Stockton Can Settle Civil Lawsuit While Bankruptcy Is Pending, Judge Says

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By Laura Mahoney

SACRAMENTO, Calif.--In a win for the City of Stockton, a federal bankruptcy judge said Jan. 30 the city does not need the court's permission to settle a lawsuit against its police force while its bankruptcy case is pending (In re City of Stockton,, Bankr. E.D. Calif., No. 2012-321118, motion to approve settlement granted in part 1/30/13).

U.S. Bankruptcy Court Judge Christopher Klein ruled from the bench that the city is not required to ask the court for approval of a $55,000 settlement with a man who sued the city alleging its police officers used excessive force on him. Klein said he will issue a written ruling on the matter soon, Marc Levinson, an attorney with Orrick, Herrington, and Sutcliffe in Sacramento, representing Stockton, told BNA Feb. 5.

The ruling applies to other city management decisions that arise during the bankruptcy proceedings, Levinson said. Stockton sought to clarify its ability to enter into the settlement, and make other day-to-day decisions, as a cost saving measure.

“The city doesn't have to run to court every time it needs to do something,” he said.

Creditors: City Could Evade Chapter 9
Klein agreed with the city's argument that in a Chapter 9 bankruptcy, the court cannot interfere with the city's rights under the Tenth Amendment to the Constitution to control its property and revenues. Levinson said. Although entities in bankruptcy under Chapter 11 need court approval for settlements and other matters, the city does not.

The city argued that Rule 9019 of the Federal Rules of Bankruptcy Procedure does not create a substantive requirement for the city to seek court approval of the settlement. The judge agreed, Levinson said.

Attorneys for Stockton's creditors argued in court filings that without the requirement for court approval the city would be free to evade the core provisions of Chapter 9. Those provisions include the mandate of equal treatment of similarly situated creditors, the prohibition on unfair discrimination, and the requirement that a plan be in the best interests of creditors.

'Scraps For Those Less Favored’
The creditors, including Assured Guaranty Corp., Franklin High Yield Tax Free Income Fund, National Public Finance Guaranty Corp., and Wells Fargo Bank said in its court filings that the city could evade Chapter 9 rules “simply by 'compromising’ and paying disputed prepetition claims held by influential or favored creditors and leaving the scraps for those less favored and those who have the temerity to question the debtor's conduct.”

The California Public Employees' Retirement System, which filed briefs with the court in support of the city, said it is pleased with Klein's ruling.

“CalPERS applauds the decision, which would allow the elected leaders in Stockton to continue to make the smart business decisions needed to protect its citizens and the valued public employees who serve them every day,” CalPERS spokesman Robert Udall Glazier said in a Jan. 30 news release.

A status conference is scheduled for Feb. 26 at the U.S. Bankruptcy Court for the Eastern District of California, in Sacramento. Klein is expected to set a schedule to hear objections to the city's eligibility for bankruptcy, Levinson said.

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