A Ninth Circuit Bankruptcy Appellate Panel (BAP) opinion in the City of Vallejo, California municipal bankruptcy case became final after appellant city labor unions voluntarily withdrew further appeal to the Ninth Circuit.
The appeal followed an 8-day bankruptcy court trial on whether Vallejo was eligible to be a Chapter 9 debtor. Section 109(c) of the Bankruptcy Codes sets forth eligibility requirements for Chapter 9.
Several issues were dealt with on municipal bankruptcy law, and the court concluded the following:
1. Vallejo was "insolvent" under the provisions of Bankruptcy Code Section 109(c)(3).
2. Vallejo demonstrated it wanted to effect a plan to adjust its debts under Section 109(c)(4).
3. Vallejo negotiated with its creditors in good faith as required by section 109(c)(5)(B), unless Vallejo was unable to negotiate with its creditors because doing so was impracticable under section 109(c)(5)(C).
Bankruptcy Code Section 101(32)(C)(ii) defines insolvency in municipalities as the inability to pay debts as they become due, or the failure to pay debts as they become due. A cash flow analysis was the means to test insolvency. Vallejo argued it would be unable to pay debts as they became due during the next year because its cash flow was insufficient to meet budgeted obligations. Cash was held in funds that were restricted by law or contract, and was unavailable for payment of general fund obligations.
The BAP found evidence showing that because the general fund was not balanced, with projected falling tax, Vallejo was insolvent. Municipal accounting is not based on GAAP, but on standards established by the Governmental Accounting Standards Board. Some funds are designated to particular purposes and can only be used for specific purposes. For example, the use of certain funds was restricted by the bond documents to water department-related expenditures.
Vallejo is required by law to adopt its annual budget by a specific date and it must be a balanced budget. Though it was suggested Vallejo could cut its budget to avoid insolvency, the BAP found budget cutting to leave the city financially debilitated and less able to face the next fiscal year.
Vallejo negotiated with its creditors before filing the bankruptcy petition. The effort to reach solutions with creditors demonstrated Vallejo's desire to effect a reorganization plan.
Bankruptcy is a complicated process, and it is important to discuss concerns with a local bankruptcy attorney.
