Category Archives: Municipal Bankruptcy and Chapter 9

It Appears California’s New Neutral Evaluation Process is a Failure Just Like Debt Consolidation is a Failure


Stockton California is the first municipality in California, that I am aware of, that has had to comply with AB 506 or Government Code Section 53760 before filing a Chapter 9 municipal bankruptcy.  As of this moment Stockton has not filed for bankruptcy protection yet.  What we do know is that the Neutral Evaluation process failed.  The city was not able to work out agreements with enough of their creditors to prevent having to file for bankruptcy protection.

Why the Neutral Evaluation process envisioned by the California legislature will most likely fail to prevent municipal bankruptcy cases are the same reasons why debt consolidation fails for our clients time and time again.  Creditors rarely choose to actually take less and work out a reasonable settlement that is possible for the city or person that owes the money.  It is also almost impossible to work something out with each and every creditor.  Unfortunately there always seems to be a creditor that files a lawsuit.  Credit card companies force our clients into bankruptcy just like the City of Stockton’s creditors are forcing them to file bankruptcy.  It is no different.

What happens when you miss a few credit card payments?  The first thing that will happen is late charges will be added to the amount owed.  Then your percentage rate will skyrocket to well over 20%.  Both of these things make it very difficult if not impossible for someone who is already having difficulty making the minimum payment to ever get out from under the debt.  Is this in the credit card company’s best interest?  Common sense would tell you no.  They are not making it easier to pay back the debt, but much more difficult.  So if you try and reach a settlement with them to make the terms easier for you to pay back the debt and avoid bankruptcy you will most likely be unsuccessful.

The City of Stockton was forced by California State Law to try and do some sort of debt settlement with their creditors.  The creditors new the other option would be bankruptcy and they still said no to better terms to keep the City of Stockton out of bankruptcy.  They would rather take their chances after the City of Stockton files for bankruptcy protection.  For some reason large credit card corporations and it appears creditors’ owed money by the City of Stockton have crunched the numbers and bankruptcy is better for them too.

Did Stockton, California File Bankruptcy Under Chapter 9?


No, not yet. On February 28, 2012, the Stockton City Council voted to begin the confidential neutral evaluation process.  Like many municipalities across the nation Stockton is being squeezed by increased retirement costs, bond payments and decreased revenue from property tax, sales tax, business license and utility user tax.

California recently passed a law, AB 506, or Government Code Section 53760, that provides two possible paths to municipal bankruptcy under California law.  One path is the “Neutral Evaluation Process.”  The other path is declaring a fiscal emergency and adopts a resolution by a majority vote of the governing board pursuant to Government Code Section 53760.5.

What is the Neutral Evaluation Process?

The Neutral Evaluation Process (“NEP”) is initiated by the request of the public entity and giving notice by certified mail to all interested parties.  The interested parties then have 10 business days from the receipt of the request for NEP to respond.  If the interested parties choose to participate in the NEP then the public entity and interested parties need to agree on whom the neutral evaluator will be and what process will be used to resolve the dispute.  If the no evaluator can be agreed upon within 7 business days after the parties agree to the NEP then the public entity shall select five qualified neutral evaluators and provide their names, references and backgrounds to the participating interested parties.  The participating parties then have 3 business days a majority of the participating parties can strike up to four of the neutral evaluator proposed by the public entity.  If the participating parties strike less than four of the proposed neutral evaluators, then the public entity may choose which of the remaining evaluators will be selected.

A neutral evaluator should have experience and training in dispute resolution and should meet at least one of the following qualifications: (1) At least 10 years of high-level business or legal practice involving bankruptcy or service as a United States Bankruptcy Judge; (2) Professional experience or training in municipal finance and one or more of the following issue areas: (A) Municipal organization; (B) Municipal debt restructuring; (C) Municipal finance dispute resolution; (D) Chapter 9 bankruptcy; (E) Public finance; (F) Taxation; (G) California constitutional law; (H) California labor law and (I) Federal labor law.

The NEP can only last 60 days from the date the evaluator is selected unless the parties agree otherwise.  The public entity will pay for half of the costs of for the evaluator.  The NEP will end if any of the following occur: (1) The parties execute an settlement agreement; (2) The parties reach an agreement or proposed plan of readjustment that requires the approval of a bankruptcy judge; (3) The neutral evaluation process has exceeded 60 days following the date the neutral evaluator was selected, the parties have not reached an agreement, and neither the local public entity or a majority of the interested parties elect to extend the neutral evaluation process past the initial 60-day time period; (4) The local public entity initiated the neutral evaluation process pursuant to subdivision (a) and received no responses from interested parties within the time specified in subdivision (b) and (5) The fiscal condition of the local public entity deteriorates to the point that a fiscal emergency is declared pursuant to Section 53076.5 and necessitates the need to file a petition and exercise powers pursuant to applicable federal bankruptcy law.  If the NEP is unsuccessful then the public entity may file for protection under Chapter 9 of the Bankruptcy Code.  See California Government Code Section 53760.3.

What is declaring a Fiscal Emergency?

A public entity may also file for bankruptcy protection under Chapter 9 in California if the public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board at public hearing.  At the public hearing, a finding that the financial state of the local public entity jeopardizes the health, safety or well-being of the residents of the public entity. See California Government Code Section 53760.5.

Stockton, California Participating Parties in the NEP

The City of Stockton, California has started the NEP and the participating parties are as follows: Association of Retired Employees of the City Of Stockton; Assured Guaranty; California Public Employees Retirement System (CalPERS); Dexia Credit Local, New York Branch; Franklin Advisers, Inc.; Jarvis/MUD case; Mid-Management/Supervisory Level Unit (Management B&C Employees); National Public Finance Guarantee Corp.; Operating Engineers’ Local 3; Price case; Stockton City Employees’ Association (SCEA); Stockton Firefighters’ Local 456; Stockton Fire Management Unit; Stockton Police Management Association; Stockton Police Officers’ Association (SPOA); Union Bank, NA; U.S. Department of Housing and Urban Development; Wells Fargo Bank, National Association, as indenture trustee for the following bonds: (1) Redevelopment Authority of the City of Stockton Revenue Bonds, Series 2004 (Stockton Events Center Arena Project) (2)Stockton Public Financing Authority Lease Revenue Bonds, Series 2004 (Parking and Capital Projects) (3) Stockton Public Financing Authority 2006 Lease Revenue Refunding Bonds, Series A (4) Stockton Public Financing Authority Variable Rate Demand Lease Revenue Bonds, 2007 Series A and 2007 Series B (Taxable) (Building Acquisition Financing Project) (5) City of Stockton 2007 Taxable Pension Obligations Bonds, Series A and Series B (6) Stockton Public Financing Authority Lease Revenue Bonds, 2009 Series A (Capital Improvement Projects) (7) Stockton Public Financing Authority Variable Rate Demand Water Revenue Bonds, Series 2010A (Delta Water Supply Project).

Stockton and the participating interested parties have selected a neutral evaluator and are beginning the negotiation process.  Hopefully the parties can find some common ground and avoid having to file bankruptcy under Chapter 9.

For more information about the municipal bankruptcy process under California law or information from a bankruptcy attorney you may reach us toll free at 1-877-963-9543.

City Council Files Untimely Notice of Appeal to City of Harrisburg Bankruptcy Dismissal


As anticipated, the Chapter 9 bankruptcy filing of the City of Harrisburg came to a crashing end under the pile of motions to dismiss and Pennsylvania state law that still arguably prohibited the bankruptcy filing.  The bankruptcy court entered the order of dismissal on November 23, 2011.  The deadline to appeal the order of dismissal without an extension of time was December 7, 2011.  The council members that originally filed bankruptcy on behalf of the City of Harrisburg filed their notice of appeal on December 10, 2011, three days late.  Then on December 11, 2011, a day later, the council members filed a motion seeking an order to extend the time they had to appeal the order of dismissal given that they filed their notice of appeal three days late.  On December 13, 2011, the bankruptcy court denied the city councils request to extend the time to appeal and struck the notice of appeal from the record.  The bankruptcy court provided that counsel for the City Council of Harrisburg new the basis of the bankruptcy court’s decision to dismiss the bankruptcy case and received the written opinion two days prior to the deadline to appeal.  The failure to timely file the notice of appeal was not excusable neglect, but inexplicable and unjustifiable.

If the appeal is still allowed to move forward, which is still possible, it will challenge the bankruptcy court’s ruling in support of upholding a state’s right to legislate and control cities within its jurisdiction.  Prior to when the City of Harrisburg filed for bankruptcy the State of Pennsylvania had passed a state law forbidding a city classified like Harrisburg from being able to file bankruptcy under Chapter 9 of the bankruptcy code.

There still could be a titanic clash of state law versus federal law if there is still a successful appeal and the appellate court choses to take a different position then the bankruptcy court.  The bankruptcy court rejected arguments that the Pennsylvania state law prohibiting Harrisburg from filing bankruptcy violated the Supremacy Clause or 14th Amendment of the United States Constitution.  The bankruptcy court also rejected the arguments that Pennsylvania state law prohibiting the filing of the bankruptcy petition violated the Pennsylvania Constitution.

Issues of federalism have come up time and time again regarding the federal government’s ability to govern and make individual states follow federal law.  The Tenths Amended provides that powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively.  Under the federal bankruptcy code municipalities can file for bankruptcy protection, but only with state authorization.

Ultimately the bankruptcy court held that the city council members of Harrisburg did not have the authority under Pennsylvania state law to commence the bankruptcy case on behalf of Harrisburg and Harrisburg is not authorized to under Pennsylvania state law to be a debtor under Chapter 9 of the bankruptcy code.

For more information about bankruptcy contact our bankruptcy lawyer or you may contact our bankruptcy lawyers .

Covanta Harrisburg, Inc. Seeks Dismissal of Harrisburg Bankruptcy


The incinerator operator, Covanta Harrisburg, Inc., drew first blood today by filing their objection and brief in support, seeking the dismissal of the bankruptcy petition of the City of Harrisburg.  Covanta is at the center of the cities bankruptcy filing given that the bonds used to fund the incinerator are what the city is having trouble paying back.

Covanta cites section 921(c) and section 109(c) for authority to dismiss the bankruptcy petition.  Under section 921(c) the court may dismiss a petition if the debtor did not file the petition in good faith or the petition does not meet the requirements of Title 11.  Covanta is arguing that the petition was not filed in good faith because of Pennsylvania Act 26 of 2011 and that the petition makes no mention of this state law.  They are also arguing the requirements of section 109(c) are not met.

Covanta argues that Harrisburg is not eligible to be a debtor pursuant to section 109(c) of the bankruptcy code.  You may remember in a previous article in the Bay Area Bankruptcy Blog details about who can be a debtor and who may not.  A municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor.  The Commonwealth of Pennsylvania passed a law providing a city such as Harrisburg cannot file for bankruptcy protection.  Rather the state can step in and appoint a receiver to help the city form a plan to become solvent.  The State of Pennsylvania did just that on October 20, 2011, when Governor Tom Corbett signed Senate Bill 1151.  This bill declares a fiscal emergency and provides a receiver may be appointed to create a plan of recovery.  See Act 26 of 2011, 72 P.S. Section 1601-D.1 (2011).

Covanta also is arguing that the petition is invalid because the person who signed the petition did not have authority.  Just like the Mayor of Harrisburg, Covanta argues that all laws and legal matters must be presented to the City Solicitor for approval.  The four council members that voted for and authorized the filing of bankruptcy by the city have been called “unauthorized council members.”  The Mayor argues that only she as the executive can sign the petition and bind the city to filing bankruptcy, not a council member.

This is probably one of many more objections and briefs to be filed in support of dismissal of this bankruptcy case.  The Commonwealth of Pennsylvania has already passed a law appointing a receiver, the Mayor of Harrisburg representing the City of Harrisburg has opposed the filing, and now the incinerator operator has lined up against this bankruptcy case.  The question still is whether the Tenth Amendment of the U.S. Constitution will force the Bankruptcy Code to defer to the state law of the Commonwealth of Pennsylvania which arguably forbids this bankruptcy filing by Harrisburg.

For more information from an experienced bankruptcy lawyer or from a Redwood City bankruptcy attorney visit us at or call us toll free at 1-877-963-9543.

Governor of Pennsylvania Signs Senate Bill 1151 Declaring Fiscal Emergency and Appoint a Receiver for the City of Harrisburg


On October 20, 2011, the Governor of Pennsylvania, Tom Corbett, signed Senate Bill 1151 authorizing the declaration of a fiscal emergency and install a receiver to attempt to develop a recovery plan for the City of Harrisburg.  The news release from the Governor’s office provides the Governor signed the bill to help enforce the state’s law that when a municipal city fails to adopt a fiscal recovery plan the state will intervene.  Wait a second; the City of Harrisburg filed a Chapter 9 bankruptcy case to do just that, implement a plan of reorganization to lead to solvency.  It is the Governor’s and State of Pennsylvania’s position that the filing of the Chapter 9 bankruptcy case was in violation of state law and Harrisburg could not file the bankruptcy petition in the first place.  It seems they are backing up that position by installing a receiver pursuant to Pennsylvania State Law, Act 47 and Act 26.  Act 47 allows a municipality such as Harrisburg to develop a fiscal recovery plan that is acceptable to the secretary of Department of Community and Economic Development.  The plan can be accepted and then the takeover and installation of a receiver is stopped.  The question is whether a plan of reorganization under Chapter 9 of the Bankruptcy Code is a possible way to satisfy this provision of Act 47?  We will find out on November 23, 2011.

The Harrisburg Chapter 9 bankruptcy case is also facing a request for dismissal from the Mayor of Harrisburg, the Honorable Linda D. Thompson.  The Mayor is arguing that the person who signed the bankruptcy petition is an unauthorized council member who lacks the authority to file bankruptcy for the city.  The Mayor is arguing that the only person who is authorized is her as the executive branch of the government of Harrisburg.

The Bankruptcy Court has entered an order setting the date of the hearing on whether this bankruptcy case should be dismissed for November 23, 2011, at 9:30 a.m.  All parties seeking to dismissal of this case must file and serve their briefs by October 28, 2011.  Responses to the briefs requesting dismissal are due by November 7, 2011.  The actual hearing will be held on November 23, 2011, at 9:30 AM in Bankruptcy Courtroom One, Third Floor, Ronald Reagan Federal Building, 228 Walnut Street, Harrisburg, Pennsylvania.  It will be interesting how the court rules and if the court agrees with both the Mayor of Harrisburg and the State of Pennsylvania regarding their state law and the authority granted to the Mayor.

For more information about bankruptcy you may find contact our Foster City bankruptcy lawyer for answers to your questions.  You may also contact our bankruptcy lawyer in Redwood city for more information.

Pennsylvania and Mayor of the City Harrisburg Seek Dismissal of the City of Harrisburgs Chapter 9 Bankruptcy


In another strange twist, the Mayor of the City of Harrisburg, the Honorable Linda D. Thompson, has hired counsel for the City of Harrisburg to seek dismissal of the Chapter 9 bankruptcy case filed by the City of Harrisburg.  Huh?  You read that right.  On October 16, 2011, a Sunday, Mayor for the City of Harrisburg filed a motion to modify or vacate an order by the Bankruptcy Court to send out notice to creditors of the Chapter 9 bankruptcy filing.  The Mayor seeks to prevent notice of the bankruptcy case from being mailed arguing the bankruptcy case should be dismissed entirely.

The Mayor of the City of Harrisburg claims that the Chapter 9 petition filed on behalf of Harrisburg was signed by an unauthorized council member.  It appears that four city council member voted in favor of filing bankruptcy for the city on October 11, 2011.  The Mayor did not agree with these four council members.  The Mayor is arguing that she has executive power over the city and only she is the governing municipal officer capable of signing a petition for bankruptcy.  The Mayor further argues that providing notice before the issue of whether the case can go forward would force the city to incur significant cost given that the number of parties to provide notice to would be in the thousands.  This is definitely a valid concern if the bankruptcy case will not go forward and is dismissed.  The cost and expense of notifying Harrisburg’s creditors would not only be expensive but cause further complications in the event the bankruptcy court rules in favor of the Mayor or the State of Pennsylvania regarding their requests for dismissal.

As the case moves along many creditors and parties in interest seek special notice of all documents filed in the case.  So far a group called Debt Watch Harrisburg and the International Association of Fire Fighters, Local Union No. 428, have filed requests for special notice with the court.

So, the Common Wealth of Pennsylvania is seeking dismissal of the bankruptcy case arguing the City of Harrisburg violated state law in filing the bankruptcy petition and now the Mayor of the City of Harrisburg on behalf of the city is arguing the petition for bankruptcy is invalid because the party that signed it lacks to the proper authority.  This case is facing an uphill battle from every direction.  A hearing will be held on November 23, 2011, regarding these various issues.  It will be interesting to see if this bankruptcy case will survive.

For more information from an experienced bankruptcy lawyer or bankruptcy attorney visit us at

The Latest Chapter 9 Municipal Bankruptcy is the City of Harrisburg


The latest municipality to file a municipal bankruptcy case under Chapter 9 of the Bankruptcy Code is the City of Harrisburg, Pennsylvania.  The City of Harrisburg filed their petition for relief on October 11, 2011, bankruptcy case number 11-06938 in the Middle District of Pennsylvania.  According to court records the scope of the City of Harrisburg’s bankruptcy case is much larger than another recent municipal bankruptcy, the City of Central Falls.

The City of Harrisburg cites past due payments of a staggering $83 million.  This is primarily due to their failure to pay the guaranteed incinerator bond debt that is due.  Like any cities throughout United States the City of Harrisburg has issued bonds to fund infrastructure improvements.  Many cities must meet certain guidelines for the services they provide the public.  Many cities issue bonds to fund waste treatment plants, waste disposal and other services necessary to meet the public’s needs.  The City of Harrisburg had a $5.35 million deficit in 2010 and has projected a $3.0 million deficit for 2011 without adding in the cost of any of their guaranteed bond obligations.  It is no surprise that small municipalities are feeling having trouble meeting their obligations when many states also have budget deficits not to mention the enormous federal budget deficit.  Like many Americans struggling with mortgage debt and credit card debt municipalities are turning to the powerful tools available under the Bankruptcy Code to obtain relief.

On October 14, 2011, the Commonwealth of Pennsylvania, the State of Pennsylvania, filed a motion seeking the dismissal of the City of Harrisburg’s bankruptcy case arguing that the City of Harrisburg does not qualify to be a debtor under the Bankruptcy Code.  Pennsylvania passed a state law, Act 26 of 2011, 72 P.S. §1601-D.1 (2011), arguably prohibiting a city such as the City of Harrisburg from filing a petition under Chapter 9 of the Bankruptcy Code.  The Pennsylvania state law includes a section providing that if a municipality such as the City of Harrisburg were to file a petition under Chapter 9, all state funding to the filing municipality will be suspended.  Whether the City of Harrisburg will be allowed to continue to seek reorganization of their debts under Chapter 9 of the Bankruptcy Code now remains to be determined.  The Bankruptcy Code is part of Title 11 of the United States Code, federal law.  The question of whether a state may enact laws to circumvent and prevent a municipality from receiving the benefits of bankruptcy is in question.

At issue is the Tenth Amendment of the United States Constitution.  The Tenth Amendment provides that powers not granted to the federal government nor prohibited to the states by the Constitution are reserved, respectively, to the states or the people.  The age old power struggle between the rights of states to govern themselves versus the power of the federal government is not new.  This issue may find its way the United State Supreme Court.

For more information about Chapter 9 bankruptcy you may contact our bankruptcy attorneys or bankruptcy lawyers.

Oakland Bankruptcy Lawyer: Did Oakland Almost File Bankruptcy In 2009?


The answer is yes.  But how is it possible for a government entity to file for bankruptcy protection?  There is a specific chapter of the Bankruptcy Code that allows a city or county to file for bankruptcy protection just like an individual or corporation, Chapter 9. Chapter 9 is for municipalities to file for protection from their creditors.  A state, such as California, cannot file for bankruptcy protection though. The United States Constitution does not allow a state to file for bankruptcy. The Federal Government likewise cannot file for bankruptcy. A state and federal government would just default on their debts.  Contact our local bankruptcy lawyers for more information about Chapter 9 bankruptcy cases.

Oakland’s problems are all too well known in California these days.  After years of cuts in funding from the State of California, reductions in Alameda County tax assessments, generous pay and retirement packages to employees and their families combined with the overall increase in the cost of providing citizens the services we depend on Oakland found itself with a multi-million dollar budget deficit.  The State of California itself has over a ten billion dollar budget shortfall.  The budget deficit of the State of California is more than the total budget for most states in the United States.  Schedule a free consultation today with our bankruptcy attorneys and find out if bankruptcy is right for you.

Orange County filed the single largest municipal bankruptcy when it filed in 1994 and lost $1.6 billion.  The Orange County bankruptcy is notable given the scale of the financial meltdown and what led to the county having to file for bankruptcy protection.  The treasurer is an elected official and had held the position for over twenty years.  Unfortunately the treasurer was investing the pooled funds of Orange County in risky investments and generating high returns to fund their general fund.  Eventually the house of cards fell apart and the largest single municipal bankruptcy was filed.