The First Fight: Stockton California Bankruptcy Case 12-32118


On June 29, 2012, the City of Stockton filed a motion to disclose information about the failed neutral evaluation process (NEV).  The NEV was required to take place under California Law, California Government Code 53760.  The NEV process began on March 27, 2012, and ended approximately 90 days later after an extension of time to try and continue negotiations to avoid bankruptcy.  The NEV process concluded on June 25, 2012.  Code section 53760 allows for disclosure of NEV information under certain circumstances.  If it is determined that the confidential information disclosed during the NEV process is necessary to prove a municipality is eligible to be a debtor under Chapter 9 of the Bankruptcy Code.  This is the reason the City of Stockton sought permission from the Bankruptcy Court to release confidential information.  Stockton wanted to provide the Bankruptcy Court with a 790 page document that details their financial circumstances, the length of the negotiations and the participants.  Stockton needs to prove it filed its bankruptcy petition in good faith pursuant to Bankruptcy Code section 921(c).

A number of parties that participated in the NEV process opposed Stockton’s request including Wells Fargo National Association.  Their limited objection argued that Stockton’s request only sought permission for Stockton to release information about the NEV process and did not ask for permission for all parties that participated in the NEV process to disclose their information.  If only Stockton could disclose this information then it would look one sided.  The concern was that Stockton would merely pick and choose the information to disclose and not show the whole picture of the failed negotiations.

A hearing was held regarding Stockton’s request on July 6, 2012.  The Bankruptcy Court chose to deny Stockton’s request and a memorandum of decision on July 13, 2012.  The Court implemented a protective order on the confidential information and take an incremental approach to approach to allowing any of the NEV information to be disclosed.  The Court reasoned that there is no evidence that Stockton needs to disclose confidential information to prove its eligibility to be a debtor under Chapter 9 yet.

Unlike a consumer or business filing for bankruptcy protection under Chapter 7 or Chapter 13, an order for relief is not immediately entered when a municipality files for protection under Chapter 9.  A municipality must prove it is eligible for relief and that the petition was filed in good faith.  This will be the next major fight in Stockton’s bid to seek relief under the Bankruptcy Code.