Orrick Wins Major Appellate Victory in Stockton Bankruptcy Case

December.10.2018

An Orrick team secured a complete victory in the Ninth Circuit on behalf of the City of Stockton, California in an appeal from an order confirming the plan of adjustment in the City’s chapter 9 bankruptcy case. The appellate win marked the latest important step in Stockton’s emergence from novel bankruptcy proceedings, which Orrick’s teams have guided for more than six years.

Led by Orrick partner Bob Loeb, Senior Counsel Marc Levinson and associate Chris Cariello, our team’s arguments were entirely backed in the Ninth Circuit’s published decision in Cobb v. City of Stockton. At issue was appellant Michael Cobb’s unsecured claim arising from the City’s inverse condemnation in 1998 of a strip of land on which the City built a road.  He argued that because his claim was based on a taking of property, it could not be adjusted in the bankruptcy and had to be paid in full.  The Ninth Circuit has now rejected Cobb’s arguments on both procedural and substantive grounds.  The court of appeals held that the matter was equitably moot because Cobb never sought any stay pending appeal and the bankruptcy plan has now been confirmed and fully implemented.  Applying its customary four-factor test in this chapter 9 case, the Court concluded that each factor favored a finding of mootness.  First, Cobb failed to seek a stay of the confirmation order.  Second, the City’s plan has been “substantially consummated.”  Third, reversal of the bankruptcy court’s confirmation order would affect innocent third parties not before the court, because it would “undermine the settlements negotiated with the unions, pension plan participants and retirees, bond creditors, and capital market creditors, all of which were built into the reorganization plan.”  And fourth, reversal “would create chaos and undo years of carefully negotiated settlements,” making it difficult or impossible to fashion effective relief. 

The court of appeals also held that the claim was properly subject to adjustment by the bankruptcy court, ruling that the Takings Clause of the Fifth Amendment did not exempt Cobb’s unsecured claim from adjustment under chapter 9.  The court explained that, because he accepted probable just compensation for the strip of land the City condemned, under California law, Cobb was left with only a bare claim for monetary compensation, indistinguishable from the typical claim for money that may be adjusted in bankruptcy. That the claim for money initially arose from some constitutional right did not make a difference, the Court explained, because it is well-settled that other types of money claims founded in alleged constitutional violations can be adjusted in bankruptcy. 

In addition to Bob, Marc and Chris, our team included associates Pat Bocash and Lesley Durmann.