By Ryan C. Wood

As of today, Friday, July 27, 2012, the City of San Bernardino has not filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code.  The San Bernardino City Council is still complying with AB 506 and Government Code Section 53760.  California recently passed this law, AB 506, or Government Code Section 53760, which provides two possible ways a municipality in California can file bankruptcy.  One path is the neutral evaluation process (NEP).  The other path is declaring a fiscal emergency and adopting a resolution by a majority vote of the governing board pursuant to Government Code Section 53760.5.  San Bernardino recently voted to declare a fiscal emergency.

It is noteworthy that they chose not to try the NEP pursuant to Government Code Section 53760.  The NEP is started by the request of the public entity and giving notice by certified mail to all interested parties.  Stockton, California tried to negotiate with its creditors prior to filing bankruptcy to no avail.  The NEP can only last 60 days from the date an evaluator is selected unless the parties agree otherwise.  Stockton and its creditors chose to extend the NEP for an additional 30 days to try and work things out.  The problem is that you must negotiate a better deal with large number of those you owe money to or even all of them to avoid filing bankruptcy.  Our clients who file consumer bankruptcy cases no this all too well.  If you settle with just one of your creditors you have most likely just wasted time and valuable money.

A public entity may also file for bankruptcy protection under Chapter 9 in California if the public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board at public hearing.  At the public hearing, a finding that the financial state of the local public entity jeopardizes the health, safety or well-being of the residents of the public entity. See California Government Code Section 53760.5.  This is what San Bernardino has chosen to do.  Now that San Bernardino has declared a fiscal emergency their bankruptcy attorneys will most likely file their case shortly.  If will be interesting how San Bernardino’s bankruptcy lawyers prove it is eligible to be a debtor under Chapter 9 of the Bankruptcy Code given it declared a fiscal emergency.  Stockton by contract chose the NEP and also must prove it is eligible to be a debtor under Chapter 9 of the Bankruptcy Code.  Will their arguments be substantially the same even though they chose different paths in complying with California law prior to filing their bankruptcy cases?  Stockton will be up first, and then eventually San Bernardino will go through the same process once it files its Chapter 9 bankruptcy petition.