Why the Impending City of San Bernardino Bankruptcy Matters

By Michael Reiter, Attorney at Law

The news that the Mayor and Common Council voted 4-2-1 to authorize the City Attorney to file for bankruptcy under Chapter 9 of the United States Bankruptcy Code is important from a legal perspective.  We appear to be moving into a new era where bankruptcy is not something to be feared, but is embraced as a solution for municipalities.  San Bernardino is the third municipality in California to move towards bankruptcy this year, and no doubt is not the last.

According to the Administrative Office of the United States Courts,

The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Although similar to other chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs. Indeed, due to the severe limitations placed upon the power of the bankruptcy court in chapter 9 cases (required by the Tenth Amendment and the Supreme Court’s decisions in cases upholding municipal bankruptcy legislation), the bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under chapter 11. The functions of the bankruptcy court in chapter 9 cases are generally limited to approving the petition (if the debtor is eligible), confirming a plan of debt adjustment, and ensuring implementation of the plan. As a practical matter, however, the municipality may consent to have the court exercise jurisdiction in many of the traditional areas of court oversight in bankruptcy, in order to obtain the protection of court orders and eliminate the need for multiple forums to decide issues.

What this means is that the City will be able to renegotiate its debt, change certain contractual terms, including agreements with its employees, and possibly reduce or eliminate debts.  The City will not give up control to a trustee in the same way seen in corporate bankruptcy.  There will be no effect on code enforcement prosecutions, and the City will not have any special way to raise money through taxes outside of California law.

What about AB 506, the law codified at Government Code section 53760 et seq.?

That section reads:

A local public entity in this state may file a petition and exercise powers pursuant to applicable federal bankruptcy law if either of the following apply: (a) The local public entity has participated in a neutral evaluation process pursuant to Section 53760.3. (b) The local public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board pursuant to Section 53760.5.

There has been no mention of AB 506 in the coverage so far, and the agenda for yesterday’s meeting does not have any mention of such a resolution, but presumably, the City of San Bernardino will take the (b) path.

Posted on our sister site is an analysis of the political implications of such a move.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog.  You should consult an attorney for advice regarding your individual situation.
Michael Reiter, Attorney at Law

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708
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About Michael Reiter, Attorney at Law
Michael Reiter is a Redlands, California-based lawyer, serving San Bernardino County and Riverside County in Southern California's Inland Empire. Michael Reiter is a lawyer practicing in the following fields of law: Municipal Law, Code Enforcement Law, Small Business Law and Real Estate Law. Michael Reiter practices in all the local courts, including San Bernardino Superior Court, Riverside Superior Court, and the United States District Court for the Central District of California. Michael Reiter was admitted to the California State Bar in 1998. Michael Reiter was Assistant City Attorney for the City of Redlands, a Deputy City Attorney for the City of San Bernardino, and Staff Attorney for Legal Aid Society of San Bernardino. Michael Reiter serves all of San Bernardino and Riverside County, Orange County, and Los Angeles County. Michael Reiter can be reached at (909) 296-6708, or by electronic mail at michael@michaelreiterlaw.com. 300 E. State St. #517 Redlands CA 92373-5235

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