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City of San Bernardino, California’s Bankruptcy Case Results in Multitude of Legal Disputes

OpenClipartVectors [Public domain (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe City of San Bernardino joined a number of cities around the country by filing for bankruptcy in 2012. See In re City of San Bernardino, 499 B.R. 776 ((Bankr. C.D. Cal 2013). While a municipal bankruptcy differs from a personal or business bankruptcy in numerous important ways, the legal conflicts that have arisen from the case can be similar to disputes that individuals and families may face with their creditors. A U.S. district judge in Los Angeles recently ruled on what he called “a trilogy of meritless appeals” by the San Bernardino City Professional Firefighters Local 891 (SBCPF). In re City of San Bernardino (“SB I”), No. 5:14-cv-02073, opinion (C.D. Cal, May 7, 2015); In re City of San Bernardino (“SB II”), No. 5:14-cv-02505, opinion (C.D. Cal, May 7, 2015); In re City of San Bernardino (“SB III”), No. 5:15-cv-00042, opinion (C.D. Cal, May 7, 2015). The decisions address efforts to negotiate with the city, relief from the automatic stay, and other issues.

Individuals and families may file for bankruptcy under Chapter 7, Chapter 13, or occasionally Chapter 11 of the federal Bankruptcy Code. Municipal bankruptcies are governed by Chapter 9, which takes unique features of city governments into account, such as the ability to renegotiate collective bargaining agreements (CBAs) with unions to address pensions and other expenses. Unions are essentially creditors in this situation, since the city has a financial obligation to union members.

The specific details of the disputes between the City of San Bernardino and the SBCPF are not as important for our purposes as the legal principles involved in the SBCPF’s three appeals. In SB I, the SBCPF appealed an order from the bankruptcy court that partly granted the City’s motion to reject a memorandum of understanding (MOU), which had served as a CBA between the two parties. After a lengthy period of time involving attempts at negotiation between the City and the SBCPF, the court held a hearing and partially granted the motion in late 2014.

The SBCPF argued on appeal, in part, that the City failed to meet its burden of proof that it made “reasonable efforts to negotiate voluntary modifications to the [CBA].” SB I at 8. Personal bankruptcies do not have an exactly-equivalent requirement for negotiation with creditors, but courts often encourage creditors to seek reasonable settlements. Part of the union’s argument, according to the court, stemmed from that fact that the mediation sessions were confidential, resulting in the SBCPF’s claim that the City presented insufficient evidence of “reasonable efforts.” The court called this argument “legally unsupported and lazy.” Id. at 11.

In SB II, the SBCPF appealed a bankruptcy court order denying its motion for relief from the automatic stay. One of the issues raised on appeal was a claim that the automatic stay, 11 U.S.C. § 362(a), does not prohibit state court litigation for conduct allegedly occurring after the filing of the bankruptcy petition. The court called the SBCPF’s arguments “misplaced.” SB II at 12.

The final appeal involved an order continuing the automatic stay in the Chapter 9 proceeding. Section 362(e) of the Bankruptcy Code provides that, 30 days after a party moves to lift the stay, the automatic stay expires with regard to the moving party unless the court holds a hearing and orders a continuation of the stay. The SBCPF asked whether it constitutes error for the bankruptcy court to order a continuation of the automatic stay after its expiration under § 362(a). Since this had not happened in this case, the court held that the SBCPF was asking a “hypothetical question” that rendered the appeal “highly meritless.” SB III at 5.

Devin Sawdayi, a Los Angeles bankruptcy attorney, has guided individuals and families through the Chapter 7 and Chapter 13 bankruptcy processes since 1997. We have dedicated our practice to helping people rebuild their finances with dignity and respect. To schedule a free and confidential consultation with an experienced financial advocate, contact us today online or at (310) 475-939.

More Blog Posts:

Bankruptcy Court Considers Whether to Lift Automatic Stay for Foreclosure-Related Proceedings, Los Angeles Bankruptcy Lawyer Blog, May 11, 2015

Violation of Automatic Stay Can Result in Emotional Distress and Punitive Damages, According to Ninth Circuit Ruling, Los Angeles Bankruptcy Lawyer Blog, April 12, 2015

California Cities File for Bankruptcy, Although It’s Different from a Personal Bankruptcy, Los Angeles Bankruptcy Lawyer Blog, December 4, 2013

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