Judge Christopher M. Klein’s decision to accept the City of Stockton’s petition for bankruptcy on April 1, 2013 set the stage for a battle over whether public workers’ pensions can be reduced through municipal reorganization.

Stockton’s public revenues tumbled dramatically when the recession hit, leaving Stockton unable to meet its day-to-day obligations. Stockton slashed its police and fire departments, eliminated many city services, cut public employee benefits and suspended payments on municipal bonds it had used to finance various projects and close projected budget gaps. Stockton continues to pay its obligations to California Public Employees’ Retirement System (“CalPERS”) for its public workers’ pensions. Pension obligations are particularly high because during the years prior to the recession, city workers could “spike” their pensions—by augmenting their final year of compensation with unlimited accrued vacation and sick leave—in order to receive pension payments that grossly exceeded their annual salaries.


Continue Reading The Stockton Saga Continues: Untouchable Pensions on the Chopping Block?

On April 30, 2013, the United States Court of Appeals for the Ninth Circuit held that the bankruptcy court has authority to recharacterize as equity, rather than debt, advances of funds made purportedly as a loan to the recipient prior to its bankruptcy. In re Fitness Holdings International, Inc., — F.3d —-, 2013 WL 1800000 (9th Cir. 2013). The Ninth Circuit, in reversing the district court, held that the fact that the same result of recharacterization can be obtained through the statutory remedy of equitable subordination under section 510 of the Bankruptcy Code does not deprive the bankruptcy court of the authority to employ the separate and distinct remedy of recharacterization.
Continue Reading The Ninth Circuit Holds that Bankruptcy Courts Have Authority to Recharacterize Debt as Equity

By Michael M. Lauter 

In an unpublished decision in In re The Village at Lakeridge, LLC, BAP Nos. NV-12-1456 and NV-12-1474 (B.A.P. 9th Cir. Apr. 5, 2013), the United States Bankruptcy Appellate Panel of the Ninth Circuit held that a vote on a plan of reorganization submitted by a non-insider claimant is not to be disregarded under Bankruptcy Code section 1129(a)(10) merely because the claimant purchased the claim from an insider. In other words, the transferee of a claim does not step into the shoes of the transferor vis à vis the transferor’s status as an insider.


Continue Reading Claims Trading From The Inside Out: Ninth Circuit BAP Holds That A Non-Insider Claimant’s Vote On A Plan Is Not Discounted Merely Because The Claimant Purchased Its Claim From An Insider

The California Court of Appeal recently rejected the argument that directors and officers owe fiduciary duties to the company’s creditors when the company is in the so-called "zone of insolvency," or is even clearly insolvent. In Berg & Berg Enterprises, LLC v. John Boyle, et al., 100 Cal. Rptr. 3d 875 (Cal. Ct. App. 6th Dist. Oct. 29, 2009), the California court expounded that "there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation’s creditors solely because of a state of insolvency."  Id. at 893-94.  The court was even much less inclined to find that directors owed such duties when the corporation is not clearly insolvent but on the brink of insolvency, and held that "there is no fiduciary duty prescribed under California law that is owed to creditors by directors of a corporation solely by virtue of its operating in the ‘zone’ or ‘vicinity’ of insolvency." Id. at 893.


Continue Reading Dead Zone? Direct Claims by Creditors of a California Corporation May Not Lie Against Management Based on Management’s Allegedly Shifting Duties When Corporation Is in the Zone of Insolvency or Even Insolvent

In a majority opinion dated December 15, 2009, the Ninth Circuit Bankruptcy Appellate Panel held that a chapter 11 debtor may not equitably subordinate a creditor’s claim and transfer the lien securing that claim, when such creditor is, itself, in bankruptcy, before first obtaining relief from the automatic stay under section 362 of the U.S. Bankruptcy Code in such creditor’s bankruptcy case. Lehman Commercial Paper v. Palmdale Hills Prop. (In re Palmdale Hills Prop., LLC), 2009 Bankr. LEXIS 4294 (B.A.P. 9th Cir. Dec. 15, 2009).  


Continue Reading Equitable Subordination of a Creditor’s Secured Claim when such Secured Creditor is, itself, in Bankruptcy

In Burkhart v. Coleman, (In re Tippett) — F.3d —, 2008 WL 4070690 (9th Cir. Sept. 4, 2008), the Ninth Circuit held that an unauthorized post-petition sale of real property may be upheld where: 1) the bankruptcy trustee failed to record the bankruptcy petition with the county recorder; and 2) a bona fide purchaser thereafter bought and recorded title in the property.  As welcome as this news is to bona fide purchasers in California, the opinion raises interesting issues pertaining to acts arguably taken in violation of the automatic stay under section 362 of the Bankruptcy Code by holding that the automatic stay may not apply to sales or transfers of property initiated by the debtor under certain circumstances.


Continue Reading Actions Taken In Violation Of The Automatic Stay Are Void… Sometimes

In 2005, in a blow to assignments for the benefit of creditors ("ABC") in California, the Ninth Circuit in Sherwood Partners Inc. v. Lycos ("Sherwood I"), 394 F.3d 1198 (9th Cir. 2005), held that an assignee in an ABC cannot bring preference actions under California law because the Bankruptcy Code preempts state preference law. Since Sherwood I, two California state courts of appeal have reached the opposite conclusion and held that assignees can bring preference actions under California law because the Bankruptcy Code does not preempt state preference law. Credit Managers Ass’n of California v. Countrywide Home Loans, Inc., 144 Cal. App. 4th 590 (2006), review denied; Haberbush v. Cummins Family Ltd. Partnership, 138 Cal. App. 4th 1630 (2006). While Sherwood I leaves uncertain an assignee’s ability to bring preference actions under state law, California state courts have resoundingly shown approval for ABCs in California in rejecting Sherwood I.


Continue Reading California State Courts Continue to Validate Assignments for the Benefit of Creditors