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CHAPTER 9 BANKRUPTCY IN CALIFORNIA:THE EFFICACY OF MANDATING

ALTERNATIVE DISPUTE RESOLUTION INMUNICIPAL BANKRUPTCY FILINGS

Michael Galen*

I. INTRODUCTION

In recent years, the recession has produced some of the largestcorporate bankruptcy filings in history.1 Many people are familiarwith the large corporations that filed for bankruptcy, but corpora-tions were not the only entities on which the recent economicdownturn had an impact.2 Municipalities throughout the UnitedStates are also facing continuing financials issues caused by de-creases in revenue since the recession.3 However, unlike corpora-tions, the municipalities that have filed for bankruptcy are affectednot only by the requirements of federal law under the BankruptcyCode, but also by state law.4

Recently passed legislation in California mandates mediationfor municipalities filing for Chapter 9 bankruptcy in the state. ThisNote will first give a brief overview of Chapter 9 bankruptcy, fol-lowed by an analysis of California’s new law (A.B. 506). Next, itwill discuss the background of the Bill, detailing how and why it

* B.S. Finance, W.P. Carey School of Business, Arizona State University; J.D. Candidate(2014), Benjamin N. Cardozo School of Law; Articles Editor, Cardozo Journal of Conflict Reso-lution. I thank my parents, Neal and Barbara Galen, and my brother Adam, for their love andsupport; Joe Zujkowski, for his wisdom and guidance.

1 Steve Schaefer, The Great Recession’s Biggest Bankruptcies: Where are they Now?,FORBES, (Aug. 10, 2011), available at http://www.forbes.com/sites/steveschaefer/2011/08/10/the-great-recessions-biggest-bankruptcies-where-are-they-now/ (Noting that the top two bankruptcorporations on the list, Lehman Bros. and Washington Mutual, were the largest corporate bank-ruptcy and the largest bank failure respectively in U.S. History).

2 Jean-Jacques Dethier, Cities in the aftermath of great recession, WORLD BANK BLOGS

(Nov. 20, 2012, 9:29 PM), http://blogs.worldbank.org/developmenttalk/cities-in-the-aftermath-of-great-recession.

3 Id. (“Revenue of cities around the world—either generated by municipalities or derivedfrom State transfers—have decreased sharply because of the economic slowdown, as did thefiscal value of real property. Some local governments also lost major assets that they invested inrisk funds and banks that collapsed during the crisis. City expenditures—especially spending toaddress social needs—rose because of the slowdown in economic activity and the correspondingincreases in unemployment and social welfare needs. The decline in revenue and increase inexpenditure led many cities to experience the worst ‘fiscal crunch’ in decades.”).

4 See generally Chapter 11 of the U.S. Code.

547


548 CARDOZO J. OF CONFLICT RESOLUTION [Vol. 15:547

came about, followed by an examination of the impact of this billon the three municipal bankruptcy cases that were filed in Califor-nia in 2012. In the final sections, this Note proposes that the alter-native dispute resolution (“ADR”) requirements of A.B. 506 maybe improved by the incorporation of certain Chapter 11 provisions,particularly § 1113, to more adequately address the shortcomingsof the Bill and to make the ADR process more equitable to allparties involved. These changes would promote efficiency and ef-fectiveness, two of the chief goals of the law as stated by the Billitself.

The subject of this Note is of importance to ADR practition-ers: the incorporation of ADR into a new state law can mitigate aheated legal struggle involving state and federal law, while balanc-ing the competing interests of powerful parties like local govern-ments and large unions. This subject demonstrates the efficacy ofADR as applicable to bankruptcy law, a realm with which manyADR practitioners may be unfamiliar. This Note’s case study fo-cuses solely on California law and cases because California standsalone in its approach of mandating ADR as a precondition to amunicipal bankruptcy filing.5 Since all states have the option tocondition their municipalities’ access to Chapter 9, the lessonslearned from California’s experience are particularly useful toother states that may face municipal filings in the near future andwish to regulate such filings with similar ADR requirements.

II. CHAPTER 9 BANKRUPTCY

Chapter 9 of the Bankruptcy Code (the “Code”) allows mu-nicipalities to file for bankruptcy protection.6 By filing underChapter 9, municipalities have the ability to reorganize their debtin a manner similar to a corporate Chapter 11 filing,7 and in factChapter 9 directly incorporates many provisions from Chapter 11and other sections of the Bankruptcy Code.8 Though in some waysit operates much like a bankruptcy filing under other chapters of

5 Katy Grimes, AB 1694 could halt city bankruptcies, CALWATCHDOG (Mar. 2, 2013, 11:37PM), http://www.calwatchdog.com/2012/04/26/manipulating-law-to-avoid-bankruptcies/ (quotingAssemblyman Bob Wieckowski, the author of A.B. 506, as saying that the law is the first of itskind, and that it is “unique to anything ever done.”).

6 See generally, 11 U.S.C. §§901 – 906.7 Id.8 11 U.S.C. § 901 (This section generally applies applicable sections, such as commencement

of a bankruptcy case (§ 301) and the effect of a case’s discharge (§ 524(a)(1)). It also includes


2014] CHAPTER 9 BANKRUPTCY IN CALIFORNIA 549

the Code, Chapter 9 allows a municipality to adjust or discharge itsdebts without allowing for liquidation, because a municipality isnot capable of liquidating like a corporation.9

Notably, although municipal filings are based on the Code,states may put conditions on when and how state municipalitiescan file for Chapter 9 protection and can even disallow filings alto-gether.10 Twenty-three states currently do not allow state munici-palities to file under Chapter 9, and several others—such asCalifornia, as illustrated by A.B. 506—have put conditions on fil-ing.11 The condition of mediation with creditors imposed by theCalifornia Bill exemplifies a permissible state requirement condi-tioning a municipality’s right to file.

III. OVERVIEW AND ANALYSIS OF A.B. 506

California Assembly Bill 506 (“A.B. 506” or the “Bill”) waspassed by the California Legislature during the 2011–2012 RegularSession12 and mandates that a municipality participate with itscreditors in at least sixty days of mediation, conducted by a state-approved mediator with sufficient bankruptcy experience, before itmay file for bankruptcy under Chapter 9 of the Code.13 The twinaims of the new law are to ensure that creditors who are interested

numerous provisions from Chapter 11, such as the manner in which claims are designated in thebankruptcy plan (§ 1123(a)(1)).

9 UNITED STATES COURTS, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter9.aspx (last visited Nov. 1, 2012) (Noting that liquidation of a municipality would“violate the Tenth Amendment to the Constitution and the reservation to the states of sover-eignty over their internal affairs.”).

10 11 U.S.C. § 109(c):An entity may be a debtor under Chapter 9 of this title if and only if such entity—

1. Is a municipality;2. Is specifically authorized, in its capacity as a municipality or by name, to be a debtor

under such Chapter by State law, or by a government officer or organization empoweredby State Law to authorize such entity to be a debtor under such Chapter;

3. Is insolvent;4. Desires to effect a plan to adjust such debts

11 A.B. 506, Legislative Counsel’s Digest 2011–12 Leg., Reg. Sess. (Ca. 2011) (unenacted),available at http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-0550/ab_506_bill_20110815_amended_sen_v94.pdf (“Twenty-seven states permit municipalities to file for bankruptcy, butmost states impose standards and guidelines for access to bankruptcy proceedings.”).

12 Id.13 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011) (stating that “it is important for [the] parties

to be able to participate in a prefiling confidential neutral evaluation process that could assistparties in reaching a settlement or otherwise lead to a prenegotiated, consensual plan of adjust-ment and avoid a Chapter 9 filing.”).



parties understand the “financial capacity of [the] local govern-ment entities” and “to make the debt restructuring process in oroutside of a Chapter 9 bankruptcy as cost effective and efficient aspossible for all participants.”14 In enacting this law, the Californialegislature wanted to allow for every possible opportunity to re-solve these cases out of court and avoid Chapter 9 altogether15;furthermore, the legislature hoped that the incorporation of ADRinto municipal filings would allow these proceedings to reach ami-cable solutions more quickly and efficiently.16

A. Bankruptcy Courts’ Role in Enforcing State Preconditionsto Chapter 9

Section 109(c) of the Bankruptcy Code grants bankruptcycourts the ability to review a municipality’s compliance with A.B.506. § 109(c) provides that a debtor must be an authorized debtorunder state law.17 It is therefore up to a bankruptcy court to decidewhether the state’s requirements are satisfied and the municipalityis, therefore, eligible to be a Chapter 9 debtor. Objections to eligi-bility were raised in recent municipal bankruptcies in California,and no court has yet held that the municipalities failed to meet thestate’s qualifications under A.B. 506.18

After mandating that a municipality cannot file a bankruptcypetition unless it “has participated in the neutral evaluation pro-cess” or has declared a “fiscal emergency and adopt[ed] a resolu-tion by a majority vote of the governing board,”19 the lawenumerates all “interested parties” between whom the debtor mu-

14 Id.15 Id. (Interested parties “deserve every reasonable and appropriate effort that state and

local government can make to avoid adverse consequences of Chapter 9 bankruptcy filings, par-ticularly where a neutral evaluation may lead to the avoidance of Chapter 9 filing by an out-of-court resolution of outstanding obligations and disputes.”).

16 Id.17 See 11 U.S.C. § 109(c).18 See, e.g., Opposition to Debtors Application for Order Setting June 9 Deadline for Filing

Objections to Petition infra note 47; Creditor San Bernardino City Professional Firefighters Lo-cal 891’s Opposition to Debtor City of San Bernardino’s Motion for Entry of an Order (1)Di-recting and Approving Form of Notice; and (2)Setting Deadline for Filing Objections to Petition;Memorandum of Points and Authorities and Declarations of Chad V. Haes in Support Thereof,In re San Bernardino, California, No. 12-28006 (C.D. Cal. 2012) ECF No. 85.; San BernardinoPublic Employees Association’s Objection to Debtor City of San Bernardino’s Petition andStatement of Qualification Under Title 11 U.S.C. Section 109(c), In re San Bernardino, Califor-nia, No. 12-28006 (C.D. Cal. 2012), ECF No. 203.

19 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011).



nicipality is obligated to mediate.20 Such parties include a “trustee,a committee of creditors, an affected creditor, an indenture trustee,a pension fund, a bondholder, a union that, under its collective bar-gaining agreements, has standing to initiate contract or debt re-structuring negotiations with the municipality, or a representativeselected by an association of retired employees of the public entitywho receive income from the public entity convening the neutralevaluation.”21 In enacting this provision, the legislature appearedparticularly focused on unions and collective bargaining agree-ments, as indicated by several sections of the Legislative Counsel’sDigest to A.B. 506 referring to collective bargaining agreements.In the digest’s first reference to collective bargaining agreements, itdefines them as “written, legally enforceable contracts for a speci-fied period, between the management of an entity or organizationand its employees represented by a recognized union.”22 The di-gest states generally that “these agreements may be subject to re-view, amendment, or rejection in the event of a Chapter 9.”23 Itgoes on to say that “[i]t is the duty of all state and local electedofficials to ensure that governments . . . respect collective bargain-ing agreements reached with their employees.”24 In order to givecontext to these references to collective bargaining, this Note’snext section will explore the history of the 2008 Vallejo, California,bankruptcy. It was the cancellation of collective bargaining agree-ments in that case that ultimately gave rise to A.B. 506.25

B. The Neutral Evaluation Process

The starting point for analysis of A.B. 506 is the Bill’s require-ment of participation in the neutral evaluation process before fil-ing. To make the mediation process as equitable and appealing aspossible, the state is required to maintain a list of qualified evalu-

20 Id.21 Id.22 A.B. 506, Legislative Counsel’s Digest 2011–12 Leg., Reg. Sess. (Ca. 2011) (unenacted),

available at http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-0550/ab_506_bill_20110815_amended_sen_v94.pdf.

23 Id.24 Id.25 Craig A. Barbarosh, Karen B. Dine & Brandon R. Johnson, California Restricts Access of

Municipalities to Chapter 9 of the Bankruptcy Code, 8 PRATT’S J. BANKR. L. 18, 21–22 (2012).



ators on its web site.26 Explaining the Bill’s purpose, the Californialegislature states that “[i]t has long been recognized that alterna-tive dispute resolution proceedings, like a neutral evaluation, offeran economical, discreet, and expeditious way to resolve potentiallydevastating situations.”27 The combination of protection of inter-ested parties and the potentially efficient results provided by ADRseems to have compelled the institution of mandatory mediation inmunicipal filings.

C. Exception To The Neutral Evaluation Process

The California legislature did provide an exception by whichmunicipalities may avoid neutral evaluation.28 The Bill exempts amunicipality from the neutral evaluation requirement if the LocalAgency Bankruptcy Committee29 “determine[s] that the local pub-lic entity’s financial difficulties have or will result in an emer-gency.”30 An emergency is defined by the Bill as a situation thatwould “jeopardize the health, safety, or well-being of the residentsof the local public entity’s jurisdiction or service area absent theprotections of Chapter 9.”31 This standard for determining when amunicipality is allowed to forego the mandatory mediation processappears to be a highly subjective analysis. The nature of the excep-tion begs the question: could a municipality manipulate its determi-nation of “emergency” if it decided that the neutral evaluationprocess was not in its best interest? If this is indeed a possibility,how much do interested parties gain from the passage of A.B. 506?

Several important, yet preliminary, answers to these questionscan be found in the string of Chapter 9 filings that have occurredsince the passage of A.B. 506. By studying the filings and opinionsin these cases, one can glean the most accurate possible picture ofthis law’s efficacy and future effects on Chapter 9 bankruptcies inCalifornia.

26 A.B. 506, Legislative Counsel’s Digest 2011–12 Leg., Reg. Sess. (Ca. 2011) (unenacted),available at http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-0550/ab_506_bill_20110815_amended_sen_v94.pdf.

27 Id.28 Id.29 Id. (consisting of the Treasurer, the Controller, and the Director of Finance).30 A.B. 506, Legislative Counsel’s Digest 2011–12 Leg., Reg. Sess. (Ca. 2011) (unenacted),

available at http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-0550/ab_506_bill_20110815_amended_sen_v94.pdf.

31 Id.



IV. BACKGROUND OF COLLECTIVE BARGAINING AGREEMENTS

AS A MOTIVATOR FOR THE BILL’S PASSAGE—IN RE CITY OF VALLEJO

The City of Vallejo, California (“Vallejo”), filed for bank-ruptcy in May of 2008.32 Because this filing was before the passageof A.B. 506, Vallejo did not have to mediate beforehand. At thattime, California had no such condition to municipal filings understate law.

Vallejo’s largest unsecured creditor was the California PublicEmployees Retirement System (“CalPERS”), which was owed$135,396,000 in retiree health benefits and $83,904,816 in unfundedpension plan benefits.33 Early in the proceeding, the unions filedan objection stating that Vallejo was attempting to rush a hearingon their Chapter 9 eligibility in order to cut off creditors’ ability toobject before acquiring all the necessary facts.34 It was further al-leged that Vallejo could have maintained its contracts with the un-ions if it had accepted the unions’ offers to take pay cuts, foregosalary increases, and reduce staffing in order to lower the city’scosts.35 Given these tactics used by, and failures of, the city, theunions inquired as to whether Vallejo was using Chapter 9 in badfaith and only “wishe[d] to use bankruptcy to reject the collectivebargaining agreements with the unions, leaving other creditorsunaffected.”36

Ultimately, Vallejo did move to reject some of its collectivebargaining agreements with its unions.37 The four unions affectedby its motion were the Vallejo Police Officers Association (“Po-lice”), the International Association of Firefighters (“Firefight-

32 See generally Chapter 9 Voluntary Petition, In re City of Vallejo, California, No. 08-26813(E.D. Cal. 2008), ECF No. 1.

33 List of 20 Largest Unsecured Creditors, In re City of Vallejo, California, No. 08-26813(E.D. Cal. 2008), ECF No. 3.

34 Opposition to Debtors Application for Order Setting June 9 Deadline for Filing Objec-tions to Petition at 1, In re City of Vallejo, California, No. 08-26813 (E.D. Cal. 2008), ECF No. 36(Arguing that “[t]he city’s requested June 9 deadline for objections would set the bar date beforemost of the relevant facts are known, or can be known.”).

35 Id. at 5 (The consultant’s report which detailed the potential union compromises sug-gested other steps the city could take to improve its financial position, such as forego thepurchase of unnecessary equipment, raise certain fees, and collect money due from the state,among others.).

36 Id. at 6.37 See generally Motion for Approval of Rejection of Collective Bargaining Agreements, In

re City of Vallejo, California, No. 08-26813 (E.D. Cal. 2008), ECF No. 69 (the motion was madepursuant to 11 U.S.C. § 365(a), as incorporated into Chapter 9 of the Code by 11 U.S.C. § 901).



ers”), the International Brotherhood of Electrical Workers(“Electrical Workers”), and the Confidential, Administrative,Managerial and Professional Association of Vallejo (“CAMP”).38

Eventually, the Police reached an agreement with the city that“modifie[d] the . . . collective bargaining agreement.”39 CAMP wassecond to alter their collective bargaining agreement with Vallejo.40

Despite extra time given by the court, a settlement was not reachedwith the Firefighters or Electrical Workers unions, and in Septem-ber 2009, the court allowed the rejection of both remaining collec-tive bargaining agreements.41 In the wake of the Vallejobankruptcy, unions pushed for legislation that would guaranteethem “a seat at the table . . . if their collective bargaining agree-ments would be implicated by [a municipality’s] Chapter 9.”42 Itmay, therefore, come as no surprise that A.B. 506 is largely under-stood to be the result of “a lobbying victory for unions and otherswho were dissatisfied with the City of Vallejo’s Chapter 9proceedings.”43

V. ONGOING CHAPTER 9 CASES IN CALIFORNIA

Three municipal Chapter 9 bankruptcies were filed in Califor-nia in 2012. They were the first and only cases, to date, that wererequired to adhere to A.B. 506. The City of Stockton, California,filed first in late June 2012.44 It was followed by The Town of

38 Id. at 2.39 City of Vallejo’s Withdrawal of Motion for Approval of Rejection of Collective Bargaining

Agreements with Respect to Vallejo Police Officers’ Association, In re City of Vallejo, Califor-nia, No. 08-26813 (E.D. Cal. 2008), ECF No. 389.

40 City of Vallejo’s Withdrawal of Motion for Approval of Rejection of Collective BargainingAgreements with Respect to Confidential, Administrative, Managerial and Professional Em-ployees Association of Vallejo, In re City of Vallejo, California, No. 08-26813 (E.D. Cal. 2008),ECF No. 446.

41 Finding of Fact and Conclusion of Law Re: Motion for Approval of Rejection of Collec-tive Bargaining Agreements, In re City of Vallejo, California, No. 08-26813 (E.D. Cal. 2008),ECF No. 522.

42 Craig A. Barbarosh, Karen B. Dine & Jennifer K. Brooks, California’s A.B. 506 Process:What Creditors Can Expect in the Wake of California Municipal Bankruptcies, INSOLVENCY AND

RESTRUCTURING ADVISORY (Katten Muchin Rosenman LLP), Sept. 18, 2012, at 1; see also EdMendel, Public employee unions push bargaining bills, CALPENSIONS (July 5, 2011, 7:15 AM),http://calpensions.com/2011/07/05/public-employee-unions-push-bargaining-bills/ (discussing theorigins of A.B. 506, and the beginning of its rise through the California legislature in mid-2011).

43 Barbarosh, Dine & Johnson, supra note 26, at 21–22.44 Chapter 9 Voluntary Petition, In re City of Stockton, California, No. 12-32118 (E.D. Cal.

2012), ECF No. 1.



Mammoth Lakes in July 201245 and, finally, by The City of SanBernardino in August 2012.46 Each of these cases involves aunique scenario and application of A.B. 506. Though none led to asuccessful pre-filing settlement through neutral evaluation, distinctinferences can be drawn from each case regarding the manner inwhich the neutral evaluation process actually occurred.

A. In re City of San Bernardino, California

The City of San Bernardino was the third California munici-pality to file for Chapter 9 bankruptcy in 2012.47 Its two largestunsecured creditors were pension funds owed a total of$189,475,384.48 San Bernardino is unique in being the first city todeclare a fiscal emergency, and file its bankruptcy petition withoutmediation.49 In declaring fiscal emergency, the City’s governingboard found that:

(a) [T]he City is or will be unable to pay its obligations withinthe next 60 days; (b) the financial state of the City jeopardizesthe health, safety, or well-being of the residents of the city ab-sent the protections of Chapter 9 of the Bankruptcy Code; and(c) it was in the best interests of the City to authorize the filingof a petition for protection under Chapter 9 of the BankruptcyCode.50

The language in subsection (b) is consistent with that of A.B. 506,which releases municipalities from the neutral evaluation processdue to health and safety concerns.51

One of the City’s twenty largest unsecured creditors, the Pro-fessional Firefighters Local 891, quickly filed an objection to theCity’s eligibility as a Chapter 9 debtor.52 In its objection, the unionalleged that the City was ineligible because it “failed to engage in

45 Chapter 9 Voluntary Petition, In re Town of Mammoth Lakes, California, No. 12-32463(E.D. Cal. 2012) ECF No. 1.

46 Chapter 9 Voluntary Petition, In re City of San Bernardino, California, No. 12-28006 (C.D.Cal. 2012) ECF No. 1.

47 Id.48 See List of Creditors Holding 20 Largest Unsecured Claims, In re City of San Bernardino,

California, No. 12-28006 (C.D. Cal. 2012) ECF No. 41.49 Amended Statement of Qualifications Under Section 109(c) at 1, In re San Bernardino,

California, No. 12-28006 (C.D. Cal. 2012) ECF No. 124.50 Id.51 See A.B. 506, 2011-2012 Leg., Reg. Sess. (Ca. 2011).52 Creditor San Bernardino City Professional Firefighters Local 891’s Opposition to Debtor

City of San Bernardino’s Motion for Entry of an Order, supra note 18.



negotiations with the firefighters prior to the filing of the petition,”and even if the city’s “declaration of fiscal emergency results incompliance with the Assembly Bill,” the City failed to comply withthe other requirements in 11 U.S.C. § 109(c).53 The City re-sponded that this was not a substantive objection54 and noted thatit had made public certain documents that detailed the state of theCity’s finances.55 These documents, preserved on the City’s website, verified its financial situation.56

A separate objection to the City’s eligibility as a Chapter 9debtor was filed by the San Bernardino Public Employees Associa-tion (“SBPEA”).57 In its objection, the SBPEA alleged that SanBernardino’s declaration of fiscal emergency should not allow it tocircumvent a neutral evaluation because the city was willfully blindto its dire financial situation.58 Essentially, SBPEA claimed thatthe City found itself in a short-term financial crunch (i.e., the Citycould not satisfy its debts within 60 days of its declaration) becauseit intentionally allowed its financial situation to erode, thereby al-lowing itself to declare a fiscal emergency and get out of negotia-tion with its creditors.59 SBPEA further alleged that “the Citybudgeted and spent itself into insolvency so as to violate the re-quirements of Section 109(c)(3)” and that it “should have foreseenthat it was spiraling towards bankruptcy when it adopted its FY2011-12 budget.”60 The objection notes that “Chapter 9 is not asubstitute for political will” and that “the City could have done,

53 Id. at 4.54 Reply to Objections [Docket Nos. 76, 80, 81, 83, 84 & 85] to motion for entry of an order

(1) Directing and Approving Form of Notice; and (2) Setting Deadline for Filing Objections toPetition at 1, In re City of San Bernardino, California, No. 12-28006 (C.D. Cal. 2012), ECF No.90.

55 Id. at 2.56 Id.57 San Bernardino Public Employees Association’s Objection to Debtor City of San Bernar-

dino’s Petition and Statement of Qualification Under Title 11 U.S.C. Section 109(c), supra note18.

58 Id. at 8 (Stating that “[a]lthough the City bases its need for a declaration of a financialemergency [in lieu of a neutral evaluation of its debts] on the late discovery of its fiscal condi-tion, the facts show that if the City was blind to its fiscal reality, such blindness was willful.”); seealso id. at 9 (“[T]he City willfully ignored viable revenue enhancements and cost cutting strate-gies for years in the face of severe financial strain.”).

59 Id. (Stating that a municipality may not “knowingly create a fiscal emergency overtime byintentionally running its finances into the ground and then claim the filing of a petition is appro-priate because of the resulting, albeit predictable, fiscal emergency that ensues.”).

60 Id. at 9 (referring to the Federal Chapter 9 requirement that a municipality be insolventbefore they are eligible to file a bankruptcy petition 11 U.S.C. § 109(c)(3)).



and should have done, much more to avoid the ‘last resort’ ofChapter 9 bankruptcy.”61

Another objection was filed by the California Public Employ-ees Retirement System alleging the City’s bad faith.62 As evidenceof bad faith, CalPERS submitted that the City had never releasedits pendency plan (an interim fiscal plan to be used until a morepermanent plan is approved by the court) as promised and was stillrunning a deficit.63 In questioning San Bernardino’s good faith infiling a bankruptcy petition, CalPERS stated:

[T]he City has not demonstrated, either pre or post-petition, anyserious attempt at negotiating with its creditors or creating aPendency Plan in an effort to adjust its debts in a manner that isboth feasible and potentially confirmable under Chapter 9weigh against its claim that it filed this petition in good faith.”64

After the motion, filed on October 24, 2012, a pendency plan wasfiled by the City on November 30, 2012.65

By the end of 2012, the City’s negotiations with CalPERS andthe SBPEA were ongoing, with no final result having been reachedwith either creditor by year’s end.66 Even well into 2013, the citywas still attempting to prove its eligibility to be a Chapter 9debtor.67

B. In re City of Stockton, California

Stockton, California, filed for bankruptcy after mediation withcreditors, as A.B. 506 intended. There were numerous unsecuredcreditors who were permitted a seat at the mediation table andwho actually got a chance to mediate using the neutral evaluation

61 Id.62 CALPERS, http://www.calpers.ca.gov/index.jsp?bc=/about/home.xml (last visited Feb. 2,

2013).63 Id.64 Id. at 15.65 Declaration of Michael Busch re City of San Bernardino’s Pendency Plan, In re San Ber-

nardino, California, No. 12-28006 (C.D. Cal. 2012), ECF No. 234.66 City of San Bernardino’s Further Status Conference Statement at 3–4, In re San Bernar-

dino, California, No. 12-28006 (C.D. Cal. 2012), ECF No. 293.67 Id. at 10–11, see also City of San Bernardino’s Chapter 9 Status Conference Statement re.

eligibility, motion to reject collective bargaining agreements, cut-off of discovery and setting ofbriefing schedules, In re City of San Bernardino, California, no. 12-28006 (C.D. Cal. 2013) ECFNo. 618.



process.68 As in In re City of Vallejo, union interests were presentin this case.69 At the end of the sixty days, a comprehensive settle-ment could not be reached, and the City filed for bankruptcy.70

The Stockton bankruptcy serves as a good example of the po-tential for the neutral evaluation process’ failure to produce a set-tlement avoiding bankruptcy. Despite A.B. 506, Stockton founditself in much the same position as municipality debtors’ pre-A.B.506, facing a lengthy stay in bankruptcy proceedings and the possi-bility of protracted litigation with creditors.71 Though neutral eval-uation need not result in successful settlements with all of themunicipality’s creditors, the situation in Stockton’s bankruptcyhighlights the probability that there may be little difference in out-come between the old method and the new.

Ultimately, it would take until June 2013 for the court to holdthat the City of Stockton was eligible to be a Chapter 9 debtor.72

Stockton’s capital market creditors were therefore unsuccessful inblocking the City’s eligibility to be a Chapter 9 debtor, despitetheir objection to the City’s unwillingness to impair pension planswith CalPERS.73 Judge Klein’s decision made it clear that al-though the City’s eligibility was not affected by its favoritism to-ward CalPERS, there would be a time and a place for this battlewhen the court later considered whether to confirm the City’sChapter 9 Plan to get out of bankruptcy.74

68 List of Creditors Holding 20 Largest Unsecured Claims, In re City of Stockton, California,No. 12-32118 (E.D. Cal. 2012) ECF No. 4 (Listing “unfunded pension costs” and “pension obli-gation bonds” as the top two largest unsecured claims.).

69 Notice of Appearance and Request for Notice, In re City of Stockton, California, No. 12-32118 (E.D. Cal. 2012) ECF No. 472 (notice of appearance for “the Stockton City EmployeesAssociation, Stockton Professional Firefighters—Local 456 and Operating Engineers Local No.3”); see also id. (in which unsecured pensions are at the top of the list).

70 Id. at 2 (submitting that the neutral evaluation “failed to resolve all pending disputesbetween the City and its creditors”).

71 Compare Chapter 9 Voluntary Petition supra note 47, with Order Confirming City of Val-lejo’s Second Amended Plan for the Adjustment of Debts of City of Vallejo, California, as modi-fied August 2, 2011, In re City of Vallejo, California, No. 08-26813 (E.D. Cal. 2008) ECF No.1113 (noting that in In re City of Vallejo, confirmation of a bankruptcy plan came over threeyears after the filing of the initial petition).

72 Opinion Regarding Chapter 9 Order for Relief, In re City of Stockton, California, No. 12-32118 (E.D. Cal. 2013) ECF No. 950.

73 Id. at 21–22.74 Id. at 46.



C. In re Town of Mammoth Lakes, California

The Mammoth Lakes bankruptcy presents an interesting sce-nario quite different from the other two cases discussed above.The Town of Mammoth Lakes, California, found itself in financialtrouble with a judgment creditor.75 After a land-development dealwith a private company fell through, the town was sued and founditself over $42.7 million in debt to a single creditor.76 This scenariois distinguishable from those of Stockton and San Bernardino, bothof which had multiple large unsecured creditors with interests inthe mediation process.

Mammoth Lakes entered into the neutral evaluation processto negotiate with its creditors, notably its judgment creditor.77 In-terestingly, the judgment creditor refused to participate in the neu-tral evaluation process, “object[ing] to several of the town’sproposed neutral evaluators” and requesting “the production ofvoluminous additional documents as a condition to its potentialparticipation.”78 Due in large part to lack of cooperation, the neu-tral evaluation was unsuccessful and the town filed forbankruptcy.79

As was the case in In re Stockton, California, the parties in Inre Town of Mammoth Lakes found themselves in much the sameposition as if there had been no neutral evaluation requirement atall. The bankruptcy petition was filed with no settlement reached.Ironically, the town and the judgment creditor reached a settle-ment after roughly two months in bankruptcy,80 the same amountof time required by A.B. 506 for the debtor to engage in the neu-tral evaluation process prepetition.81 Thus, the question arises: are

75 List of Creditors Holding 20 Largest Unsecured Claims, In re Mammoth Lakes, Califor-nia, No. 12-32463 (E.D. Cal. 2012) ECF No. 5 (listing Mammoth Lakes Land Acquisition c/oQuinn Emanuel as the largest unsecured creditor).

76 Id.77 Declaration of David Wilbrecht in Support of Statement of Qualifications Under 11

U.S.C. § 109(c) at 29, In re Town of Mammoth Lakes, California, No. 12-32463 (E.D. Cal. 2012)ECF No. 9.

78 Id. at 29–30.79 Chapter 9 Voluntary Petition, supra note 48.80 Motion Pursuant to Bankruptcy Code Sections 362(d) and 930 for Order (I) Granting

Relief from the Automatic Stay to Permit the Town and MLLA to Jointly Seek Amended Writof Mandate in State court and (II) Granting Conditional Dismissal of Case, In re Town of Mam-moth Lakes, California, No. 12-32463 (E.D. Cal. 2012) ECF No. 167 (requesting dismissal of thecase from bankruptcy court so the parties may affect their settlement through the state court thatoriginally issued the judgment).

81 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011).



parties’ time more efficiently spent without participating in theneutral evaluation process?

VI. IS THERE AN INCENTIVE TO CIRCUMVENT THE NEUTRAL

EVALUATION PROCESS?

Perhaps the most promising objection, in any of the threecases, to a municipality’s qualification under A.B. 506 is that of theSBPEA in In re San Bernardino.82 Unlike the earlier FirefightersLocal objection, which stated only the uncontested fact that theCity did not participate in neutral evaluation (despite acknowledg-ing the City’s declaration of a fiscal emergency),83 SBPEA’s objec-tion puts forth more substantive allegations that can be tried by thecourt through a fact-finding process.

Aside from such an objection that a city acted intentionally orknowingly, creditors may have trouble getting municipalities to ad-here to the intended purpose of A.B. 506. As evidenced by theFirefighter Local’s objection to qualification in In re City of SanBernardino, California,84 simply stating that the debtor has failedto mediate under A.B. 506 is insufficient to invalidate a Chapter 9filing in which the debtor has declared fiscal emergency. It seemsthat as long as the municipality follows the general guidelines ofthe Bill, it is difficult for creditors to successfully object to its cir-cumvention of the neutral evaluation process. Given this difficulty,municipalities conceivably could opt to declare a fiscal emergencyjust to avoid negotiating with their creditors. Absent a direct viola-tion of A.B. 506 requirements85 or perhaps some showing of badfaith,86 it is very possible that such municipalities would besuccessful.

82 San Bernardino Public Employees Association’s Objection to Debtor City of San Bernar-dino’s petition and Statement of Qualification Under Title 11 U.S.C. Section 109(c), supra note18 at 68–69 (alleging willful blindness of the debtor to its financial situation so that it may driveitself into a fiscal emergency, and thereby circumvent the neutral evaluation process).

83 Creditor San Bernardino City Professional Firefighters Local 891’s Opposition to DebtorCity of San Bernardino’s Motion for Entry of an Order at 4, supra note 18.

84 See Creditor San Bernardino City Professional Firefighters Local 891’s Opposition toDebtor City of San Bernardino’s Motion for Entry of an Order, supra note 18.

85 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011).86 See generally San Bernardino Public Employees Association’s Objection to Debtor City of

San Bernardino’s petition and Statement of Qualification under Title 11 U.S.C. Section 109(c),supra note 18 at 68–69.



Even when the debtors willingly engage in the neutral evalua-tion process, a positive result is far from certain. The Stockton andMammoth Lakes bankruptcy filings were both preceded bymandatory mediation, but neither municipality was able to avoid abankruptcy filing.87 While the judgment creditor in In re Town ofMammoth Lakes is not the type contemplated by the law, In reCity of Stockton does implicate collective bargaining agreementsand pensions.88 Though this latter case is hardly a reliable indica-tor of the Bill’s overall efficacy, it does prompt the question, doesthis new law have any teeth?

Perhaps this law’s putative appeal to unions is a heightenedsense of leverage. The unions now have the municipality in theroom and presumably obligated to negotiate in good faith. Thealternative is to have post-petition negotiations, as was the case inboth the Vallejo and Mammoth Lakes bankruptcies.89 We knowthat in these cases, Mammoth Lakes resolved an impasse with itsjudgment creditor, while in Vallejo, two of the four unions restruc-tured their collective bargaining agreements post-petition. Even inan A.B. 506 neutral evaluation process, the unions would be re-structuring these agreements and taking a hit. It is not as if neutralevaluation will leave the unions’ agreements untouched; the munic-ipalities in those cases are still laden with massive debt and theunions are often the largest unsecured creditors.

The downside to negotiation during the bankruptcy proceed-ing is the court’s ability to reject collective bargaining agreements,which seems the worst-case scenario for the unions. But whetherthe unions are incentivized to negotiate pre- or post-petition, a cutto their pension plans or collective bargaining agreements is a nearcertainty. So, perhaps this law is all about which party gets morebargaining power, rather than about the actual effectiveness of bar-gaining pre-petition in a neutral evaluation process. Instead of ne-gotiating with the debtor while possible rejection of the collectivebargaining agreement looms in the background, the unions now

87 See Amended Statement of Qualifications Under Section 109(c), supra note 52; see alsoDeclaration of David Wilbrecht in Support of Statement of Qualifications Under 11 U.S.C.§ 109(c), supra note 77.

88 List of Creditors Holding 20 Largest Unsecured Claims, supra note 44 (listing “unfundedpension costs” and “pension obligation bonds” as the top two largest unsecured claims).

89 City of Vallejo’s Withdrawal of Motion for Approval of Rejection of Collective BargainingAgreements with Respect to Vallejo Police Officers’ Association, supra note 40; see also City ofVallejo’s Withdrawal of Motion for Approval of Rejection of Collective Bargaining Agreementswith Respect to Confidential, Administrative, Managerial and Professional Employees Associa-tion of Vallejo, supra note 42.



have a brief period in which to negotiate on a somewhat more levelplaying field. It seems, however, that debtors just have to wait un-til the sixty days are up and then file their bankruptcy petitions. Atthe very least, debtors are now encouraged to negotiate pre-peti-tion, and if they want to circumvent this process, they must make ashowing in court.

VII. PROPOSAL

The Assembly Bill’s intended purpose was to level the playingfield for municipality debtors and their creditors, with particularfocus on unions in renegotiation of collective bargaining agree-ments. In its current form, however, A.B. 506 harbors several gapsand inefficiencies. Despite the California Legislature’s best inten-tions, the law seems easy to exploit90 and to avoid91 by both debtorand creditors. More stringent restrictions on the neutral evaluationprocess might encourage municipalities to negotiate pre-petition.A version of A.B. 506 that was designed to facilitate negotiationwith measurable criteria, while demanding good faith on the partof both parties, could fulfill the initial goals that the Bill sought tomeet. Chapter 11’s provision for canceling collective bargainingagreements may be instructive in the crafting of such a version ofA.B. 506.

Section 1113 of the Bankruptcy Code provides for rejection ofcollective bargaining agreements by the debtor in a Chapter 11case.92 While this Code section bears similarities to A.B. 506, it isimportant to note that “Section 1113 is not incorporated in Chap-ter 9”93 and has no direct Chapter 9 parallel. The text of § 1113provides that the court may approve the rejection of a collectivebargaining agreement if the debtor: (1) made a proposal with mod-ifications to the agreement and provided sufficient information for

90 As with a potential debtor who declares a state of emergency solely to avoid negotiatingwith its creditors, rather than facing a true fiscal emergency.

91 As with a creditor who decides not to participate in the neutral evaluation process. SeeDeclaration of David Wilbrecht in Support of Statement of Qualifications Under 11 U.S.C.§ 109(c), supra note 77.

92 11 U.S.C. § 1113.93 COLLIER ON BANKRUPTCY 6-901 P901.04 (Alan N. Resnick & Henry J. Sommer eds., 16th

ed.) (noting 11 U.S.C. § 901.).



the creditor to evaluate the proposal;94 (2) the creditor has “re-fused to accept such proposal without good cause”;95 and (3) “thebalance of the equities clearly favors rejection of such agree-ment.”96 This statute was enacted with awareness that in many sit-uations, negotiation of such contracts is preferable to wholesalerejection of the collective bargaining agreement.97 While § 1113encourages compromise, it is simultaneously aware that time is ofthe essence when dealing with insolvent parties and that circum-stances may call for a resolution before consensus is reached.98

The statute thereby provides for a timely, court-overseen negotia-tion, while recognizing that rejection may be necessary if negotia-tions fail to result in a deal.

Many similarities can be observed between Chapter 11’s§ 1113 and California Assembly Bill 506. Both laws recognize thetime-sensitive nature of the negotiation. Though A.B. 506 is ex-plicit about the time allotted for the neutral evaluation process99

while § 1113 is not, § 1113 was written to provide for rejection ofthe contracts if a timely agreement was not reached.100 Section1113 does, however, provide specific time limits concerning howlong after rejection of a contract a hearing must be held and howquickly the court must rule on the application.101 Furthermore, thetwo laws share the common purpose of providing for negotiationso that the parties may reach an amicable consensus without thewholesale rejection of their agreement.102 The bankruptcy court

94 11 U.S.C. § 1113(c)(1) (referring to 11 U.S.C. § 1113(b)(1)(A-B) (the debtor in possessionor trustee has, “prior to the hearing, made a proposal that fulfills the requirements of subsection(b)(1)).

95 11 U.S.C. § 1113(c)(2).96 11 U.S.C. § 1113(c)(3).97 COLLIER ON BANKRUPTCY 7-1113 P 1113.01 (Alan N. Resnick & Henry J. Sommer eds.,

16th ed.) (“The language and history of section 1113 make clear that the preferred outcomeunder section 1113 is a negotiated solution rather than contract rejection.”).

98 Id. (“The time limits contained in section 1113, however, reflect a recognition that adebtor-employer often faces exigent circumstances and may not be able to reach timely consen-sual agreements with its union(s)”).

99 A.B. 506, 2011-2012 Leg., Reg. Sess. (Ca. 2011) (“The neutral evaluation established bythis process shall not last for more than 60 days following the date the evaluator is selected,unless the local public entity or a majority of participating interested parties elect to extend theprocess for up to 30 additional days.”).

100 COLLIER ON BANKRUPTCY 7-1113 P 1113.01 (Alan N. Resnick & Henry J. Sommer, eds.,16th ed.).

101 11 U.S.C. § 1113(d)(1-2).102 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011) (“To the extent financial relief granted

through Chapter 9 could affect public employee compensation, employees have a direct interestin the Chapter 9 process, particularly prior to filing.”); COLLIER ON BANKRUPTCY, supra note101.



exercises at least some degree of supervision over the negotiationunder both § 1113 and A.B. 506.103

However, differences between the two laws coexist with theirsimilarities. First, § 1113 is not a prerequisite to filing a bankruptcypetition, as is A.B. 506.104 Section 1113 also makes negotiationwith creditors mandatory in order to later obtain a rejection of thecontracts,105 whereas under A.B. 506, a debtor-municipality couldconceivably reject its collective bargaining agreements without ne-gotiating if it filed for bankruptcy after first declaring a fiscal emer-gency.106 However, fiscal emergency is an exception to A.B. 506’susual rule, and typically both laws require mediation beforerejection.

The incorporation of certain elements of 11 U.S.C. § 1113 intoCalifornia’s A.B. 506 could help solve the inefficiencies inherent inA.B. 506, some of which have already appeared in the Chapter 9cases filed in 2012 just months after the Bill took effect. This is notto suggest that § 1113 should (or even could) be incorporated fullyinto Chapter 9 by the California Legislature. Aside from the po-tential constitutional issues (which are, specifically, beyond thepurview of this Note) that can arise due to such a putative totalincorporation of § 1113 into Chapter 9, a wholesale incorporationis simply unnecessary. While unions’ interests in collective bar-gaining agreements were the catalyst of A.B. 506, the Bill has amuch broader scope than § 1113 because it includes many types ofcreditors in the neutral evaluation process. This distinguishing fac-tor between the two laws does not, however, impede improvementto A.B. 506 by means of incorporation of certain § 1113 strategies.The requirements laid out in § 1113(c)107 could prove useful to acourt in determining a municipality’s eligibility to be a Chapter 9debtor.

103 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011), (“The neutral evaluation process shall endif . . . [t]he parties reach an agreement or proposed plan of readjustment that requires the ap-proval of a bankruptcy judge.”); 11 U.S.C. § 1113(c)(3) (the bankruptcy judge must balance theequities in deciding whether to reject the collective bargaining agreement).

104 11 U.S.C. § 301 (noting how a case is commenced under the Federal Code); A.B. 506(adding the prerequisite to filing of either partaking in neutral evaluation, or declaring fiscalemergency).

105 11 U.S.C. § 1113(b)(1)(A-B) (Before the debtor may reject collective bargaining agree-ments it is obligated to “make a proposal to the authorized representative of the employees,”and “provide . . . such relevant information as is necessary to evaluate the proposal.”).

106 A.B. 506, 2011–12 Leg., Reg. Sess. (Ca. 2011).107 11 U.S.C. § 1113(c).



A. 11 U.S.C. § 1113(c)(1)

Subsection one of § 1113 provides that the debtor must, “priorto the hearing, [have] made a proposal”108 that “provides for thosenecessary modifications in the employees benefits and protectionsthat are necessary to permit the reorganization of the debtor[,] [ ]assures that all creditors . . . are treated fairly”109 and provides “therepresentative of the employees with such relevant information asis necessary to evaluate the proposal.”110 The application of such arule could have helped jumpstart the negotiations that were unsuc-cessful in the Stockton111 and Mammoth Lakes bankruptcies.112

The rule lays a framework for a reasonable settlement to beworked out in negotiations. If making a proposal like this wererequired, the court would have an easier time applying a good-faithanalysis to the debtor’s eligibility.

B. 11 U.S.C. § 1113(c)(2)

Subsection two of § 1113(c) provides a second criterion for therejection of a collective bargaining agreement, stating that “the au-thorized representative of the employees has refused to acceptsuch proposal without good cause.”113 This rule appears to breathelife into the good-faith requirement stated earlier in the statute.114

Incorporating such a requirement into pre-petition negotiationsthrough A.B. 506 would provide a bankruptcy court with anotherobjective factor in its determination of the municipality’s eligibility.Though no settlement need be reached in the neutral evaluationprocess, this structured scheme for a debtor’s reasonable offer anda creditor’s reasonable consideration of the offer not only wouldmake a settlement more likely, but also would make later decisionson eligibility more balanced. Applied to the recent California

108 11 U.S.C. § 1113(c)(1).109 11 U.S.C. § 1113(b)(1)(A).110 11 U.S.C. § 1113(b)(2)(B).111 Notice of Appearance and Request for Notice, In re City of Stockton, California, supra

note 87.112 Declaration of David Wilbrecht in Support of Statement of Qualifications Under 11

U.S.C. § 109(c), supra note 77.113 11 U.S.C. § 1113(c)(2).114 11 U.S.C. § 1113(b)(2) (The debtor “shall meet, at reasonable times, with the authorized

representative to confer in good faith in attempting to reach mutually satisfactorymodifications.”).



cases, this type of rule could have helped in the situation presentedby the Mammoth Lakes bankruptcy, in which the town had appar-ently made a good-faith effort to engage in the neutral evaluationprocess but its largest creditors refused to take part.115 If Mam-moth Lakes had been obligated to make a reasonable offer thatrepresented a “necessary modification”116 for it to emerge frombankruptcy, and if the creditor had then refused it without goodcause, the court would have been presented with more objectivecriteria with which to determine eligibility under 11 U.S.C. § 109.

VIII. CONCLUSION

From its inception, California’s Assembly Bill supported theagenda of a specific group of creditors117 to correct for what wasseen by them as an injustice in the Vallejo bankruptcy. Despite thenarrow interests that the bill was created to serve, its languagechanges the process of Chapter 9 filings for all parties involved.118

The neutral evaluation process is meant to add efficiency and givemore control to the creditors. While these are legitimate concernsfor the legislature to address, it should be noted that the Bill alsoadds to the process time and costs, both of which debtors generallyhave in short supply. Though the goals may have been noble, theCalifornia Legislature provided a loophole through which munici-palities can avoid the neutral evaluation process altogether if theydeclare a state of fiscal emergency.119 The result is significantweakening of the law’s effect on municipalities; ultimately, the lawcould be rendered pointless if it is too easily or too often employed.Nevertheless, it is an interesting experiment of merging alternativedispute resolution and bankruptcy law that could have impactswithin other jurisdictions, if successful.

Three California municipalities filed for bankruptcy in 2012,making them the first cases to which A.B. 506 was applicable.Each of the cases presented a distinct set of facts and application ofthe Assembly Bill, making for a valuable study at the close of theBill’s first year in effect. The bankruptcy of Stockton, California,

115 Declaration of David Wilbrecht in Support of Statement of Qualifications Under 11U.S.C. § 109(c), supra note 77.

116 Referring back to a “necessary modification,” as in a §1113(c)(1) type rule.117 Barbarosh, Dine & Johnson, supra note 26.118 A.B. 506, 2011-2012 Leg., Reg. Sess. (Ca. 2011).119 Id.



displayed the simple, and somewhat predictable, lesson that theneutral evaluation process might not lead to a settlement pre-peti-tion.120 Mammoth Lakes involved a single creditor holding a judg-ment against the town, serving as a reminder that although A.B.506 was championed by unions to protect their interests, it also af-fects many of the creditors involved.121 Mammoth Lakes alsopresented a creditor’s refusal to engage in negotiation, thereby act-ing contrary to the law’s intended purpose of protecting credi-tors.122 In the third case, San Bernardino declared a fiscalemergency (making it the first municipality to do so), thereby cir-cumventing the neutral evaluation process.123 The city’s eligibilitywas challenged by a union-creditor for willfully becoming insolventin order to declare fiscal emergency,124 a challenge that, in turn,questioned the requirements for declaring a state of emergencyunder the law. Given the cases thus far, the Assembly Bill appearsunsuccessful in reaching its goals. As more municipalities file overtime, it will be interesting to see if the law has more success.

The law could be made more effective by incorporating as-pects of 11 U.S.C. § 1113(c) into A.B. 506. This section of Chapter11 provides criteria for the rejection of collective bargaining agree-ments by Chapter 11 debtors.125 Since A.B. 506 was enacted toprotect solely these interests, the safeguards provided by this sec-tion of Chapter 11 are particularly instructive. Section 1113(c) re-quires that the debtor make a proposal to the creditor and that thecreditor not refuse the offer without good cause.126 The applica-tion of these standards to Chapter 9 in California by means of A.B.506 can allow the same objective criteria to be applied by the courtto guard the interests that the Bill was originally intended toprotect.

120 Statement of Qualifications Under Section 109(c), In re City of Stockton, California, No.12-32118 (E.D. Cal. 2012) ECF No. 5–6

121 List of Creditors Holding 20 Largest Unsecured Claims, In re Mammoth Lakes, Califor-nia, supra note 75.

122 Declaration of David Wilbrecht in Support of Statement of Qualifications Under 11U.S.C. § 109(c), supra note 77.

123 Amended Statement of Qualifications Under Section 109(c), supra note 52.124 Creditor San Bernardino City Professional Firefighters Local 891’s Opposition to Debtor

City of San Bernardino’s Motion for Entry of an Order (1)Directing and Approving Form ofNotice; and (2)Setting Deadline for Filing Objections to Petition; Memorandum of Points andAuthorities and Declarations of Chad V. Haes in Support Thereof, In re San Bernardino, Cali-fornia, supra note 18.

125 11 U.S.C. § 1113(c).126 Id.



Ultimately, the California Legislature’s attempt to incorporateADR to protect the interests of parties in bankruptcy cases is laud-able. Assembly Bill 506 is very new and its full effects are stillunknown. Over time, more comprehensive improvements can besuggested. However, it is important to note the law’s shortcomingsand their potential solutions in order to improve the law with aslittle waste as possible. Though A.B. 506 has been in effect foronly one year, so far it has been unsuccessful in incorporatingADR into Chapter 9 bankruptcies and requires more stringentcourt oversight to effect the goals that it purports to achieve.

Documents

CHAPTER 9 BANKRUPTCY IN CALIFORNIA: THE … · ALTERNATIVE DISPUTE RESOLUTION IN ... and the effect of a case’s discharge ... Legislative Counsel’s Digest 2011–12 Leg.,