental/political functions but not financial/employment contractual relations; PERL cannot override Bankruptcy Code. |
| Should Stockton’s chapter 9 plan be confirmed despite not modifying CalPERS pensions? | Franklin: Plan not proposed in good faith and unfairly classifies Franklin; demands separate classification for cramdown protections. | City: Plan is negotiated, feasible, employees/retirees gave substantial concessions; Franklin’s loss reflects its unsecured position and poor collateral. | Court: Plan is proposed in good faith, feasible, classification appropriate (Franklin not separately classified), retirees surrendered more value than Franklin; plan confirmed. |
Key Cases Cited
- United States v. Bekins, 304 U.S. 27 (recognizing federal power to adjust municipal debt via bankruptcy)
- Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513 (federal bankruptcy may impair contracts despite Contracts Clause concerns)
- Sturges v. Crowninshield, 17 U.S. 122 (historical Contracts Clause principles about impairment)
- NLRB v. Bildisco & Bildisco, 465 U.S. 513 (heightened standard for rejecting collective bargaining agreements in bankruptcy)
- M & G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (Supreme Court’s approach to vested rights in retiree benefits under collective agreements)
- Mission Independent School Dist. v. Texas, 116 F.2d 175 (state cannot reserve superior treatment for its own claims in municipal bankruptcy)