Category Archives: City of Stockton Argues It Is Eligible to File Bankruptcy

Update of Stockton California’s Chapter 9 Bankruptcy Case as of November 2013


If you did not know, The City of Stockton, California filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code on June 28, 2012, Bankruptcy Case Number 12-32118. Chapter 9 is the chapter for municipalities to seek relief from their debts. Chapter 9 is a reorganization of debts in a plan that creditors vote on. For the plan of reorganization to be confirmed/approved a certain number of votes for the plan from different debt holders/classes of the City of Stockton must approve or vote for approval of the plan of reorganization. It is a similar process in a corporate or individual Chapter 11 reorganization. Filing Chapter 13 is also a reorganization of debts, but creditors do not have the right to vote on their treatment in the plan of reorganization.

City of Stockton Eligible for Relief Under Chapter 9

Unlike other chapters of the bankruptcy Code a municipality that files under Chapter 9 for relief from its debts must prove it is eligible for relief. On April 1, 2013, the Honorable Christopher M. Klein, bankruptcy judge for the Bankruptcy Court for the Eastern District of California held that the City of Stockton demonstrated by a preponderance of the evidence that (i) it is a municipality; (ii) it is authorized under state law to file for chapter 9; (iii) it was insolvent (as of the petition date); (iv) it desired to effectuate a plan to adjust its debts; and (v) it negotiated in good faith with relevant creditors. See 11 U.S.C. § 109(c)(1)-(5); Cal. Gov’t Code §53760.3(o). The Court also found that the City filed its petition in “good faith” under 11 U.S.C. § 921(c).

Amended Disclosure Statement Filed on November 21, 2013

On November 21, 2013, Stockton’s bankruptcy attorneys filed Stockton’s Amended Disclosure Statement. Filing a Disclosure Statement is part of the process of reorganizing debts in a Chapter 9 case. The Disclosure Statement provides for the treatment of the creditors in the Plan of Reorganization to be filed later. The City of Stockton filed their Disclosure Statement and Amend Disclosure Statement on November 21, 2013. The City of Stockton’s plan involves about $299 million publicly held securities (various bonds issued over the years). Please see a previous blog article about Why Did Stockton California File For Bankruptcy Under Chapter 9 for more information about why Stockton filed for bankruptcy and Pension Obligation Bonds.

Reduction of Retiree Healthcare Benefits

Stockton is trying to impair or reduce the interests of former employees and current retirees regarding their health benefits. Stockton cannot go into anymore debt or issue more pension obligations bonds to make up the difference in what they promised people and what they can actually afford. According to Stockton’s disclosure statement retirees have had their benefits reduced by 30% – 50% and new hires are receiving benefits at a 50% – 70% reduction from historical benefit levels. Retiree Health Benefits filed a general unsecured claim for their reduction in benefits due to the City of Stockton’s bankruptcy filing, negotiated reductions and changes in California State law. The reduction of retiree healthcare benefits according to their claim filed with the Bankruptcy Court is $545 million. This total does not include the reduction of existing healthcare benefits for employees of Stockton employed as of July 1, 2012 (reduction of healthcare benefits estimated at $1 billion). This general unsecured claim of retiree’s will be paid less than 1% of the amount claimed or about $5 million.

Next Steps

The City of Stockton’s bankruptcy lawyers need to file its Plan of Reorganization. The deadline to object to confirmation is February 24, 2014. The confirmation/approval hearing of the plan of reorganization is set for March 5, 2014, at 9:30 a.m.

The City of Stockton’s Position Regarding Qualifying to File Chapter 9 Bankruptcy


The single most important issue in the City of Stockton’s Chapter 9 bankruptcy case at the moment is whether Stockton is eligible to be a debtor under Chapter 9 of the Bankruptcy Code. Assured Guaranty Corp.’ bankruptcy lawyers have mounted a pretty good case as to why Stockton is not eligible. Stockton’s bankruptcy attorneys continue to fire back though.

The City of Stockton Fires Back

On February 15, 2013, Stockton filed its Reply to Objections to its Statement of Qualifications Under Section 109(c) of the United States Bankruptcy Code. The three issues are: (1) whether Stockton was insolvent at the time the petition was filed; (2) did Stockton act in good faith during the AB 506 process and generally by failing to seek pension concessions and/or additional concessions from the members of its nine unions and retirees; (3) did the City’s 790-page Ask produced for and during the AB 506 process satisfy the good faith negotiation requirement of Bankruptcy Code § 109(c)(5)(B)?

Was Stockton Insolvent?

The argument is that Stockton could have or should have done a number of things and then it would not have been insolvent. While that might be true, hindsight is always 20-20. Stockton argues that as a matter of law a third-party, such as Assured Guaranty, Corp., is not legally relevant. Of course Stockton could have fired 90% of their employees and stopped providing essential services and then be able to pay bills as they came due.
Did Stockton Act in Good Faith During the Neutral Evaluation Process?
Stockton believes it did act in good faith. They point out that they reduced the city workforce to levels that made delivering basic levels of service near impossible. They also have reached concession agreements with all nine labor unions and reduced pay and employment benefits. Stockton believes that making or requesting additional reductions would make seasoned veterans, particularly police officers, seek employment in other cities. They go no to point out Stockton is not the safest city. While this seems to be a valid concern, what counties or cities are really hiring new employees right now? Not many. At the same time, how can decisions to try and preserve the workforce be determined to be not in good faith?

The City of Stockton Made Significant Cuts

Stockton reduced its general fund by 36% of three years prior to filing for bankruptcy protection. It reduced non-public safety staffing by 43%, reduced sworn police officers by 25% even while violent crime was increasing and reduced fire staff by 30%. Stockton argues it aggressively negotiated and reduced the above-market compensation it chose to give employees in earlier years and now offers compensation at below market rates. What markets are they comparing themselves to is the question though? They also provide they closed senior centers and reduced recreation classes, after school programs and library programs, reducing library hours by 48%, did not replace city vehicles and used them beyond their useful lives and deferred maintenance of roads and city buildings.

Stockton Hired A Professional to Provide a Second Opinion

In February 2012 Management Partners came to the conclusion that Stockton was insolvent and the city could no longer provide services at the appropriate level. Management Partners also came to the conclusion that additional reductions in expenses would have to take place. Assured argues that Stockton could have increased revenues by raising taxes. Stockton addresses this by countering the cities accounting irregularities and perceived or actually mismanagement would make tax increases unsuccessful.

Stockton adamantly believes that Chapter 9 was the only viable option for the city to stop the bleeding and continuous cuts in city programs and staffing. The trial on these issues begins March 26, 2013, and is supposed to last four days.