St. John’s Law Student
In a proceeding requiring the municipality of Stockton (the “City”) to establish its eligibility for chapter 9 relief under sections 109(c) and 921(c) of the Bankruptcy Code, the Bankruptcy Court of the Eastern District of California held that the City met its requirement of negotiating in good faith with its creditors.
When the City was set to end the fiscal year with a deficit of over $8,000,000,
the City manager, “ask[ed] the City Council to initiate the neutral evaluation process under California [law],” which the City needed to complete before it filed for Chapter 9 relief.
This request was approved, and the City began the neutral evaluation process by presenting a proposed adjustment plan describing how it would deal with the affected parties.
In response to this proposal, two capital creditors refused to negotiate unless the City include in its plan an impairment of its pension obligation to the California Public Employees’ Retirement System (“CalPERS”).
Upon the completion of the neutral evaluation process, the City filed a chapter 9 petition.
Four creditors objected to the petition granted, alleging the City was ineligible to be a debtor under chapter 9, arguing that the City failed to negotiate in good faith.
Rejecting this argument, the court not only held that the City had satisfied the requirement to negotiate in good faith, but also concluded that the City’s creditors had a reciprocal duty to negotiate in good faith.