San Bernardino’s Debt Adjustment Plan Approved

Bloomberg Law’s® Bankruptcy Law News publishes case summaries of the most recent important bankruptcy law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy...

By Daniel Gill

San Bernardino, Calif., won approval of its debt adjustment plan Feb. 7, not quite five years after the Southern California municipality filed for Chapter 9 bankruptcy relief ( In re City of San Bernardino , Bankr. C.D. Cal., Order Confirming Third Amended Plan 2/7/17 ).

All impaired classes of creditors—creditors who would receive less than the whole value of their claims—approved and accepted the city’s Third Amended Debt Adjustment Plan, Judge Meredith A. Jury wrote in her order approving it.

It appears that San Bernardino made structural adjustments going beyond reducing current debt which may well reduce costs going forward, Samir Parikh, a professor of bankruptcy and restructuring at Lewis & Clark Law School in Portland, Or., told Bloomberg BNA. Whether those changes are enough to prevent a future bankruptcy remains to be seen, he said.

Under the plan, general unsecured creditors will receive only 1 percent of the value of their allowed claims. The plan also reduces retiree health plan benefits, although it preserves pensions.

The plan also enjoins any lawsuits against police or other city employees for damages caused in the line of duty. The 200,000-resident city has a serious unemployment and crime problem that must be addressed for the city to have a viable future, the court said. Without the injunction, the city would have a hard time retaining or attracting much-needed police officers.

Other recent municipal bankruptcy plans, such as those of Vallejo and Stockton, Calif., and Detroit, did not include similar provisions.

The debt adjustment plan is necessary because of San Bernardino’s dire financial circumstances, the court said.

The plan’s reduction of return to bondholders “has become quite commonplace in Chapter 9. Fortunately, San Bernardino has gone a step further,” Parikh said, “but it is unclear if the savings will be sufficient to prevent recidivism.”

City Attorney Gary D. Saenz and Stradling Yocca Carlson & Rauth represented the city.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Bankruptcy Law News on Bloomberg Law