By Ryan C. Wood

If you did not know, The City of Stockton, California filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code on June 28, 2012, Bankruptcy Case Number 12-32118. Chapter 9 is the chapter for municipalities to seek relief from their debts. Chapter 9 is a reorganization of debts in a plan that creditors vote on. For the plan of reorganization to be confirmed/approved a certain number of votes for the plan from different debt holders/classes of the City of Stockton must approve or vote for approval of the plan of reorganization. It is a similar process in a corporate or individual Chapter 11 reorganization. Filing Chapter 13 is also a reorganization of debts, but creditors do not have the right to vote on their treatment in the plan of reorganization.

City of Stockton Eligible for Relief Under Chapter 9

Unlike other chapters of the bankruptcy Code a municipality that files under Chapter 9 for relief from its debts must prove it is eligible for relief. On April 1, 2013, the Honorable Christopher M. Klein, bankruptcy judge for the Bankruptcy Court for the Eastern District of California held that the City of Stockton demonstrated by a preponderance of the evidence that (i) it is a municipality; (ii) it is authorized under state law to file for chapter 9; (iii) it was insolvent (as of the petition date); (iv) it desired to effectuate a plan to adjust its debts; and (v) it negotiated in good faith with relevant creditors. See 11 U.S.C. § 109(c)(1)-(5); Cal. Gov’t Code §53760.3(o). The Court also found that the City filed its petition in “good faith” under 11 U.S.C. § 921(c).

Amended Disclosure Statement Filed on November 21, 2013

On November 21, 2013, Stockton’s bankruptcy attorneys filed Stockton’s Amended Disclosure Statement. Filing a Disclosure Statement is part of the process of reorganizing debts in a Chapter 9 case. The Disclosure Statement provides for the treatment of the creditors in the Plan of Reorganization to be filed later. The City of Stockton filed their Disclosure Statement and Amend Disclosure Statement on November 21, 2013. The City of Stockton’s plan involves about $299 million publicly held securities (various bonds issued over the years). Please see a previous blog article about Why Did Stockton California File For Bankruptcy Under Chapter 9 for more information about why Stockton filed for bankruptcy and Pension Obligation Bonds.

Reduction of Retiree Healthcare Benefits

Stockton is trying to impair or reduce the interests of former employees and current retirees regarding their health benefits. Stockton cannot go into anymore debt or issue more pension obligations bonds to make up the difference in what they promised people and what they can actually afford. According to Stockton’s disclosure statement retirees have had their benefits reduced by 30% – 50% and new hires are receiving benefits at a 50% – 70% reduction from historical benefit levels. Retiree Health Benefits filed a general unsecured claim for their reduction in benefits due to the City of Stockton’s bankruptcy filing, negotiated reductions and changes in California State law. The reduction of retiree healthcare benefits according to their claim filed with the Bankruptcy Court is $545 million. This total does not include the reduction of existing healthcare benefits for employees of Stockton employed as of July 1, 2012 (reduction of healthcare benefits estimated at $1 billion). This general unsecured claim of retiree’s will be paid less than 1% of the amount claimed or about $5 million.

Next Steps

The City of Stockton’s bankruptcy lawyers need to file its Plan of Reorganization. The deadline to object to confirmation is February 24, 2014. The confirmation/approval hearing of the plan of reorganization is set for March 5, 2014, at 9:30 a.m.