Aug. 17 (Bloomberg) -- Creditors of San Bernardino, California, have until Oct. 24 to decide whether they will try to have the city’s bankruptcy petition thrown out, a judge said in the city’s first day in court.
U.S. Bankruptcy Judge Meredith M. Jury approved the deadline after creditors, including bondholders and firefighters, asked for more time. Under Chapter 9 of the U.S. Bankruptcy Code, used by governmental entities that can’t pay their debts, the city must prove that it is eligible for court protection from creditors.
Should creditors decide to challenge San Bernardino’s eligibility, the bankruptcy could take months longer to complete, lawyers who have worked on other California municipal bankruptcies said.
“Time is no one’s friend in a Chapter 9 case,” Ron Oliner, who represents the city’s police union, said in court. “I am encouraged to hear that it is not going to drift.”
San Bernardino, where about 209,000 people live about 60 miles (97 kilometers) east of Los Angeles, is the third California city to file bankruptcy since June. The city said a fiscal emergency, brought on by a $46 million budget shortfall, forced it to file despite a state law that normally requires towns and counties to negotiate with creditors first in a process overseen by a neutral arbitrator.
By declaring an emergency, the city sidestepped that requirement.
The filing “was necessary to assure that the city will be able to continue to operate to provide essential services,” the city’s main bankruptcy attorney Paul Glassman said in court today. “If the city could not continue to operate it would be tragic and we think unacceptable.”
Under Chapter 9, creditors, including unions, lenders and bondholders, can force a municipality to prove it is eligible to remain in bankruptcy after a case is filed. In the city of Vallejo’s bankruptcy, which was filed in 2008, a battle over eligibility added months and delayed work on a reorganization plan they need to exit court protection.
San Bernardino had originally proposed a deadline of Sept. 21. Creditors, including the main union for firefighters, National Public Finance Guarantee Corp., and bondholder Erste Europaische Pfandbrief und Kommunalkreditbank sought more time. The city agreed to extend the date to Oct. 24 and to file papers justifying its bankruptcy by Aug. 31.
Glassman said he hoped the city’s papers would persuade creditors not to challenge eligibility so that the case could move forward more quickly.
“That may just be wishful thinking,” he said.
The judge agreed.
“Certainly in the history of the few municipal Chapter 9s I don’t think any have gone through without objections to eligibility,” Jury said.
After the City of Vallejo filed bankruptcy in 2008, three city unions spent months trying to get the case thrown out, said Dale Ginter, a lawyer who represented retired city workers in that case.
Oliner, who represented police officers in the Vallejo case, said that bankruptcy showed that delays unnecessarily run up the costs for lawyers and financial advisers.
Creditors may feel they have no choice, even if they think they will lose a fight over eligibility, Ginter said. That’s because once a judge rules that a city’s bankruptcy was properly filed, the city gains the power to try to cancel certain contracts, like union agreements and leases that are tied to bond financings, Ginter said.
The right to challenge whether a city is entitled to file bankruptcy is a key difference between municipal and corporate bankruptcies. Under Chapter 11, a corporation automatically gains the right to try to cancel contracts and seek other help from a court as soon as it files a bankruptcy petition.
The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).
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