LOS ANGELES — The California Public Employees’ Retirement System has filed its appeal of the ruling that found San Bernardino, Calif. eligible for Chapter 9 bankruptcy.
“Never has a bankruptcy court set such a low bar for a municipal debtor to enter the doors of the bankruptcy court,” CalPERS attorneys said in the 244-page document. CalPERS filed its appeal Monday night.
The pension fund has battled the city’s efforts to seek bankruptcy protection since it filed in August 2012.
In its recent filing, CalPERS is asking U.S. Bankruptcy Judge Meredith Jury for leave from the bankruptcy court’s automatic stay, preventing creditors from suing in other courts, to appeal her decision in district court.
“In CalPERS view, Chapter 9 petitions must be scrutinized with a “jaded eye” in order to honor Congress’ intent that the gates to Chapter 9 be intentionally difficult to open,” CalPERS argues.
The pension fund’s attorneys contend that the judge granted eligibility despite shortcomings in the city’s case.
“In its August 28 ruling, the bankruptcy court agreed that the City of San Bernardino did not negotiate with its principal creditors before filing for bankruptcy; did not consider alternatives to filing for bankruptcy; made significant preferential payments on the eve of filing and, a year after the bankruptcy filing, had no plan of adjustment,” CalPERS attorneys said.
San Bernardino is the first California city to attempt to impair the pension fund in its bankruptcy filing. Neither Vallejo, which exited bankruptcy in 2011, nor Stockton, which is awaiting votes by creditors and then a bankruptcy judge’s approval on its plan of adjustment, attempted to impair the pension fund.
Shortly before filing bankruptcy in August 2012, San Bernardino quit making $1.2 million bimonthly payments to the pension fund. Although it resumed payments in July, it currently owes the pension fund $17 million in missed payments, interest and fees, according to CalPERS officials.
San Bernardino Mayor Pat Morris said earlier this year in an interview that the city may not be able to make good on the missed payments.
The nation’s largest pension fund argued in its filing that the city did not file for bankruptcy in good faith and with any concept of a plan of adjustment, which CalPERS contends are two requirements for filing bankruptcy.
An early indicator of how the pension fund might fare with its latest attempt to derail the city’s bankruptcy is the written opinion filed by Judge Jury on Oct. 18. The written opinion supplements the summary judgment she made Aug. 28 granting the city eligibility to be in bankruptcy.
“The court recognizes the city was not a poster child in organization and pre-petition planning, before it entered into the complex world of chapter 9 reorganization,” Jury said.
Despite what Jury called “the untidy disarray of the city’s finances and the early lack of direction toward long-term resolution of its admitted financial distress,” she found the city eligible based on the fiscal distress she outlined in her 30-page written opinion.
Jury paints a picture of a city dependent on the home construction industry that experienced double-digit percentage growth in its housing market during the boom; and fell harder than many others following the economic crash.
She also disagrees with CalPERS’ assertion that the city was ineligible to be in bankruptcy, because city officials knew in 2006 the city had fiscal problems.
“The inactivity of the city to forestall cash flow insolvency in prior years does not mean, as a matter of law, the city is forever forbidden to file chapter 9 when the full impact of the cash situation was presented to the Common Council on July 10,” Jury wrote. “Just because it did not act earlier, does not mean it cannot act now.”
The bankruptcy case continues down other avenues. On Oct. 15 San Bernardino filed a confidential term sheet that lays the groundwork for mediation with creditors slated to begin formally on Nov. 24 before U.S. Bankruptcy Judge Gregg Zive in Reno, Nev.