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San Bernardino Wins Its Eligibility Fight

The Chapter 9 case of the city of San Bernardino, California will proceed. After a year in limbo and a spirited fight from the California Public Employees' Retirement System (CalPERS), San Bernardino was finally able to win a ruling from Bankruptcy Judge Meredith Jury that it is eligible to be a Chapter 9 debtor. 

San Bernardino filed for Chapter 9 on August 1, 2012, claiming a budget shortfall of $46 million. The eligibility fight centered on San Bernardino's claim that the requirement to negotiate in good faith with its creditors was impractical. CalPERS argued that the city effectively side-stepped its obligation to negotiate by ignoring warnings of its impending financial difficulties. Further, CalPERS insisted that the city waited until its financial predicament became so dire that the circumstances were exigent, thereby manufacturing a situation where negotiations became impractical. 

Despite CalPERS’ arguments, Judge Jury appeared to accept the genuineness of the need for San...

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Let’s Watch Those Attorneys’ Fees: Another First in Detroit

Judge Steven Rhodes, who is overseeing Detroit’s Chapter 9 bankruptcy, appears set to take the unprecedented step of appointing an examiner to review professional fees in the case. 

Judge Rhodes proposed the use of an examiner prior to a hearing held on August 2, and, following that hearing, entered an order opening up a one week comment period in which parties could make suggestions for who the examiner should be. The use of fee examiners is on the rise in complex bankruptcy cases, having been used in the Lehman Brothers and General Motors bankruptcies, among others. 

The move by Judge Rhodes is notable because reviewing the retention and fees of a Chapter 9 debtor’s professionals is generally not within a bankruptcy court’s power. In most bankruptcy cases, a debtor must apply to the bankruptcy court for authorization to retain professionals, including attorneys, financial advisors and accountants. Once retained, those professionals may generally be paid out of a debtor’s estate, and...

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Detroit News Roundup

Friday’s hearing in Detroit provided some indication of how the Detroit’s high-profile bankruptcy case will proceed moving forward. Judge Rhodes agreed to the creation of a committee of retired workers but left the U.S. Trustee to decide who its members would be, leaving open the possibility that organized labor would be represented.

Judge Rhodes also set a schedule going forward, ordering a hearing on the city’s eligibility to be a bankruptcy debtor on October 23, and indicating that the specific issues that will be addressed are whether Governor Rick Snyder's authorization for Chapter 9 bankruptcy filing was proper under the Michigan Constitution and whether the city has bargained in good faith with creditors. The city indicated it would file a plan by the end of the year while pensioners complained the cases were moving forward too quickly. Interested parties also have seven days to respond to his proposed mediator, Chief District Judge Gerald Rosen, of the U.S. District Court...

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A Back Door Bailout for Detroit?

Chapter 9 is designed to "provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts." Much like Chapter 11, this can be accomplished in a variety of ways (other than a conversion of debt to equity), and a municipality has great latitude in proposing a plan of adjustment in order to accomplish the goals of Chapter 9. 

Chapter 9 does not imply a bailout by the federal government, or a takeover of the troubled municipality. Such an approach would be an offense to the notion of state sovereignty, a sacrosanct concept in the Chapter 9 realm. 

Recent news stories indicate that Detroit may attempt to push its retirees into the exchanges created by the Affordable Care Act (a/k/a Obamacare). The impact of this, depending on each individual retiree's income level, could be to shift the burden to federal taxpayers. Thus, rather than addressing one of Detroit's key problems: unfunded pension liabilities for retirees...

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Detroit’s Bankruptcy Case Gets Murkier With Other Collateral Lawsuits

On July 23, 2013, the Michigan Court of Appeals ordered a temporary halt to three lawsuits that seek to stop Detroit from filing for bankruptcy. The lawsuits were filed by city workers, retirees, and pension funds earlier this month, prior to Detroit’s bankruptcy filing on July 18, 2013

The suits anticipated that, in a bankruptcy, Detroit  would seek to cut retirement benefits. After filing the petition for relief under Chapter 9 of the Bankruptcy Code, Detroit’s emergency manager  requested an extension of the Chapter 9 automatic stay to include a freeze on legal actions such as those filed by the city workers, retirees, and pension funds. This is the first in what will certainly be many interesting events in the case of the nation’s largest city to have filed for Chapter 9. 

On Friday, the Michigan Circuit Court ruled that the state law that allowed Michigan Governor Snyder to approve the bankruptcy filing violated the Michigan Constitution. The Court ordered Kevyn Orr, the...

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Detroit Files for Chapter 9

The city of Detroit filed for bankruptcy protection in the Bankruptcy Court for the Eastern District of Michigan on Thursday. Detroit’s bankruptcy is the largest Chapter 9 case in U.S. history. The filing comes just over three months after Governor Rick Snyder appointed Emergency Manager Kevyn Orr to try to solve the city’s apparently intractable debt woes.

As Orr stated in a declaration filed with the Court, “[a]fter decades of fiscal mismanagement, plummeting population, employment and revenues, decaying city infrastructure, deteriorating city services and excessive borrowing that provided short term band-aids at the cost of deepening insolvency, the city of Detroit today is a shadow of the thriving metropolis that it once was.” The city’s debt had swollen to over $18 billion by Orr’s count, with 38 cents of every city dollar going to service legacy debt. The city’s filing will give it an opportunity to formulate a proposal to make its debt burden more manageable.

A fight over the...

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Detroit Roundup: There’s Good News and There’s Bad News (Mostly Bad News)

Detroit received a rare bit of good news as word emerged that the city’s emergency manager, Kevyn Orr, is close to reaching an agreement with two of the city’s secured creditors to accept concessions on repayment of their debt. Although it was unclear which creditors were involved, the amount of debt involved, or the extent and nature of the concessions, any relief from Detroit’s financial woes was welcome news.

Unfortunately, the positive news was too little too late to enhance Standard & Poor’s view of Detroit’s financial prospects. The ratings agency took the unusual step of applying a “superdowngrade” to Detroit’s bond rating, cutting it four levels to CCC- and continuing to list its outlook as negative. The downgrade came in anticipation of bondholders being asked to accept diminished payouts as part of the city’s attempt to restructure its debt.

These developments, days ahead of Detroit’s meeting with labor groups and creditors, combined with the emergency manager’s refusal to...

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Orr Will Announce His Decision on Chapter 9 Petition in Five Weeks

Detroit's Emergency Manager Kevyn Orr recently announced that he will make his decision on filing a petition under Chapter 9 of the Bankruptcy Code in about five weeks. Within that timeframe, Orr will try to speak with the city's many labor unions and make progress on many other goals. 

Orr's plan involves designating a new police chief, restructuring the fire department via an outside expert, maximizing the efficiency of the public transportation system, speeding up demolition of blight, and analyzing the pension systems for potential modifications. He has placed a high emphasis on change and quick improvements based on evaluations of the city's  continually worsening financial state.  

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CalPERS Seeks to Disqualify Counsel for National Public Finance Guarantee

In the continuing saga of Chapter 9 petitions in San Bernardino and Stockton, California, the cities' largest creditor, CalPERS, has petitioned the Bankruptcy Court to disqualify counsel for National Public Finance Guarantee (NPFG), the cities’ bond insurer.

CalPERS alleges that Winston & Strawn, counsel for NPFG, hired lawyers from K&L Gates that had previously worked on CalPERS matters, causing a conflict of interest.  

NPFG wants CalPERS to take a cut in the payments otherwise allowed to CalPERS.  They hired Winston & Strawn to represent it in the Chapter 9 cases, but certain of those lawyers had worked on CalPERS matters.  

A hearing is set for June 5, 2013, on the San Bernardino's eligibility for Chapter 9 (Stockton was already approved as a Chapter 9 case) and motions made by CalPERS and two city employee unions seeking relief from the automatic stay to sue in state court.

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Detroit: At Least as Bad as Expected

In his first report as Detroit’s Emergency Manager, Kevyn Orr outlined the city’s problems. To those familiar with the situation, there were no surprises about the top level interrelated problems facing  Detroit: urban sprawl/blight, soaring and unsustainable union contracts and pension liabilities, a history of municipal “borrowing from Peter to pay Paul,” archaic infrastructure, and systemic municipal inefficiencies. The result is a current negative cash position of $162 million and the blunt assertion that debt payment on current obligations will not be made in order to prevent the city from running out of cash. Moreover, Detroit has in all likelihood lost its access to capital in the marketplace given its current credit ratings, the amount of outstanding debt, and its stated inability to repay the obligations. As a result, the solution must be a comprehensive overhaul of the current municipal system. 

Addressing problems of this magnitude will require widespread, comprehensive...

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Detroit, California, Jefferson County…Oh My!

While much of the focus in municipal bankruptcies has been on cities that have actually filed for Chapter 9 relief or appear to be on the precipice of doing so, there are numerous other municipalities that could be heading down that path, absent a dramatic change in circumstance. 

Recent reports indicate that as many as 40% of hometowns in Pennsylvania may be headed for financial trouble. Most officials point the finger at municipal pensions that are “out of whack” with the current tax base of the municipality, especially as the residents of the towns age and decline. Restructuring these obligations can be a political hot potato. A recent bill has proposed changes to the pension rules for new workers.  While this will likely bring opposition from the unions, compromise is the key to avoiding a bankruptcy filing. 

While Pennsylvania has Act 47 to help stressed and distressed municipalities attempt to solve their problems short of a Chapter 9 filing, New York Governor Andrew Cuomo...

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Section 903 – In Chapter 9 Does Federal Law Trump State Law or Vice Versa?

In San Bernardino, California, a fight is brewing regarding the scope of Section 903 of the Bankruptcy Code. It stems from the motions filed by the San Bernardino Public Employees Association (SBPEA), the San Bernardino Police Officers Association (SBPOA) and the San Bernardino City Professional Firefighters (SBCPF) in response to the city’s motion to reject collective bargaining agreements with these unions.  These groups are seeking relief from the automatic stay to pursue various state remedies. The issue to be decided by the Bankruptcy Court is whether the city’s rejection of the collective bargaining agreements is an impermissible violation of state law.

The city contends that the Bankruptcy Code clearly gives it the authority to reject executory contracts, including collective bargaining agreements. The unions, on the other hand, argue that the city’s proposed rejection violates state law. 

The dispute was made more contentious when the California Public Employees’ Retirement...

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Detroit – Can You Really Manage a City Like a Business?

This guest post was contributed by Marti Kopacz, Founder and Managing Principal of Brant Point Advisors LLC.

Kevyn Orr, Detroit’s newly appointed emergency manager, is going to try. Restructuring professionals have long pondered the advantages and disadvantages of solving public sector problems with private sector strategies. As Orr prepares to take control of what may be the country’s most dysfunctional municipality, he has made it clear that the problem solving will be “data driven.” In other words, politics are way down on the list of considerations and maybe even not on the list at all.  Governor Snyder’s selection of Orr was superb: a top notch restructuring professional with Michigan ties (Michigan University and law school grad), deep familiarity with southeastern Michigan thinking as a result of his experience in the Chrysler restructuring, but without the complications of being a community “insider.”

Orr’s three-prong approach: maintain and grow city services, address...

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Detroit Likely to Get Emergency Manager

On Friday, Michigan Governor Rick Snyder published a formal declaration that a financial emergency exists in Detroit. As a result, unless opponents can convince the Governor to change his mind, a three-member emergency loan board appointed by the Governor will select an emergency manager. 

Governor Snyder’s announcement was, in effect, a confirmation of the state financial review team’s conclusion reached on February 19, 2013 that a financial emergency exists in Detroit because there is no satisfactory plan to resolve its extensive fiscal problems. The financial emergency process is occurring under Michigan’s 1990 emergency financial manager law, which became effective again in November after voters repealed a stronger financial manager law by referendum. A new law, passed in a lame duck legislative session and signed by Governor Snyder in December, does not become effective until March 27, 2013. The new law, once in effect, will give the emergency manager increased power, including...

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CalPERS Slams San Bernardino Bankruptcy as “Sham”

CalPERS has fired back at the city of San Bernardino and its pendency plan for operating during the Chapter 9 case, calling it  “criminal” and a “sham.” A copy of the pendency plan can be found here. Since filing for bankruptcy, the city has stopped making its bi-weekly payments to CalPERS. As a result, San Bernardino now owes CalPERS approximately $8 million. 

While CalPERS may cast aspersions on the city’s motivation, financially, the city is faced with either making the CalPERS payment or making its payroll. Even though the hit to CalPERS is 0.00329% of its overall portfolio, CalPERS has a legitimate concern that any acquiescence to San Bernardino’s refusal to pay will set a negative precedent for future Chapter 9 cases. As there are pending municipal bankruptcies underway throughout the state, CalPERS does not want to undermine its position that it is a priority creditor for the municipalities of California. 

The legal issue is whether the pensions of government workers take...

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Can Detroit Get Its Groove Back?

Detroit is in a state of crisis. In addition to the “traditional” municipal financial woes of decreasing revenue, legacy pension burdens, and an increased demand for services, Detroit has several more practical and unique problems. 

First, according to the Wall Street Journal, there has been a mass exodus from the city of Detroit. Almost 25% of Detroit’s total population left the city between 2000-2010. The resulting smaller tax base has led to a “top line” revenue problem for the city. 

This exodus has also contributed to a second problem. From a land mass perspective, Detroit is simply too large with only 713,000 residents spread across 139 square miles. This geographic sprawl makes providing basic municipal services inordinately expensive. There are neighborhoods with literally more abandoned houses and buildings than residents.

Consequently, Detroit mayor, former NBA star Dave Bing, has proposed plans for the revitalization of certain areas, including the city’s waterfront, in the...

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Pension Wars Round 2: Objections to San Bernardino’s Chapter 9 Petition

After San Bernardino threw the first punch in round one of the pension wars by refusing to pay amounts owed to CalPERS, the San Bernardino Public Employees Association (“SBPEA”) and CalPERS have now responded with blows of their own by filing objections to San Bernardino’s Chapter 9 petition. 

CalPERS, the nation’s largest public pension system and San Bernardino’s largest creditor, filed what it termed a “preliminary” objection.  This preliminary objection requests that the Bankruptcy Court defer all determinations regarding San Bernardino’s eligibility for Chapter 9 relief until the city presents a feasible plan of adjustment, demonstrating how prepetition claims and ongoing operating expenses will be paid. CalPERS argues that “[t]he city’s financial records are in disarray” and that it is impossible to determine, at this point, whether the city has met the Chapter 9 eligibility requirements.  CalPERS also argues that that the Chapter 9 petition was not filed in good faith, as San...

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MuniBK Bond Buyer Conference Panel Recap

The Bond Buyer’s 22nd Annual California Public Finance Conference took place last week in San Francisco. Chief Judge Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, participated in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”   The panel also included Bill Nolan of FTI, and MuniBK Blog contributors Manny Grillo and Lew Feldman.

Copies of the materials distributed by the panelists at that meeting can be found here. Video of the roundtable discussion will be posted soon on MuniBK.

The panelists discussed topics including:

• Limitations of the Bankruptcy Code in offering Chapter 9 relief to municipalities;
• Precedential impact of any Bankruptcy Court Chapter 9 decision on other pending municipal bankruptcy cases;
• The ability of states to “step in” and offer distressed municipalities other alternatives;
•...

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Stockton Bankruptcy Judge to Speak at the Bond Buyer’s California Public Finance Panel

Chief Justice Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, will be participating in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know” at The Bond Buyer’s 22nd Annual California Public Finance Conference on Thursday, October 18, from 7:30-8:30 am PST.  

Chief Justice Klein will be joined by speakers Lew Feldman, Partner, Goodwin Procter LLP; Emanuel Grillo, Partner, Goodwin Procter LLP; and William Nolan, Senior Managing Director – Corporate Finance, FTI Consulting, Inc. 

The panel will be recorded and portions thereof will be featured on blog.MuniBK.com in the near term.

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Building Consensus in a Municipal Bankruptcy

Throughout the United States, many municipalities are facing severe financial distress and being forced to examine Chapter 9  -- the section of the Bankruptcy Code governing municipality eligibility -- as a means of eliminating debt and restructuring their obligations. 

While the causes of financial distress vary among municipalities, municipal creditors are often composed of the same groups, a mix of “ordinary people” such as pensioners and civil servants, combined with sophisticated financial institutions and bondholders. 

Add these diverse constituencies to the current political environment, mix in the fact that municipalities must often raise taxes to raise revenue, and the result is often a prolonged political battle that provides little progress towards a real solution.

It is often overlooked that the Bankruptcy Code itself attempts to alleviate the potential for stalemate and assuage fears that if bankruptcy is “too easy” there will be a rash of unnecessary municipal filings. The...

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