Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Stephanie Cumings
Jan. 20 — The San Bernardino City Professional Firefighters Local 891 lost another fight in federal court against the city that cut their salaries and benefits.
Judge Otis D. Wright, II, upheld the bankruptcy court's decision to block the firefighters from suing the city for alleged violations of state law by refusing to lift the bankruptcy stay.
This is the latest in several setbacks for the firefighters, who earlier this year lost an appeal on the rejection of their union contract after the district court found the union's arguments “legally unsupported and lazy.”
This latest appeal arose from the firefighters' failed attempt to get the bankruptcy court to lift the automatic stay. Filing for bankruptcy imposes an automatic stay under the Bankruptcy Code, which halts all judicial proceedings against the debtor. A party must get court permission to lift the automatic stay in order to proceed with an action against the debtor.
The firefighters wanted the stay lifted so that they could sue the city and its officers in state court for reducing their salaries and benefits following the city's rejection of the union's contract in San Bernardino's bankruptcy. San Bernardino filed for Chapter 9 protection, a form of bankruptcy available to municipalities, in August 2012 (24 BBLR 1035, 8/9/12).
The bankruptcy court refused to lift the stay and the firefighters appealed. Last April, the firefighters lost an appeal over the city's rejection of their collective bargaining agreement (27 BBLR 689, 5/14/15). They lost another appeal last December over whether or not the city could outsource firefighting services (28 BBLR 5, 1/7/16).
This appeal was no different as the district court once again sided with the city. The court rejected the argument that Section 922(a)(1) doesn't stay the firefighters' proposed claims. That section, which specifically applies to municipal bankruptcies, stays actions against “an officer or inhabitant of the debtor that seeks to enforce a claim against the debtor.” The court said that “[c]ontrary to the [f]irefighters' arguments, that section is not limited to pre-petition claims.”
“All bankruptcy stay provisions that are so limited expressly state that limitation in the text of the statute,” the court said. “The fact that [Section] 922 contains no such limitation demonstrates that the statute was intended to stay both pre- and post-petition claims.”
The firefighters also argued that the stay automatically terminated when it wasn't properly extended by the bankruptcy court between hearings. The court said that under Section 362(e)(1), the automatic stay is automatically lifted 30 days after a party moves to lift it unless “(1) a preliminary hearing is held within thirty days of the filing of the motion; (2) the court orders the ‘stay continued in effect pending the conclusion of ... a final hearing'; (3) ‘there is a reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion of such final hearing'; and (4) the final hearing occurs ‘not later than thirty days after the conclusion of such preliminary hearing, unless the 30-day period is extended ... for a specific time which the court finds is required by compelling circumstances.'”
The court said that in this case, “[e]ach condition was clearly met.” The court said that the bankruptcy court did have compelling circumstances to keep continuing the hearing date because other issues that could have a “substantial impact” on the stay motion needed to be decided first, including whether or not the collective bargaining agreement would be rejected.
Finally, the firefighters claimed that the bankruptcy court abused its discretion by not lifting the stay, but these arguments were also unavailing. Even though the firefighters argued there was cause to lift the stay, the court said that “[t]he merit of the proposed action has no bearing on whether relief from stay is appropriate beyond a threshold showing that the movant has a ‘colorable claim' for relief.”
The court also rejected the notion that the bankruptcy process can't provide the firefighters with adequate relief, noting that the firefighters “can file—and indeed have filed—an adversary proceeding before the bankruptcy court ... and the [f]irefighters do not explain why such a proceeding is inadequate.”
Corey William Glave of Hermosa Beach, Calif., and David M. Goodrich of SulmeyerKupetz APC, Los Angeles, represented the firefighters.
The city was represented by Fred Neufeld, Laura L. Buchanan, Kathleen D. DeVaney, and Paul Robert Glassman of Stradling Yocca Carlson and Rauth PC, Santa Monica, Calif., and Gary David Saenz of the San Bernardino City Attorney's Office, San Bernardino, Calif.
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