Fairness and Risk in Stockton: Pensions, Bonds, and Taxes -- When Doing Nothing is Doing Well
40 Pages Posted: 25 Jul 2013
Date Written: July 23, 2013
Until very recently the political story line of municipal Chapter 9 bankruptcy has seen it deployed as a means to address unfunded public employee pension obligations. The reality has always been more complex but with the filings of Stockton and now Detroit the question of pensions vs. bonds has come to center stage. If the creditors cannot agree on a plan of adjustment, it can be crammed down but cramdown under Chapter 9 requires that the plan be "fair and equitable." If a municipality pursues this route to confirmation, courts will need to resolve three questions.
Do preferences created by state law control bankruptcy distributions?
Can a plan of adjustment that prefers retirees (or bondholders) be crammed down over the objection of the impaired class?
If the answer to the second question might be no, could a municipality move assume its collective bargaining agreements subject to only the business judgment rule to avoid battling over fairness at confirmation?
This working paper suggests that each question should be answered in the negative. Notwithstanding the Tenth Amendment, when a state permits its cities to file, it loses control. "In for a penny, in for a pound." If my conclusions are correct -- and even if they only may be correct -- all parties have an incentive to negotiate to a consensual plan.
Dismissal is the appropriate remedy for an nonconsensual, unfair plan and the threat of sending everyone back to state court and state law remedies should be a sufficient penalty to encourage settlement.
Comments, suggestions, and criticisms are actively solicited.
Keywords: bankruptcy, Chapter 9, cramdown, Stockton, Detroit, assumption, executory contracts, fair and equitable
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