The Ninth Circuit Court of Appeals, in a new ruling, helps point-the-way for cities facing the complexities of Chapter 9 bankruptcy.
On March 28, 2003, three citizens of Vallejo, California, have a violent encounter with two of Vallejo’s police officers. A lawsuit ensues.
Then, the City of Vallejo files Chapter 9 bankruptcy and achieves a confirmed bankruptcy plan.
Then, the lawsuit results in a judgement for one of the plaintiffs.
The New Ninth Circuit Ruling
Legal wranglings about the judgment result in a September 8, 2016, ruling by the Ninth Circuit Court of Appeals in a case captioned Deocampo v. Potts (Case No. 14-16192).
The Ninth Circuit’s Deocampo v. Potts ruling addresses a narrow issue. Yet, practical lessons for cities facing Chapter 9 bankruptcy can be gleaned from it.
10 Practical Lessons
Here are ten of such practical lessons.
Lesson # 1. Mediation is an essential tool for resolving Chapter 9 cases. As in other Chapter 9 cases, mediation plays a central role in achieving a confirmed plan in the City of Vallejo’s bankruptcy.
Lesson # 2. There is no such thing as an “involuntary” Chapter 9 bankruptcy. A Chapter 9 case can begin only by the municipality filing a voluntarily Chapter 9 petition, with authorization from the state and with a desire “to effect a plan to adjust” its debts (11 U.S.C. §§ 109(c)(4), 301 & 921).
Lesson # 3. A city in bankruptcy, unlike a business debtor, cannot resolve its financial problems by liquidating its assets and terminating operations. A city must continue operating and meeting the needs of its citizens.
Lesson # 4. A city in bankruptcy can confirm it’s Chapter 9 plan without the consent of its creditors (11 U.S.C. §§ 109(c)(5) & 943).
Lesson # 5. The primary plan confirmation standard in Chapter 9 is this: the plan must be, (i) “in the best interests of creditors,” and (ii) “feasible” (11 U.S.C. § 943(b)(7)). This standard provides neither precision nor clarity. The Ninth Circuit explains such imprecision and lack of clarity like this in Deocampo v. Potts:
“Our case law construing Chapter 9 is scant, and this appeal confronts us with a novel legal issue, of the kind that often surfaces when changing social and economic conditions awaken dormant statutes. But Chapter 9 has awakened, and we do not presume further disputes over its interpretive and practical complexities will remain long at rest.”
Lesson # 6. When a Chapter 9 plan is confirmed, the City is discharged from debts that aren’t “excepted from discharge” by the confirmed plan (11 U.S.C. § 944(b), (c)(1)).
Lesson # 7. At least two large municipalities, Detroit and San Bernardino, have expressly discharged the claims of citizens against their police officers for misconduct.
Lesson # 8. If a city wants to make an attempt at discharging its police officers from misconduct liability, the city must make explicit provision for such a discharge in its Chapter 9 plan.
Lesson# 9. An ambiguity in a bankruptcy plan drafted by the city is construed against the city.
Lesson # 10. A city’s commitment, made after confirmation of its Chapter 9 plan, to defend and indemnify a police officer is unimpaired by the terms of its confirmed plan.
Thanks to the Ninth Circuit for pointing-the-way on various complexities of the newly-awakened Chapter 9 statutes.
Links to prior articles on this Chapter 9 city-bankruptcy subject are:
Part 1: Police Abuse Claims and Municipal Bankruptcy — A New Report
Part 2: Will Police Misconduct Liability Allow a City to File Bankruptcy? — “Insolvent” Eligibility Standard
Part 3: Can a City File Bankruptcy to Deal With Police Misconduct Liability? — “Good Faith” Requirement