Stockton, San Bernardino, Mammoth Lakes: Cities in Bankruptcy

The current American economy has had a record effect on everyone’s finances. While Chapter 7 and 13 bankruptcy filings are up, even cities are feeling the pinch. In southern California, three notable cities have all entered bankruptcy proceedings – Stockton, San Bernardino and Mammoth Lakes.

Chapter 9 Bankruptcy

Chapter 9 is the section of the U.S. Bankruptcy Code that is only available to municipalities, and it is analogous to Chapter 13 in that it is not a “fresh start,” but a reorganization of debts. Certain debts will be eliminated; others will be sharply reduced or offset by the sale of collateral. To exit bankruptcy, a reorganization or ‘exit plan’ must be approved by the Bankruptcy Court. Because of the powers reserved for the states in the Tenth Amendment to the Constitution, however, certain features of other types of bankruptcy are not observed. For example, because of state laws and powers, the court cannot take over the municipality or remove board members or the like. The municipality must remain in control of its actions.

The Cases

Stockton, referred to by Time Magazine as “the most miserable city in America,” filed for Chapter 9 bankruptcy in 2012. There are several factors that contributed to its decline, most notably an unusual degree of involvement in the subprime mortgage crisis in 2007 and over-optimistic expectations on pension spending. Reuters characterized the case as a “fifteen-year spending binge.” It reached pre-trial settlements with all but a few of its creditors. Franklin Templeton Investments, which provided a $35 million loan to the city in 2009, filed an objection. Also, the California Public Employees’ Retirement System (Calpers) still demands payment on a significant pension debt. As of this writing, a deal has still not yet been reached, and one must be reached in order for Stockton’s exit plan to be approved.

San Bernardino, meanwhile, allegedly experienced malfeasance in which city officials falsified financial reports to the mayor to hide the scale of the city’s debt. The primary expense in San Bernardino is public safety spending; approximately 73% of the general fund is allocated to those expenses. The city filed for bankruptcy in August 2012, but only in July 2014 was a deal able to be reached with creditors, most notably Calpers, which had filed an official objection to the exit plan.

Mammoth Lakes, on the other hand, filed for bankruptcy not due to long-standing debt problems, but because a judgment against the town in a breach of contract suit left its coffers decimated. In 1997, the town entered into an agreement with a developer, Mammoth Lakes Land Acquisition (MLLA), to make improvements to the local airport. Due to FAA concerns, the plans were later abandoned, and MLLA sued for breach of contract, winning a $43 million judgment. Mammoth Lakes had to enter into bankruptcy in 2012, it was stated, in order to pay off the judgment without losing city services. Unlike Stockton and San Bernardino, however, Mammoth Lakes’ bankruptcy had very little impact on its day-to-day life – there was no mismanagement of public funds, nor any alleged malfeasance, so with payment of the judgment set at an affordable sum per year, life goes on.

Contact a Bankruptcy Attorney

It does some people good to know that even large municipalities with cash reserves and financial experts can be forced to file for bankruptcy. If you have been put in that position recently, please do not hesitate to contact the Dowe Law Firm for a free consultation today. We serve Contra Costa, Solano and Alameda counties.