April.02.2013
Following a three-day, hotly contested trial the last week of March, Chief Bankruptcy Judge Christopher Klein of the Eastern District of California ruled on April 1, 2013 that Orrick client, the City of Stockton, California, is eligible for chapter 9 bankruptcy relief. Stockton is the largest U.S. city to file a bankruptcy case.
The bankruptcy protection will shield Stockton from creditor lawsuits seeking writs of mandate compelling City officials to pay their debts and seeking the appointment of receivers to collect lease and other revenues, and will allow Stockton's leaders to negotiate adjustment of debts that may include payment of a reduced amount of principal—a rare occurrence, as municipalities almost always pay their bond debts in full.
In order to be eligible for chapter 9, the debtor must satisfy a number of statutory requirements; the inquiry is very fact-specific. During the trial, our team argued that the City had no other option but bankruptcy because it was insolvent even after making significant staff reductions, after slashing health care benefits to retirees, after defaulting on certain bond payments and after ceasing to fund various community programs. Throughout his two hours of oral findings of fact and conclusions of law on Monday, Judge Klein made it clear that the City had done everything it could to avoid bankruptcy, and that the City’s public safety services cannot withstand further cuts.
"It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law," Judge Klein said.
The closely watched case has raised questions regarding neglecting other debts in favor of satisfying state pension obligations—specifically, whether federal bankruptcy law trumps state laws requiring pension fund debts to be honored—and the resulting implications for cities across the United States.
The decision received extensive national coverage, including from the Wall Street Journal, Law360, Bloomberg BusinessWeek, the Los Angeles Times, The Sacramento Bee and NBC News, among many others.
The Orrick team on the Stockton case is headed by restructuring partner Marc Levinson and public finance partner, John Knox, and includes members of Orrick’s Public Finance, Restructuring, Litigation, Corporate, Real Estate and Tax Practice Groups, as well as our Document Review Services team. Our trial team on the eligibility issue, which was headed by commercial litigation senior counsel Norm Hile, included Marc Levinson and litigation associates John Killeen, J.R. Riddell, Pat Bocash, Emmanuel Fua and Lesley Durmann. The City's bond insurers—our opposition at trial—were represented by Sidley Austin, Jones Day and Winston & Strawn.