Monthly Archives: February 2013

The Latest in the City of Stockton’s Chapter 9 Bankruptcy Case

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The single largest issue in the City of Stockton’s Chapter 9 bankruptcy case is the cities qualification under section 109(c) of the bankruptcy code to be a debtor. The City has filed its Statement of Qualification. In my previous blog articles I discussed the various arguments by parties in interest as to why the City faces challenges proving it qualifies to be a debtor and obtain relief under the Bankruptcy Code. Assured Guaranty Corp. (“Assured”) is definitely leading the charge. Assured has guaranteed bonds issued by Stockton and does not want to allow the bankruptcy court to allow Stockton to not have to pay the bonds back in full. If that happened then Assured would be on the hook to satisfy the bond holders. On December 14, 2012, Assured’s bankruptcy lawyers filed a supplemental objection to the City’s Chapter 9 petition and statement of qualifications.

The supplemental brief is a scathing analysis of events leading up to Stockton’s bankruptcy filing. To recap, Stockton must prove that it was insolvent under pursuant to 11 U.S.C. § 109(c)(3); (ii) has satisfied the negotiation requirement contained in 11 U.S.C. § 109(c)(5); (iii) has negotiated in “good faith” under Cal. Gov’t Code § 53760.3(o), which is a requirement for specific authority under Cal. Gov’t Code § 53760(a) to be a debtor under 11 U.S.C. § 109(c)(2); and (iv) has filed its petition in “good faith” under 11 U.S.C. § 921(c). Cal. Gov’t Code § 53760 was passed by the California legislature to force California municipalities down two paths before filing for bankruptcy protection. A municipality can either declare a fiscal emergency or participate in the neutral evaluation process before filing for bankruptcy protection under Chapter 9. Stockton chose the neutral evaluation process and it has caused the city nothing but problems since. Assured is using Stockton’s participation in the neutral evaluation process against them now that Stockton is trying to prove it qualifies to be a debtor under Chapter 9 of the bankruptcy code.

Back to the supplemental objection filed by Assured. Assured argues that Stockton purposely to budget itself into not being able to pay a few bills on time in an attempt to show it was not paying its bills as they came due. Assured also argues that Stockton has not changes its ways regarding spending. It appears Stockton is still paying millions to subsidize entertainment venues that are non-essential. Prior to filing for bankruptcy protection Stockton’s Chief Financial Officer direct the various departments to reduce general fund spending by identifying ways to cut costs by 5%, 10% or 15%. Each department head submitted ways to cut costs but Stockton’s city manager did not recommend the cuts the city council did not adopt any of the cuts. Stockton then initiated the neutral evaluation process to try and negotiate with debt holders. Why did Stockton not adopt the cuts suggested by its department heads?

As pointed out before the single most significant factor in Stockton’s financial problems is how it compensated employees. The most egregious was the medical benefits for retirees. Retirees enjoyed free medical care for themselves and a dependent for life without any co-pays or premiums. This just simply does not exist in the real world. Especially not for all the other hard working citizens of Stockton who do not work fo the City of Stockton.
Assured also argues that Stockton failed to seek additional revenue sources to prevent revenue shortfalls prior to bankruptcy. Assured argues that the City has not sought to increase taxes, has not charged for reimbursable services and not evaluated its saleable property.

Assured further argues that Stockton cannot prove it was insolvent as of the bankruptcy filing date given that Stockton’s record keeping and internal controls were so poor. Apparently the CFO in September 2011 called Stockton’s record keeping grossly negligent and California’s State Controller has launched an investigation into Stockton’s record keeping.
Assured’s supplemental brief provides many concerning alleged financial practices by the City of Stockton leading up to the bankruptcy filing. The hearing on Stockton’s qualifications to be a debtor under chapter 9 is actually today, February 26, 2013, at 1:30 p.m. It will be very interesting what arguments Stockton’s bankruptcy attorneys make to explain Assured’s allegations.

Do I Have the Right To Amend My Schedules After Filing My Bankruptcy Petition?

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What happens when you filed your bankruptcy petition with incorrect information? Mistakes happen all the time. No one is perfect. Does that mean you get to amend your petition to include the correct information?

According to the Federal Rules of Bankruptcy Procedure Rule 1009(a), “a voluntary petition, list, schedule, or statement may be amended by the Debtor as a matter of course at any time before the case is closed.” The bankruptcy courts want to provide the honest consumer who is unable to repay his or her debts with the opportunity to obtain a fresh start. For the dishonest consumer the rules are not as lenient. The Federal Rules of Bankruptcy Procedure Rule 4003(b) states that a party in interest or the trustee may object to the amendments if they believe that the amendments are incorrectly applied or used. The bankruptcy courts have also ruled that a judge could disallow certain exemptions if there was bad faith by the debtor (person claiming the exemptions) or prejudice to creditors. See Martinson v. Michael (In re Michael), 163 F.3d. 526, 529 (9th Cir. 1998).

So what is considered bad faith? Generally, this question is answered based on the totality of circumstances. There can be many instances of bad faith. One of the most common examples of bad faith is when the person amending their petition tried to hide assets and only amended their schedules to reflect the true value when it was beneficial to them or when they are found out or are in danger of being found out by the trustee or creditor. Bad faith can be found even if the person amending their petition disclosed the asset but misrepresented the value or undervalued the asset. If bad faith is found the right to amend the petition to claim an exemption could be lost. If you need to make a change in your bankruptcy petition is best to let your bankruptcy lawyer know as soon as possible.

What about prejudice to creditors? The court in Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir. 1983) states, “simple delay in filing an amendment….does not alone prejudice creditors. Nor does prejudice to creditors occur merely because a claimed exemption, if held timely, would be granted.” The court in In Re Arnold, 252 B.R. 778 (B.A.P. 9th Cir., 2000) lays out some instances of what is considered prejudice to creditors. “Prejudice to creditors is clearly present where they suffer an actual economic loss due to a debtor’s delay in claiming his exemption.” See Grzesnikowski v. Shaffer (In re Shaffer), 92 B.R. 632, 635 (Bankr.E.D.Pa. 1988). This was considered prejudice to creditors because the creditor would have acted differently if they knew the exemptions would be amended. In another case, In re Bowman, 1996 WL529233 (Bankr.D.Md. 1996), the court found there was prejudice to creditors because “substantial judicial resources were devoted to resolving issues that would not have required resolution if the debtor had promptly claimed the exemption.”

Needless to say, it is very important to make sure your petition and schedules are accurately listed to avoid losing your assets to creditors. It would be wise to consult with a bankruptcy attorney before filing your petition to ensure that all your assets are listed properly and therefore eligible to be protected by properly applied exemptions.

Can Student Loans Be Discharged In Bankruptcy?

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A large portion of Americans are struggling with their student loan payments. Student loans are available for many different types of occupations and programs. Not just for going to a traditional college and receiving a college degree. Student loans are called good debt sometimes because the idea is that you obtain training or education and then you can make more money and payoff the student loan debt. Things to not always work out like that though.

So, can student loans be discharged when filing for bankruptcy protection? Section 523(a)(8) and the Bankruptcy Reform Act of 2005 make student loans not dischargeable unless you can successfully argue the student loans impose an undue hardship on the person filing bankruptcy or their dependents.

In the Ninth Circuit the test is the Bruner test from a Second Circuit case in 1987. In re Brunner, 46 B.R. 752, 753 (S.D.N.Y. 1985) aff’d, 831 F.2d 395 (2d Cir. 1987). Your bankruptcy lawyer must file an adversary proceeding within the bankruptcy case to prove the bankruptcy filer (1) cannot maintain, based on their current income and expenses, a minimal standard of living if the student loans have to be paid back; (2) these circumstances are likely to persist for a significant portion of the repayment period of the student loans; (3) the bankruptcy filer made a good faith effort to repay the student loans.

Can A Minimal Standard of Living Be Maintained With Student Loans?

What is a minimal standard of living and can it be maintained if forced to repay the student loans? This is a case by case analysis based on the circumstances the bankruptcy filer finds themselves in. The bankruptcy filers Schedules I & J will be scrutinized. Your bankruptcy attorney and you will have to spend some time discussing your income and expenses in great detail. Are the bankruptcy filer’s expenses even necessary? Is too much money being spent on food or clothes each month? Are there any children that need to be supported and for how long? What future expenses will the bankruptcy filer have to pay in the future?

Is the Condition Likely to Persist?

There are again any number of factors that make the condition likely or unlikely to persist. If the debtor is 55 years old and well past the peak earning years of their life, then the condition is most likely to get worse and not better. Is future employment or pay increases likely or unlikely? If there is only a temporary problem reducing the debtor’s income and their income will increase in the near future the condition is not likely to persist, or you in fact know the condition is not going to persist.

Good Faith Attempt to Repay the Student Loans

The best evidence that you have acted in good faith and made a good faith effort to repay the loans is you actually did pay some of the student loan payments until they became too much. If you have asked for multiple deferments that is evidence that you are acting in good faith and tried to continue to make the student loan payments.