Finance & Bankruptcy Blog

By Barbara Altimus Shreero

Judge Christopher M. Klein's decision to accept the City of Stockton's petition for bankruptcy on April 1, 2013 set the stage for a battle over whether public workers' pensions can be reduced through municipal reorganization.

Stockton's public revenues tumbled dramatically when the recession hit, leaving Stockton unable to meet its day-to-day obligations. Stockton slashed its police and fire departments, eliminated many city services, cut public employee benefits and suspended payments on municipal bonds it had used to finance various projects and close projected budget gaps. Stockton continues to pay its obligations to California Public Employees' Retirement System ("CalPERS") for its public workers' pensions. Pension obligations are particularly high because during the years prior to the recession, city workers could "spike" their pensions—by augmenting their final year of compensation with unlimited accrued vacation and sick leave—in order to receive pension payments that grossly exceeded their annual salaries.

By Robert Sahyan

On April 30, 2013, the United States Court of Appeals for the Ninth Circuit held that the bankruptcy court has authority to recharacterize as equity, rather than debt, advances of funds made purportedly as a loan to the recipient prior to its bankruptcy. In re Fitness Holdings International, Inc., --- F.3d ----, 2013 WL 1800000 (9th Cir. 2013). The Ninth Circuit, in reversing the district court, held that the fact that the same result of recharacterization can be obtained through the statutory remedy of equitable subordination under section 510 of the Bankruptcy Code does not deprive the bankruptcy court of the authority to employ the separate and distinct remedy of recharacterization.

By Adam McNeile

Conventional wisdom says that it is nearly impossible to obtain a discharge of student loan debt in bankruptcy. Indeed, Section 523(a)(8) expressly excepts student loans from discharge, unless the exception of such indebtedness from discharge would impose an undue hardship upon the debtor. But two recent developments may signal that this bedrock principle is eroding – i.e., (i) the Seventh Circuit's affirmance of a bankruptcy court's ruling that an impoverished but otherwise healthy woman's student loan debts were dischargeable, and (ii) the recent introduction of a Congressional bill that would make it easier to discharge privately issued student loan debt.

By Michael M. Lauter 

In an unpublished decision in In re The Village at Lakeridge, LLC, BAP Nos. NV-12-1456 and NV-12-1474 (B.A.P. 9th Cir. Apr. 5, 2013), the United States Bankruptcy Appellate Panel of the Ninth Circuit held that a vote on a plan of reorganization submitted by a non-insider claimant is not to be disregarded under Bankruptcy Code section 1129(a)(10) merely because the claimant purchased the claim from an insider. In other words, the transferee of a claim does not step into the shoes of the transferor vis à vis the transferor’s status as an insider.

By Danielle Kennedy

Round one of the fight between the City of Stockton, California and its creditors is finally over. On April 1, 2013, Bankruptcy Judge Christopher M. Klein held that Stockton satisfied the eligibility requirements for a Chapter 9 debtor.

Back on June 28, 2012, Stockton filed a petition seeking to adjust its debts under Chapter 9 of the United States Bankruptcy Code.

By Eugene Kim 

In a recent Fifth Circuit decision, Western Real Estate Equities, LLC v. Village at Camp Bowie I, L.P., No. 12-10271 (5th Cir. 2013), the court held that the acceptance vote from a minimally and “artificially impaired” class of claims meets the 11 U.S.C. § 1129(a)(10) requirement for the confirmation of a non-consensual “cramdown” chapter 11 plan.

By Blanka Wolfe 

In a recent decision, In re Castleton Plaza, LP, 2013 WL 537269 *1 (Feb. 14, 2013), the Seventh Circuit held that the absolute priority rule – which requires that creditors be paid in full before equity holders receive anything on account of their equity interests under a plan of reorganization – applies equally to the “insiders” of a debtor. In so holding, the Seventh Circuit is accused of extending the scope of the absolute priority rule to the point that it threatens the ability of debtors to reorganize. However, the Court’s holding merely requires that any non-consensual reorganization plan that leaves creditors unpaid and proposes to distribute equity to insiders be subject to competition, as mandated by the U.S. Supreme Court in Bank of American National Trust & Savings Ass’n v. 203 North LaSalle St. P’ship, 526 U.S. 434 (1999). This competition requirement preserves the Bankruptcy Code’s priority scheme to ensure that creditors are paid before equity holders, and protects creditors from creative efforts by equity holders to funnel value to insiders in the face of creditor dissent.

By Reed Mercado 

In a recent decision from the California Court of Appeals entitled Jolley v. Chase Home Finance, LLC, the Court severely curtailed lenders’ ability to dispose of lender liability claims on summary judgment, thereby adopting a marked departure from existing law. In so doing, the Court admonished lenders that the “world [has been] dramatically rocked in the past few years by lending practices colored by short-sighted self-interest.”

By Aaron Kleven

The bankruptcy of the largest U.S. city to file a chapter 9 bankruptcy petition has yielded a decision with serious implications for municipal creditors. Specifically, the United States Bankruptcy Court for the Eastern District of California overruled the objections asserted by retired employees of the City of Stockton, California and authorized the City to suspend the retiree’s health benefits during the City’s Chapter 9 case. Ass’n of Retired Employees of the City of Stockton, et al. v. City of Stockton, California (In re City of Stockton), 56 Bankr.Ct.Dec. 250 (Bankr. E.D. Cal.). Bankrutcy Judge Klein acknowledged the potential hardship to the retirees, but citing Section 904 of the Bankruptcy Code stated that the court has no power to interfere with the property or revenues of the debtor during Chapter 9. Continue Reading Questions & comments

By Christine Swanick, Carren Shulman, Wilda Wahpepah, and Shawn Watts

On March 4, 2013, ‘SA’ NYU WA, Inc., a tribally-chartered corporation wholly owned by the Hualapai Indian Tribe, filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court, District of Arizona. This is a very important case for tribes and any party conducting business with tribes because the petition will raise a question of first impression for the Bankruptcy Court. The Bankruptcy Court will have to decide whether a tribal corporation is eligible to be a debtor under the Bankruptcy Code. Continue Reading Questions & comments