Regional News

Vallejo Bankruptcy Ruling Imminent

SAN FRANCISCO - The judge in Vallejo, Calif.'s bankruptcy case may rule on its eligibility for protection from creditors as soon as today.

Lawyers for the San Francisco Bay-area city and employee unions filed final briefs Friday.

Judge Michael McManus of the U.S. Bankruptcy Court for the Eastern District of California had previously scheduled hearings and told lawyers to expect a ruling today but late last week he delayed the hearings to Sept. 8. Lawyers for the two parties said he may rule this week via the court's Web site.

Vallejo and its unions have been fighting over the city's eligibility for bankruptcy in McManus' Sacramento courtroom since the city filed on May 23.

Vallejo is the biggest U.S. municipality to seek bankruptcy protection to since Orange County, Calif., in 1994. Its biggest unsecured creditors are workers, who had contracts that promised pay raises the city now says it can't afford, and retirees, who are owed almost $220 million in unfunded pension and retirement health benefits.

The city also owed $53 million to bondholders at the time of its filing. Union Bank of California, which was the letter of credit bank on $47 million of Vallejo variable-rate demand obligations, is the largest holder because it called the debt after the filing.

McManus must decide whether the city has proven it is insolvent, has negotiated in good faith to avoid bankruptcy and has shown it wants to negotiate a plan of adjustment to its debts.

Chapter 9 of the bankruptcy code requires a very different test of solvency than other forms of bankruptcy: It is not a balance sheet test; it's a cash flow test.

The city doesn't have to prove that it has no assets or that its liabilities are greater than its assets. It doesn't even have to show that it has cut basic city services. It simply has to show that it doesn't have the cash to pay its bills.

Vallejo says its general fund has no reserves and would have had a $17 million deficit this year outside of bankruptcy.

"We had no choice," said city bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe LLP. "We're insolvent."

The unions say the judge should look beyond the city's general fund to consider the $116 million that the city holds in other funds. The city and the unions disagree over whether the city has the right to tap those funds. The unions brought in an expert witness to show how the city could tap other funds, raise revenues and cut costs to stave off bankruptcy.

Union attorney Dean Gloster of Farella Braun + Martell LLP in San Francisco, also argued that the city has overstated what it owes - and hence its inability to pay - by rejecting salary concessions from employees.

Workers offered to take temporary pay cuts of about $10 million to keep the city out of bankruptcy, but the city rejected the offer because it wouldn't make the city solvent in the long term.

Gloster acknowledged last week that the unions have taken on a tough case.

"We thought it was a real clear issue in the law," he said. "But it is a very difficult argument to win in front of a bankruptcy judge."



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