Chapter 9 Municipal Bankruptcy Eligibility Standards Set in City of Stockton

The U.S. Bankruptcy Court for the Eastern District of California granted the City of Stockton, California relief under chapter 9, holding that Stockton satisfied its burden of proof on eligibility under sections 109(c) and 921(c) of the Bankruptcy Code. The court issued its decision, In re City of Stockton, Cal., 2013 WL 2629129 (Bankr. E.D. Cal. June 12, 2013), after several days of trial and overruled the objections of capital market creditors. In doing so, the court provided a careful roadmap for chapter 9 eligibility, including an analysis of (i) the “good faith” prepetition negotiation requirement under California’s gateway statute, (ii) the requirement that a municipality be “cash” insolvent, (iii) the requirement that a municipality “desire” and “intend” to effect a plan to adjust its debts, and (iv) the requirement that a municipality negotiate with its creditors in good faith before filing. The decision is likely to have a significant impact on large chapter 9 bankruptcies.