Appeals Court Wants to Revisit Ruling on Vallejo Bankruptcy

SACRAMENTO - The U.S. Ninth Circuit Bankruptcy Appellate Panel wants to take a closer look at a lower court decision to accept testimony by a city accountant who helped convince the lower court that Vallejo, Calif., is bankrupt.

Judge Michael McManus, chief judge of the U.S. Bankruptcy Court for the Eastern District of California, ruled in September that Vallejo was eligible for protection from creditors under Chapter 9 of the bankruptcy code. The city said it would have been unable to pay its debts and payroll as they came due at the beginning of the current fiscal year and projected a $17 million deficit in its $95 million general fund for the full year.

The Vallejo locals of the International Association of Fire Fighters and International Brotherhood of Electrical Workers appealed McManus' ruling, arguing that the city had $136 million in other funds that could have helped close the deficit. The city and its workers argued their cases before the appellate panel in Pasadena last week.

The appellate panel late Friday ordered Vallejo to file more briefs on whether McManus should have accepted the testimony of assistant finance director Susan Mayer in determining that the city's nearly 100 enterprise, debt service, and other non-general funds were legally and contractually restricted, making them off-limits to solve the general fund budget crisis.

"The city of Vallejo (and no other entity) shall have until March 6, 2009, to file and serve a post-argument brief addressing whether it is appropriate for this panel to consider the argument that the bankruptcy court erred when it overruled the appellants' evidentiary objections to Ms. Mayer's testimony," the appellate panel said in an order.

The issue is whether the lower court judge should have required some proof beyond Mayer's testimony to determine restrictions on the city's 100 funds. Mayer, who is a certified public accountant, spent days on the stand, explaining why each extra dollar or asset on the city's balance sheet was restricted or unavailable to pay general fund debts.

But union lawyer Kelly Woodruff, of Farella Braun + Matel LLP, told the appeals court that the city had offered no proof, legal citations, or specific contracts to support those claims. She told the court she was fairly certain that some funds were restricted but others were not, and that the judge shouldn't have simply taken management's word for it.

The evidentiary issue was tangential to Woodruff's initial appeal and only showed up on her reply to the city's reply to the union appeal. Court rules kept Vallejo's bankruptcy attorney, Marc Levinson of Orrick, Herrington & Sutcliffe LLP, from writing a response on the issue.

But the appellate panel said it wants to hear more.

Wells Fargo & Co., the city's bond trustee, and Union Bank NA, the holder of most of Vallejo's general fund bond debt, joined the city in opposing the appeal in part because they wanted to protect the city's debt service reserve funds and enterprise fund revenue that are pledged to non-general fund debt.

Levinson argued in court that the city could have introduced 5,000 pages of citations that showed the legal restrictions on its 100 funds, but that the lower court had correctly held that the city accountant's professional judgment was adequate evidence of the restrictions.

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