LOS ANGELES — A U.S. District Court Judge granted the California Public Employees' Retirement System leave to appeal San Bernardino's eligibility to be in bankruptcy to the U.S. Ninth Circuit Court of Appeals.
In her ruling Friday, U.S. District Judge Dolly Gee noted the lack of case law involving Chapter 9 municipal bankruptcies and a need for clarification around the definitions of what constitutes eligibility to be in bankruptcy.
CalPERS has challenged the city's eligibility to be in bankruptcy on the grounds that it filed for Chapter 9 without demonstrating it "desired to effect a plan to adjust its debt," and did not file in good faith.
Mediation between San Bernardino and its creditors, which include CalPERS, is occurring even as CalPERS pursues its appeal. The parties met before U.S. Bankruptcy Judge Gregg Zive in Reno just before Thanksgiving to hammer out a term sheet that will form the basis of the city's plan of adjustment needed to exit bankruptcy. Additional mediation is scheduled for Jan. 9 and 10 in Los Angeles.
San Bernardino is the first city in California to attempt to impair the pension fund in its bankruptcy proceedings. According to CalPERS, the city owes the pension fund $17 million for missed payments, penalties and interest.
U.S. Bankruptcy Judge Meredith Jury, the primary judge in the San Bernardino bankruptcy, who appointed Zive to mediate the term sheet negotiations, has twice ruled against CalPERS' motions asking the bankruptcy court to certify a direct appeal to the Ninth Circuit Court of Appeals.
In her second ruling, Jury denied the motion without prejudice saying the eligibility orders are interlocutory and CalPERS must first obtain leave from the District Court, before the interlocutory, or non-final matter, qualifies for a direct appeal to Ninth Circuit court.
"The better procedure is to allow the district court to rule on the motion for leave first," Jury said in her ruling. "If that is granted, CalPERS may request the district court certify the direct appeal."
Jury granted San Bernardino eligibility to be in Chapter 9 bankruptcy on Aug. 28.
"We are very pleased with today's ruling in the federal district court," Anne Stausboll, CalPERS chief executive officer, said in a release.
CalPERS believes that it is important to have clarity regarding the standard for admission to bankruptcy for municipalities, Stausboll said.
"Today's ruling ensures that the federal appellate courts will have an ability to provide guidance on this important policy matter," she said.
San Bernardino's attorneys opposed CalPERS leave to appeal on the grounds that the eligibility orders are not final orders and CalPERS has not met the standard for leave to appeal.
In her ruling, U.S. District Judge Dolly Gee cited a statement made by Judge Jury that speaks to the lack of case law related to municipal bankruptcies.
"There is a side of me that would support the Ninth Circuit weighing in on these tricky definitions of desire and good faith, to give direction not only to cities in the State of California, but my guess is if the Ninth Circuit ruled, there would be citations of that circuit authority by bankruptcy courts around the country, because right now we're citing each other's opinions from the trial level because there is nothing else to look at," Jury said.
Jury added that an opinion from the Ninth Circuit would give direction to potential debtor cities and potential creditors, perhaps "changing the landscape of how much the eligibility battle has become the war that it is."