Bloomberg News

San Bernardino Bankruptcy Invalid, Employees Union Says

October 25, 2012

San Bernardino, the second-largest U.S. city to enter Chapter 9 bankruptcy, should have its court restructuring dismissed because it failed to follow a state law requiring negotiations with creditors before seeking court protection, a government employees union said.

The San Bernardino Public Employees Association objected to the California city’s bankruptcy case saying it was improperly filed because it bypassed a new law that mandated municipalities engage in a “neutral evaluation” process with debt holders for 60 days, in an attempt to reach a resolution out of court.

“Rather than attempting a good faith adjustment of its debts and obligations, the city’s petition seeks one purpose only -- to avoid and /or delay its obligations and debts owed a single class of creditors, its current and former public employees,” the union said in court papers filed yesterday, the last day to oppose the bankruptcy.

Paul R. Glassman, a lawyer representing San Bernardino, didn’t immediately return a phone call yesterday seeking comment on the objection.

The California Public Employees’ Retirement System, which said it’s the city’s biggest creditor, also filed an objection yesterday.

Eligibility Requirements

“At this point in the case, it is impossible to determine whether the city meets the eligibility requirements of Chapter 9 because, despite its previous promises, the city has failed to provide interested parties with reliable financial information and a purported plan upon which to evaluate the City’s legitimate desire to effect a plan of adjustment,” Calpers said in a court filing.

The city in July declared a fiscal emergency, an exception to the California law that it claims allowed it to skirt negotiations, because it wouldn’t be able to pay its obligation within the next 60 days and it financial situation would put residents at risk.

San Bernardino realized in late June it “was fast approaching the edge of a massive fiscal cliff with no viable way to raise revenue and cut spending fast enough to avoid falling off the edge,” and therefore announced the fiscal emergency to provide essential service to its citizens, it said in court papers filed Aug. 31 supporting its filing.

While the city claims that its late recognition of its financial situation necessitated the emergency declaration, “facts show that if the city was blind to its fiscal reality, such blindness was willful,” the union argued in court papers.

San Bernardino filed for municipal bankruptcy Aug. 1, the third California city since June, after disclosing a $46 million shortfall in its budget. The city of 209,000 about 60 miles (97 kilometers) east of Los Angeles, listed assets and debt of more than $1 billion in a filing with the U.S. Bankruptcy Court in Riverside, California.

The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

To contact the reporter on this story: Michael Bathon in Wilmington at mbathon@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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