October 2014

My last post was motivated by an interesting article in the L.A. Times, written by Chris Megerian, Melody Petersen, and Dean Starkman, that discussed the recent ruling by Judge Christopher Klein, the judge in the Stockton, California Chapter 9 bankruptcy.  As you may recall, the ruling put pension payments on the bankruptcy chopping block.

In that post I predicted that more municipalities would seek Chapter 9 bankruptcy protection due to unsustainable public retirement commitments.  I suspect that Judge Klein’s ruling will add fuel to the Chapter 9 fires.  And I am by no means the only one with that opinion.  In the October 2, 2014 L.A. Times, the perspicacious Melody Petersen reported:

Financially pressed California cities might turn to bankruptcy as a way to cut their increasing pension costs after a judge’s ruling, experts said Thursday.  Analysts from Moody’s Investor Services, a bond rating firm, said that Wednesday’s ruling by a federal judge considering Stockton’s case could open the door for cities to cut retirement obligations — once considered sacrosanct.  In that ruling, Judge Christopher Klein said cities could walk away from their pension obligations — just as they can from other debts.

While I am convinced that other California cities are eventually going to seek Chapter 9 protection — Madhu Ravi’s analysis suggests that an Oakland bankruptcy is on the horizon — there is a very big city in Illinois that I am watching:  Chicago is sitting on the pension obligation edge.  If Chicago were to file, it would undoubtedly displace Detroit as the largest municipal bankruptcy in the country’s history.  How likely is a Chicago bankruptcy?
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One chapter of the Bankruptcy Code that up until the last few years had not gotten much use is Chapter 9.  It is the chapter under which municipalities such as cities and counties file for bankruptcy protection.

On October 13th, 2011, I wrote a post predicting that a wave of municipal bankruptcies would start breaking on our shores.  On August 15th, 2012,  I discussed several municipal bankruptcies that had just been filed.  One of those bankruptcies, the Stockton, California, one has just been in the news because of a dispute over whether Stockton could reduce its payments to CalPERS, the retirement plan for California public employees.

Here’s an excerpt from the L.A. Times article written by Chris Megerian, Melody Petersen, and Dean Starkman, describing the ruling by the bankruptcy judge, Christopher Klein:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.  U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.  “I’ve concluded the pension could be adjusted,” Klein said.

What does that mean for California public employees who work for a municipality that files for Chapter 9 protection?  Quite simply it means that the Rolls Royce retirement plan might end up as more of a Yugo plan.
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I am regularly asked what happens when a Chapter 7 Trustee sells a debtor’s asset in a bankruptcy.  This post answers that question.

I.      Business Chapter 7

If a business files for Chapter 7 bankruptcy protection, the Chapter 7 Trustee assigned to the case seizes all of the business’s assets and liquidates them.  As part of the liquidation the Trustee pays off all encumbrances against the assets — e.g., mortgages against real property — pays the cost of selling the assets, takes the statutory cut found in 11 U.S.C. § 326(a), and distributes the remaining proceeds to the creditors according to the priority rules found in 11 U.S.C. §§ 507(a) and 726(a).

When the smoke all clears the debtor ceases to exist, which is why a business is ineligible for a Chapter 7 discharge pursuant to 11 U.S.C. § 727(a)(1).

II.     Personal Chapter 7

I am pleased to report that although the title of Chapter 7 in the Bankruptcy Code is “Liquidation,” no individual debtors are liquidated in a Chapter 7 bankruptcy.  However, there can be a liquidation component to the case.

A.  Exempting Assets

I have already written about exempting assets many times — see, e.g., the September 16, 2011 post.  Therefore, I won’t discuss that topic here; other than to say that in a personal Chapter 7 bankruptcy the debtor keeps the exempt assets, while the Chapter 7 Trustee seizes and liquidates the nonexempt assets for the benefit of creditors.

B.  The Liquidation

When faced with a nonexempt asset, a Trustee must answer a question:  Is it worth the time, effort, and expense to do the liquidation?  Here is the analysis the Trustee will do:

1.  How much is the asset worth?

Although the debtor provides an estimated value in the bankruptcy papers, this estimate does not bind the Trustee — even if the estimate was a professional appraisal of the property.  The only way to really determine the value of the asset is to put it on the market because an asset is only worth what the market will pay for it.  Of course, a professional appraisal may dissuade the Trustee from taking further action because the appraisal may indicate the futility of selling the asset due to the required payout discussed below.
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