Chapter 9: Where Are They Now? Major Cases We Watched in 2012

Contributed by Will Hueske
For chapter 9 municipal bankruptcies, 2012 was a busy year, as noted on this blog here, here, here, and here. Entering 2013, the economic and housing recoveries continue to plod along slowly, and the albatross of fewer workers paying for more retirees’ benefits continues to hang around the necks of municipal treasuries. While it is unclear how many chapter 9 cases we may see in 2013, we at the Weil Bankruptcy Blog want to provide status updates on some of the major municipal bankruptcy cases that drew our attention in 2012.
City of Stockton, California (12-32118) (Bankr. E.D. Ca. 2012)
The City of Stockton filed for chapter 9 on June 28, 2012, stemming from chronic budgetary shortfalls due to a dramatic loss of tax revenue following the housing and economic collapse. With a population of 292,000, the filing was and remains the largest municipal bankruptcy case in U.S. history. On July 10, 2012, the Association of Retired Employees of the City of Stockton filed an adversary complaint seeking a temporary restraining order and declaratory and injunctive relief to prevent the city from cutting health benefits for retirees. On August 6, 2012, the bankruptcy court dismissed the adversary proceeding, noting that section 904 of the Bankruptcy Code forbids the court from using any of its powers to “interfere with” property or revenues of a chapter 9 debtor.
On December 14, 2012, several major creditors in the case filed objections to the city’s chapter 9 eligibility, alleging, among other things, that the city (i) failed to satisfy the negotiation requirements of section 109(c)(5); (ii) is not insolvent under section 109(c)(3); and (iii) did not file the petition in good faith under California AB 506 or the Bankruptcy Code, as it only seeks to cram down a plan on bondholders to the benefit of employees and retirees. A status conference on the eligibility motions is currently scheduled for February 26, 2013.
San Bernardino County, California (12-28006) (Bankr. C.D. Ca. 2012)
San Bernardino County sought chapter 9 protection on August 1, 2012, after a $45 million budget shortfall, largely owing to the same factors as Stockton, was revealed to have been hidden through improper conduct in the city council. On October 24, 2012, the California Public Employees’ Retirement System (“CalPERS”) filed an objection to the chapter 9 petition, alleging, among other things, that (i) the county has yet to present credible financial records and projections upon which a plan of adjustment might be based; (ii) certain postpetition financial obligations have gone unmet; and (iii) the county did not conduct a considered evaluation of its options prior to filing a chapter 9 petition, but rather rushed into the bankruptcy case without a full understanding of its financial obligations and projections. The CalPERS objection does not directly challenge the eligibility of the county to file for chapter 9, but rather states that additional financial information is necessary from the county before such an evaluation can be made. A hearing to consider the objection of CalPERS, along with objections filed by other parties, is currently scheduled for March 5, 2013.
Town of Mammoth Lakes, California (12-32463) (Bankr. E.D. Ca. 2012)
The Town of Mammoth Lakes, California filed for chapter 9 protection on July 3, 2012, due to a $43 million judgment in a breach of contract action related to the development of a hotel and condominium project at the Mammoth Yosemite Airport. A plan of adjustment was filed along with the petition on July 3, 2012, but before it was considered, on September 20, 2012, a settlement was reached between the town and Mammoth Lakes Land Acquisition concerning the judgment award in the breach of contract action. On October 19, 2012, the bankruptcy court lifted the automatic stay with respect to Mammoth Lakes Land Acquisition to allow for entry of the settlement in the Mono County Superior Court case, and the case was dismissed on December 5, 2012.
Jefferson County, Alabama (11-5736) (Bankr. N.D. Ala. 2011)
Jefferson County filed for chapter 9 protection on November 9, 2011, after the elimination of the state’s occupation tax decimated the county’s revenues and an unmanageable debt accrued following the renovation of the county’s sewer system. On December 9, 2011, the county’s creditors filed a motion to dismiss the case, on the grounds that section 11-81-3 of the Alabama Code requires a municipality to hold “refunding or funding bond” debt in order to be eligible as a debtor under section 109(c) of the Bankruptcy Code.  On March 4, 2012, the bankruptcy court rejected the creditors’ arguments and ruled that Jefferson County was indeed eligible to file chapter 9. The court’s interpretation of Alabama law was affirmed in a subsequent opinion of the Alabama Supreme Court issued on April 20, 2012, in City of Prichard v. Balzer.
On July 10, 2012, Assured Guaranty Municipal Corp. filed a motion seeking a deadline for the county to file a plan of adjustment, but on September 14, 2012, the bankruptcy court denied the motion, stating that it was too early to set such a deadline. On November 5, 2012, The Bank of New York Mellon (“New York Mellon”), trustee for $3.6 billion in warrants issued to fund the sewer project, filed a motion to lift the automatic stay, seeking leave to compel the county to increase sewer rates beyond what the county is currently proposing. On February 6, 2013, the bankruptcy court ordered that the stay would remain in place pending further hearings on the matter. The same day, New York Mellon filed a new motion for stay relief seeking leave to accelerate certain of the sewer project warrants, as well as an adversary complaint seeking declaratory judgment that New York Mellon may accelerate such warrants without the consent of certain parties thereto. A hearing to consider the newly filed stay relief motion is currently scheduled for March 7, 2013. 
City of Prichard, Alabama (09-15000) (Bankr. S.D. Ala. 2009)
On October 27, 2009, the City of Prichard, Alabama, filed its petition under chapter 9 in the United States Bankruptcy Court for the Southern District of Alabama due to a mountain of pension obligations owed to former municipal employees. On August 11, 2010, the bankruptcy court—which had just given oral approval to the city’s third amended plan of adjustment—dismissed the case on the grounds that Alabama law only allowed municipalities holding “refunding or funding bond” debt to file for chapter 9 relief. However, the Alabama Supreme Court ruled on April 20, 2012, in City of Prichard v. Balzer, that the bankruptcy court’s interpretation of Alabama law was incorrect and the city was, indeed, eligible to file a chapter 9 petition. On May 7, 2012, the bankruptcy judge withdrew the order dismissing the case and ordered that the case should proceed. The city filed a fourth amended plan of adjustment on September 18, 2012, which incorporates a settlement agreement reached with city pensioners. Due to various delays in the case, the bankruptcy court has set a deadline for the filing of an amended plan and disclosure statement for February 19, 2013.
We will continue to monitor these cases and keep you apprised of any interesting developments.