In re: City of Stockton, California, 9th Cir. BAP (2015)

7/25/2019 In re: City of Stockton, California, 9th Cir. BAP (2015)

1/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

FILED

DEC 11 2015

SUSAN M. SPRAUL, CLERU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP No. EC- 14- 1550- DJ uF)

CI TY OF STOCKTON, CALI FORNI A, ) Bk. No. 12- 32118- CMK)

Debt or . )______________________________)

)FRANKLI N HI GH YI ELD TAX- FREE )I NCOME FUND; FRANKLI N )CALI FORNI A HI GH YI ELD )MUNI CI PAL FUND, )

)Appel l ant s, )

)v. ) OPINION

))

CI TY OF STOCKTON, CALI FORNI A, ))

Appel l ee. )______________________________)

Ar gued and submi t t ed on November 19, 2015at Sacr ament o, Cal i f or ni a

Fi l ed - December 11, 2015

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Easter n Di str i ct of Cal i f or ni a

Hon. Chr i st opher M. Kl ei n, Bankrupt cy J udge, Pr esi di ng

Appear ances: J ames C. J ohnst on, J ones Day, appear ed and ar guedon behal f of Appel l ant s Fr ankl i n Hi gh Yi el d Tax-Fr ee I ncome Fund and Fr ankl i n Cal i f or ni a Hi ghYi el d Muni ci pal Fund.

Mar c A. Levi nson, Or r i ck, Her r i ngt on & Sut cl i f f eLLP, appear ed and argued on behal f of t he Appel l eeCi t y of St ockt on, Cal i f or ni a.

Bef ore: DUNN, J URY AND FARI S, Bankr upt cy J udges.


2/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

DUNN, Bankrupt cy J udge:

Fr ankl i n Hi gh Yi el d Tax- Fr ee I ncome Fund and Fr ankl i n

Cal i f or ni a Hi gh Yi el d Muni ci pal Fund ( col l ect i vel y, Fr ankl i n)

appeal t he bankrupt cy cour t s or der ( Conf i r mat i on Or der )

conf i r mi ng t he Ci t y of St ockt on, Cal i f or ni a s ( Ci t y) f i r st

amended pl an of adj ust ment ( Pl an) i n chapt er 9. 1 We DI SMI SS,

as equi t abl y moot , Frankl i n s appeal of t he Conf i r mat i on Or der

gener al l y and ot her wi se AFFI RM t he Conf i r mat i on Or der s t r eat ment

of Frankl i n s gener al unsecur ed cl ai m under t he Pl an.

I. FACTUAL BACKGROUND2

A. Event s pr i or t o bankrupt cy

The f i nanci al probl ems t hat drove t he Ci t y t o seek chapt er 9

r el i ef di d not ar i se over ni ght . The Ci t y was an epi cent er of t he

subpr i me mor t gage def aul t cr i si s t hat ar ose i n conj unct i on wi t h

1 Unl ess ot her wi se i ndi cat ed, al l chapt er and sect i on

r ef er ences are t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532, andal l Rul e r ef er ences ar e t o t he Feder al Rul es of Bankrupt cyProcedur e, Rul es 1001- 9037.

2 Hi st or i cal backgr ound f act s ar e t aken pr i mar i l y f r om t heCi t y s modi f i ed di scl osur e st at ement , f i l ed on November 21, 2013( Di scl osur e St at ement ) , and t he bankrupt cy cour t s publ i shedopi ni on on t he Ci t y s el i gi bi l i t y f or chapt er 9 r el i ef i n I n r eCi t y of St ockt on, Cal i f or ni a, 493 B. R. 772 ( Bankr . E. D. Cal .2013) . Frankl i n onl y i ncl uded por t i ons of t he Di scl osur eSt at ement i n t hei r excer pt s of r ecor d. We have exer ci sed ourdi scr et i on t o r evi ew t he ent i r e Di scl osur e St at ement and cer t ai not her document s i n t he el ect r oni c r ecor d of t he Ci t y s mai nchapt er 9 case. See O Rour ke v. Seaboar d Sur . Co. ( I n r e E. R.Feger t , I nc. ) , 887 F. 2d 955, 957- 58 ( 9t h Ci r . 1988) ; At wood v.Chase Manhat t an Mort g. Co. ( I n r e At wood) , 293 B. R. 227, 233 n. 9( 9t h Ci r . BAP 2003) .

-2-


3/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

t he r ecessi on t hat began i n 2007- 08. Dur i ng t hi s per i od, r eal

est at e val ues, bot h commer ci al and r esi dent i al , i n t he Ci t y

decl i ned by ar ound 50%, and unempl oyment grew t o about 22%. The

medi an home pr i ce i n the Ci t y dr opped f r om$397, 000 i n 2006 to

$109, 000 i n 2012, a decl i ne of 72%. Di scl osure St at ement , at 17.

The Ci t y had one of t he hi ghest f or ecl osur e r at es i n t he count r y.

Consequent l y, pr oper t y t ax, sal es t ax and ot her publ i c r evenues

decl i ned pr eci pi t ousl y.

Two sel f - i nf l i ct ed f act or s wor ked t o exacer bat e

si gni f i cant l y t he Ci t y s f i nanci al pr obl ems: 1) As not ed by t he

bankrupt cy cour t ,

I n bet t er t i mes, [ t he Ci t y] commi t t ed i t s gener al f undt o back l ong- t er m bonds t o f i nance devel opment pr oj ect sbased on an over l y- sangui ne i f - you- bui l d- i t - t hey- wi l l -come ment al i t y. They di d not come. Hence pr oj ectr evenues wer e i nsuf f i ci ent t o pay pr oj ect bi l l s.

Ci t y of St ockton, 493 B. R. at 779.

2) I n addi t i on, t he Ci t y had a hi st or y of compensat i ng i t s

empl oyees at above- market l evel s.

Among ot her t hi ngs, t he Ci t y pai d f or gener ous heal t hcar e benef i t s t o whi ch empl oyees di d not cont r i but e,i ncl udi ng l i f et i me heal t h car e r egar dl ess of l engt h ofser vi ce. I t per mi t t ed, t o an unusual degr ee, so- cal l edadd- pays f or t asks t hat al l owed nomi nal sal ar i es t obe i ncr eased t o t ot al s gr eat er t han t hose pr evai l i ngf or other muni ci pal i t i es. And t her e wer e pr e-det er mi ned aut omat i c annual cost - of - l i vi ng payi ncr eases not t i ed t o t he st at e of t he economy or l ocalf i nances. . . . Pensi ons wer e al l owed t o be based ont he f i nal year of compensat i on, whi ch compensat i oncoul d i ncl ude essent i al l y- unl i mi t ed accr ued vacat i onand si ck l eave. Thi s l ed t o a phenomenon of so- cal l edpensi on- spi ki ng i n whi ch a pensi on coul d be

subst ant i al l y gr eat er t han t he r et i r ee s act ual f i nalsal ar y. Nor wer e i ndi vi dual empl oyees r equi r ed t ocont r i but e t o t hei r pensi ons.

I d.

The Ci t y s f i nanci al probl ems wer e obscur ed by f aul t y

-3-


4/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

management and account i ng pr act i ces. Ci t y account s were i n such

di sar r ay t hat i t has t aken l i t er al l y year s t o unscr ambl e t hem.

I d. However , ul t i mat el y, t he Ci t y s f i scal excesses,

par t i cul ar l y i n l i ght of t he r ecessi on, pr oved unsust ai nabl e.

Begi nni ng i n 2008, t he Ci t y decl ar ed a ser i es of f i nanci al

emer genci es and t ook cer t ai n uni l at er al act i ons t o t r y t o get i t s

f i scal house i n or der . The Ci t y r educed i t s wor k f or ce by 25%

f r om1, 886 on J ul y 1, 2008 t o 1, 420 on December 31, 2011. I d.

at 780. [ S] wor n pol i ce of f i cer s wer e cut by 25%, non- swor n

pol i ce st af f i ng by 20%, f i r e st af f i ng by 30%, and non- saf et y

st af f i ng by 43%. Di scl osure St at ement , at 9. Compensat i on t o

Ci t y empl oyees was reduced by $52 mi l l i on, and st af f i ng and

ser vi ce l evel s wer e cut by $38 mi l l i on, f or an over al l Gener al

Fund budget r educt i on of appr oxi mat el y $90 mi l l i on dur i ng f i scal

year s 2009- 10, 2010- 11, and 2012- 13. I d. Unf or t unat el y, t hese

act i ons wer e not enough t o sol ve t he Ci t y s f i scal pr obl ems.

As of J une 30, 2012, t he Ci t y s gener al f und budget f or t he

2012- 13 f i scal year was pr oj ected t o be $25. 9 mi l l i on underwat er , wi t h f undi ng pot ent i al l y not avai l abl e t o cover J ul y 2012

payr ol l , unl ess dr ast i c act i on was t aken. I d. Accor di ngl y, t he

Ci t y Manager and St ockt on s Ci t y Counci l t ook steps t o i ni t i at e

t he neut r al eval uat i on pr ocess under Cal i f or ni a Gover nment Code

( Cal . Gov. Code) 53760 as a pr el ude t o a chapt er 9 f i l i ng.

Ci t y of St ockt on, 493 B. R. at 780- 81.

For mer bankrupt cy j udge Ral ph Mabey was sel ect ed as t heneut r al eval uat or . Ther eaf t er , t he neut r al eval uat i on pr ocess

cont i nued f or ni net y days, as aut hor i zed by Cal . Gov. Code

53760. 3( r ) , and some posi t i ve r esul t s wer e achi eved: Agr eement s

-4-


5/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

wer e negot i at ed t o adj ust al l unexpi r ed col l ect i ve bar gai ni ng

agr eement s wi t h Ci t y empl oyees, and subst ant i al progr ess was made

i n negot i at i ons wi t h some ot her s t ake hol der s. I d. at 783.

However , no agr eement s were r eached wi t h any capi t al markets/ bond

credi t or s, i ncl udi ng Fr ankl i n. I d. at 782- 83.

B. Chapt er 9 f i l i ng and event s pr i or t o conf i r mat i on

The Ci t y f i l ed i t s pet i t i on f or r el i ef under chapt er 9 on

J une 28, 2012. Fr om t he out set , proceedi ngs i n t he Ci t y s

bankrupt cy case wer e cont ent i ous. The capi t al market s/ bond

cr edi t or s cont est ed el i gi bi l i t y, and onl y af t er many mont hs of

cost l y di scover y, br i ef i ng, l egal maneuver i ng, and ul t i mat el y a

t r i al di d t he bankrupt cy cour t det er mi ne t hat t he Ci t y was

ent i t l ed t o r el i ef i n chapt er 9. The or der f or r el i ef was

ent er ed on Apr i l 1, 2013, and t he bankrupt cy cour t s opi ni on

st at i ng i t s f i ndi ngs and concl usi ons as to t he Ci t y s el i gi bi l i t y

f or chapt er 9 r el i ef was ent er ed on J une 12, 2013. See Ci t y of

St ockton, 493 B. R. 776- 98 ( Bankr . E. D. Cal . 2013) . The

bankrupt cy cour t s el i gi bi l i t y deci si on was not appeal ed and i sf i nal .

I n the meant i me, t he bankr upt cy cour t had appoi nt ed Or egon

bankrupt cy j udge El i zabet h L. Per r i s as medi at or on J ul y 12,

2012, and negot i at i ons cont i nued bet ween t he Ci t y and i nt er est ed

par t i es under her auspi ces, wi t h t he goal of r eachi ng agr eement

on t he t erms f or a consensual pl an of adj ust ment . These

negot i at i ons wer e pr ot r act ed and pr oceeded i n f i t s and st ar t s,but over t i me, t hey wer e l ar gel y successf ul , wi t h def i ni t i ve

set t l ement s r eached wi t h t he f ol l owi ng cr edi t or s and cr edi t or

gr oups:

-5-


6/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

1) The St ockt on Pol i ce Of f i cer s Associ at i on t he onl y

l abor organi zat i on wi t h whi ch the Ci t y had not r eached agr eement

pr epet i t i on;

2) The Of f i ci al Commi t t ee of Ret i r ees whi ch r epr esent ed

2, 100 r et i r ees wi t h pensi on benef i t s, of whi ch appr oxi mat el y

1, 100 al so cl ai med r i ght s t o l i f et i me heal t h benef i t s ( Ret i r ee

Heal t h Benef i t Cl ai ms) ;

3) Cal i f or ni a Publ i c Empl oyees Ret i r ement Syst em

( Cal PERS) whi ch admi ni st er s t he Ci t y s pensi ons;

4) Assur ed Guarant y Corp. and Assur ed Guarant y Muni ci pal

Cor p. ( col l ect i vel y, Assur ed) whi ch i nsur ed t he Ci t y s

pensi on bonds;

5) Nat i onal Publ i c Fi nance Guar ant ee Cor por at i on ( NPFG)

whi ch i nsured an aggr egat e of appr oxi mat el y $93. 8 mi l l i on i n 2004

and 2006 Ci t y bonds, secur ed i n part by parki ng st r uct ur es, among

ot her t hi ngs.

6) Ambac Assur ance Corpor at i on ( Ambac) whi ch i nsur ed

appr oxi mat el y $13. 3 mi l l i on i n 2003 Ci t y cer t i f i cat es ofpar t i ci pat i on; and

7) Wel l s Fargo Bank ( Wel l s Fargo) whi ch ser ved as t he

i ndent ur e t r ust ee f or a number of t he Ci t y s bond i ssues.

I n f act , t he onl y maj or cr edi t or gr oup wi t h whi ch no

set t l ement was negot i at ed was Fr ankl i n.

C. Pl an pr ovi si ons and conf i r mat i on pr oceedi ngs

The Pl an submi t t ed by t he Ci t y f or conf i r mat i on cl ass i f i edcl ai ms, i ncor por at i ng t he medi at ed set t l ement s wi t h cr edi t or

const i t uenci es, i ncl udi ng t he f ol l owi ng:

1) Cl ai ms of Cal PERS and pensi on pl an par t i ci pant s ( Cl ass 15) :

-6-


7/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

The cl ai ms of pensi on pl an part i ci pant s and Cal PERS wer e t r eated

as uni mpai r ed because the Ci t y set t l ed wi t h t hem on t he basi s

t hat i t woul d r emai n bound t o honor t hei r l egal , equi t abl e and

cont r act r i ght s unal t er ed. ( The qui d pr o quo f or t he Ci t y s

set t l ement was t hat i t woul d be r el i eved of l i abi l i t y t o pay

Ret i r ee Heal t h Benef i t Cl ai ms, except f or $5, 100, 000, t o be pai d

as provi ded f or gener al unsecur ed cl ai ms i n Cl ass 12. )

2) Cl ai ms of Assur ed ( Cl asses 5 and 6) : Assur ed s cl ai ms wer e

t r eat ed as i mpai r ed, ent i t l i ng Assur ed t o vot e bot h as Cl ass 5

and Cl ass 6. Under t he Pl an, t he Ci t y agr eed t o t r ansf er f ee

t i t l e t o i t s i nt er est i n an of f i ce bui l di ng l ocat ed at 400 E.

Mai n St r eet i n St ockt on ( 400 E. Mai n) , i t s pl anned r epl acement

f or ci t y hal l , t o Assur ed i n exchange f or t he ext i ngui shment of

t he Ci t y s obl i gat i ons under 2007 l ease obl i gat i on bonds. Lease

arr angement s wi t h r espect t o 400 E. Mai n were t o be al t ered t o

pr ovi de t hat t he Ci t y woul d l ease space i n 400 E. Mai n f r om

Assured f or ei ght year s at bel ow- mar ket r at es, wi t h f our one- year

opt i ons t o r enew. As par t of t hei r set t l ement , t he Ci t y andAssur ed agr eed t hat t he Ci t y s obl i gat i ons under pensi on bonds

woul d be reduced t o 52%, but al l owed f or cont i ngent f ul l

r epayment of t he bond obl i gat i ons i f t he Ci t y s r evenues out -

per f or med cer t ai n basel i ne pr oj ect i ons.

3) Cl ai ms of NPFG ( Cl asses 2, 3 and 4) : NPFG s 2004 parki ng

st r uct ur e bonds were t o be pai d t hr ough a new Par ki ng Aut hor i t y,

t o be cr eat ed by t he Ci t y, t hat woul d t ake owner shi p of al ldownt own St ockton par ki ng f aci l i t i es. The payment obl i gat i on f or

t he bonds woul d be shi f t ed f r om t he Gener al Fund t o t he Par ki ng

Aut hor i t y, r emovi ng t he obl i gat i on f r om t he Gener al Fund l edger .

7


8/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

NPFG s 2004 ar ena- r el ated bonds were secur ed by both a l ease of

t he ar ena and a pl edge of cer t ai n r est r i ct ed t ax r evenues. The

bonds wer e to be rest r uct ur ed t o pr ovi de debt ser vi ce savi ngs and

make i t mor e l i kel y t hat t he rest r i ct ed t ax revenues woul d be

suf f i ci ent t o ser vi ce t he debt . A cei l i ng on Gener al Fund

l i abi l i t y was negot i at ed as par t of t hi s set t l ement . Fi nal l y,

NPFG s 2006 bonds were secur ed by a l ease on t he St ewar t

Eberhardt Bui l di ng, whi ch houses t he Ci t y s depar t ment s of Human

Resour ces, 911 Di spat ch, Pol i ce I nvest i gat i ons and Cr i me Lab, and

Publ i c Works. Because t he St ewart Eberhardt Bui l di ng was

const r uct ed t o meet Cal i f or ni a s essent i al ser vi ces bui l di ng

st andar ds, i t woul d be ver y expensi ve t o r epl ace. Accor di ngl y,

t he set t l ement pr ovi ded t hat t he obl i gat i ons of t he Ci t y under

NPFG s 2006 bonds woul d not be al t ered. NPFG s cl ai ms i n Cl asses

2, 3 and 4 were t r eat ed as i mpai r ed.

4) Cl ai ms of Ambac ( Cl asses 1A and 1B) : Ambac s cl ai ms were

secur ed by l eases of t he Ci t y s mai n pol i ce st at i on, t wo f i r e

st at i ons, and a l i br ar y br anch. The Pl an di d not pur por t t oal t er t he amount s due t o hol der s of t he 2003 Ci t y cer t i f i cat es of

par t i ci pat i on, but t he Pl an pr ovi ded f or a r educt i on of t he

Gener al Fund s l i abi l i t y wi t h r espect t o Ambac s cl ai ms and f or

f ut ur e f l exi bi l i t y t o ext end payment s, i f necessar y, such t hat

Ambac woul d have r i ght s t o vote as i mpai r ed i n both Cl asses 1A

and 1B under t he Pl an.

5) Gener al Unsecur ed Cl ai ms ( Cl ass 12) : I ncl uded i n cl ass 12wer e Gol f Cour se/ Par k Unsecur ed Cl ai m ( Fr ankl i n s unsecur ed

cl ai m) ; Ret i r ee Heal t h Benef i t Cl ai ms; Leave Buyout Cl ai ms; t he

cl ai m f i l ed by Mi chael A. Cobb; and mi scel l aneous Ot her

8


9/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

Post pet i t i on Cl ai ms and General Unsecur ed Cl ai ms. The medi ated

agr eement wi t h t he Of f i ci al Commi t t ee of Ret i r ees provi ded t hat

t he Ret i r ee Heal t h Benef i t Cl ai mant s woul d r ecei ve an aggr egat e

payment of $5, 100, 000 i n f ul l sat i sf act i on of t hei r al l owed

cl ai ms. Al l ot her cr edi t or s i n Cl ass 12 woul d r ecei ve a

per cent age of t he al l owed amount s of t hei r r espect i ve cl ai ms

equal t o t he per cent age that t he Ret i r ee Heal t h Benef i t Cl ai mant s

woul d r ecover ( based on t he $5, 100, 000 payment ) .

As not ed above, t he Ci t y di d not r each a set t l ement wi t h

Frankl i n, but t he Ci t y of f er ed Frankl i n t he oppor t uni t y t o shar e

pr o r at a i n cont i ngent f unds promi sed t o Assured i f a deal coul d

be made wi t h r espect t o t r eat ment of Fr ankl i n s cl ai ms.

Frankl i n obj ect ed t o conf i r mat i on of t he Pl an. Fol l owi ng

ext ensi ve pr e- hear i ng br i ef i ng by the par t i es, t he bankrupt cy

cour t conduct ed a f i ve- day t r i al of conf i r mat i on i ssues. At t he

same t i me, t he bankr upt cy cour t hear d evi dence t o determi ne t he

amount of Frankl i n s secur ed cl ai m i n a pendi ng adver sary

pr oceedi ng. The bankr upt cy cour t r ecei ved and consi deredmul t i pl e post - hear i ng submi ss i ons and hear d a day of post - hear i ng

argument .

At a hear i ng on J ul y 8, 2014, t he bankr upt cy cour t announced

i t s f i ndi ngs as to t he val ue of Fr ankl i n s col l at er al , consi st i ng

of t wo gol f cour ses, a communi t y cent er associ ated wi t h one of

t he gol f cour ses, and an i ce skat i ng r i nk. The bankrupt cy cour t

f ound t he aggr egat e val ue of Frankl i n s secur i t y t o be$4, 052, 000. Frankl i n has not appeal ed t hat f i ndi ng. Ther eaf t er ,

t he Ci t y amended t he Pl an t o pr ovi de f or t r eat ment of Frankl i n s

secur ed cl ai m as Cl ass 20, speci f yi ng t hat Frankl i n s al l owed

9


10/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

secur ed cl ai m i n t he amount of $4, 052, 000 woul d be pai d i n f ul l

on t he ef f ect i ve dat e of t he Pl an.

At a hear i ng ( Hear i ng) on Oct ober 30, 2014, t he bankr upt cy

cour t st at ed or al l y on t he r ecor d i t s f i ndi ngs and concl usi ons

wi t h r espect t o conf i r mat i on of t he Pl an. The f i r st t hi ng t he

bankrupt cy cour t di d was i ncor por at e t he f i ndi ngs and concl usi ons

f r om i t s el i gi bi l i t y det er mi nat i on. See Ci t y of St ockt on, 493

B. R. at 776- 98. I t not ed t he out st andi ng obj ect i ons t o

conf i r mat i on f r om Fr ankl i n, f ocusi ng on Fr ankl i n s chal l enges t o

t he Ci t y s good f ai t h i n pr oposi ng t he Pl an and i t s argument t hat

i t s cl ai m shoul d be separ at el y cl assi f i ed f r om t he gener al

unsecur ed cl ass. The bankrupt cy cour t f ur t her noted t hat one of

t he requi r ement s f or i mpl ement at i on of t he Pl an was t hat t he

Ci t y s vot er s appr ove a t ax i ncr ease t o f und Pl an obl i gat i ons,

and t he Ci t y s vot ers had done so.

The bankrupt cy cour t quot ed 1122( a) s r equi r ement t hat ,

[ A] pl an may pl ace a cl ai m or an i nt er est i n a par t i cul ar cl ass

onl y i f such cl ai m or i nt er est i s substant i al l y s i mi l ar t o t heot her cl ai ms or i nt er est s of such cl ass. I t t hen obser ved t hat

bond cl ai ms, ot her t han Frankl i n s, wer e al l separ at el y

cl assi f i ed, and t hat s appr opr i at e because each one has i t s own

l egal r i ght s and st at us.

The bankrupt cy cour t noted t hat 1123( a) ( 4) r equi r es t hat

t her e be t he same t r eat ment of each cl ai m or i nt er est of a

par t i cul ar cl ass unl ess t he hol der of a cl ai m or i nt er est agr eest o l ess f avor abl e t r eat ment . I t t hen st at ed t hat i t had

exami ned t he t r eat ment of al l of t he cl asses of cl ai ms i n t he

Pl an, wi t h par t i cul ar f ocus on Cl ass 12' s t r eat ment of gener al

10


11/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

unsecur ed cl ai ms, and f ound t her e i s equal t r eat ment wi t h

r espect t o al l of t he cl ai ms t hat ar e gener al unsecur ed cl ai ms.

Accor di ngl y, i t concl uded t hat t he r equi r ement s of 1123( a) ( 4)

had been sat i sf i ed. I n addi t i on, l at er on dur i ng t he Hear i ng,

t he bankr upt cy cour t determi ned t he aggr egate amount of t he

Ret i r ee Heal t h Benef i t Cl ai ms t o be $545 mi l l i on.

The bankrupt cy cour t f ur t her not ed 1129( a) ( 3) s

r equi r ement t hat t he Pl an must have been pr oposed i n good f ai t h

and not by any means f or bi dden by l aw. I t consi der ed Fr ankl i n s

obj ect i on t hat i t was unf ai r l y di scri mi nat or y t o t r eat Fr ankl i n s

unsecur ed cl ai m as pr ovi ded f or i n Cl ass 12 whi l e not al t er i ng

t he t r eat ment of t he Ci t y s pensi on obl i gat i ons. However , i t

r ej ect ed Frankl i n s ar gument .

The gener al r educt i on i n compensat i on has an i ndi r ectef f ect on pensi ons. The r educt i on i n . . . number ofempl oyees has a si gni f i cant ef f ect t o pensi ons. Ther ear e f ewer peopl e ent i t l ed t o pensi ons i n t he f i r stpl ace. Al so, t he Ci t y has a pl an f or new empl oyees i nwhi ch pensi ons are l ess gener ous t han t he exi st i ngpensi ons, and t hose have al l been appr oved and si gnedof f i n t he col l ect i ve bar gai ni ng agr eement s.

Hr g Tr . Oct . 30, 2014, at 35: 9- 16. I n addi t i on, t he bankrupt cy

cour t poi nt ed out t hat , [ O] ne of t he f eat ur es of t he agr eement s

wi t h ot her capi t al mar ket credi t or s i s a cont i ngent f und t hat i s

avai l abl e i n a number of year s down t he Pl an t hat i s desi gned t o

pr ovi de f or addi t i onal payment i f t he f i nances of t he Ci t y

pr osper and t hat . . . mor e than 20 per cent of t hat was r eserved

f or Frankl i n Funds i f i t wi shed t o t ake advant age of i t bef or et he t i me of conf i r mat i on, but Frankl i n el ect ed not t o accept

t hat opt i on. I d. at 36: 13- 20. Based on t hose f i ndi ngs, t he

bankr upt cy cour t concl uded t hat t he Pl an had been pr oposed i n

11


12/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

good f ai t h and not by any means f orbi dden by l aw.

The bankrupt cy cour t , af t er r ei t er at i ng i t s under st andi ng

t hat Frankl i n had chal l enged t he cl assi f i cat i on of i t s unsecur ed

cl ai m under t he Pl an, not ed t hat al l i mpai r ed cl asses had vot ed

t o accept t he Pl an, and, t hus, t he r equi r ement s of 1129( a) ( 8)

and 1129( a) ( 10) wer e sat i sf i ed. 3

The bankrupt cy cour t t hen moved on t o consi der whet her t he

r equi r ement s f or conf i r mat i on of a pl an of adj ust ment i n chapt er

9 under 943( b) wer e sat i sf i ed and so f ound. I n par t i cul ar , i t

f ound t hat [ a] l l amount s t o be pai d by t he debt or or any per son

f or servi ces or expenses i n t he case or i nci dent t o t he Pl an have

been f ul l y di scl osed and ar e r easonabl e. Accor di ngl y, t he

r equi r ement s of 943( b) ( 3) wer e sat i sf i ed.

The bankrupt cy cour t f ur t her f ound t hat , i n l i ght of t he

Ci t y vot er s appr oval of t he sal es t ax i ncr ease necessar y to f und

t he Pl an, t he r equi r ement s of 943( b) ( 6) wer e sat i sf i ed.

Fi nal l y, t he bankrupt cy cour t consi der ed 943( b) ( 7) , whi ch

r equi r es t hat t he Pl an be i n t he best i nt er est s of credi t or s andbe f easi bl e. I t not ed t hat t he best i nt er est s t est i n chapt er

9 i s necessar i l y di f f er ent f r om t he t est i n chapt er 11, whi ch

r equi r es t hat cr edi t or s r ecei ve at l east as much as t hey woul d

r ecei ve i n a chapt er 7 l i qui dat i on. [ I ] t goes wi t hout sayi ng

3 Towar d t he end of t he hear i ng, counsel f or t he Ci t ypoi nt ed out t hat one i mpai r ed cl ass, Cl ass 14, t or t cl ai mant sagai nst t he Ci t y, had vot ed i n f avor of t he Pl an i n t er ms of t hemaj or i t y i n amount r equi r ed under t he Bankr upt cy Code, but not i nnumber . The bankrupt cy cour t di d not make f ur t her f i ndi ngs wi t hr espect t o Cl ass 14 at t he Hear i ng, but as no member of Cl ass 14has appeal ed t he Conf i r mat i on Or der , we do not consi der t hi smat t er f ur t her .

12


13/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

t hat a muni ci pal i t y cannot be l i qui dat ed, so i t s ki nd of har d t o

f i gur e out what a hypot het i cal l i qui dat i on woul d be. Hr g Tr .

Oct . 30, 2014, at 40: 20- 23.

Havi ng consi der ed car ef ul l y t he pr ovi si ons of t he Pl an and

avai l abl e al t er nat i ves, i ncl udi ng st ar t i ng over t o const r uct a

new chapt er 9 pl an at gr eat addi t i onal cost , t he bankrupt cy cour t

f ound t hat t he Pl an was t he best t hat can be done i n t erms of

t he r est r uct ur i ng and adj ust ment s of t he debt s of t he Ci t y and

concl uded t hat t he r equi r ement s of 943( b) ( 7) wer e sat i sf i ed.

Accor di ngl y, t he Pl an woul d be conf i r med.

Frankl i n f i l ed a mot i on t o al t er or amend f i ndi ngs of f act

and concl usi ons of l aw ( Mot i on t o Amend Fi ndi ngs) , ar gui ng t hat

t he Ret i r ee Heal t h Benef i t Cl ai ms shoul d be di scount ed t o pr esent

val ue, whi ch woul d r educe t hose cl ai ms bel ow t he $545 mi l l i on

amount f ound by t he bankr upt cy cour t at t he Hear i ng. The

bankr upt cy cour t addr essed t he Mot i on t o Amend Fi ndi ngs at a

hear i ng on December 10, 2014. I t f i r st not ed t hat no

obj ect i on( s) had been f i l ed t o t he Ret i r ee Heal t h Benef i t Cl ai ms,and accor di ngl y, under 925, t hey were deemed al l owed. I t t hen

not ed t hat , even i f i t di scount ed t he Ret i r ee Heal t h Benef i t

Cl ai ms t o pr esent val ue, t he l owest aggr egate amount argued f or

t he cl ai ms was $261. 9 mi l l i on, as advocat ed by Fr ankl i n, and

usi ng t hat number woul d not change t he Cl ass 12 vot i ng out come

f or t he Pl an.

The bankrupt cy cour t t hen di scussed t he par t i espr esent at i ons as t o appr opr i at e di scount r at es, and af t er

anal yzi ng t hei r pr esent at i ons and appl i cabl e aut hor i t i es,

i ncl udi ng 502, i t char act er i zed t he Ret i r ee Heal t h Benef i t

13


14/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

Cl ai ms as an ent i r el y unf unded benef i t as of t he f i l i ng dat e and

det er mi ned t hat i t was not r equi r ed t o di scount t he Ret i r ee

Heal t h Benef i t Cl ai ms t o pr esent val ue. Accor di ngl y, t he

bankr upt cy cour t deni ed t he Mot i on t o Amend Fi ndi ngs.

Frankl i n f i l ed a not i ce of appeal and a mot i on f or st ay

pendi ng appeal ( St ay Mot i on) . Af t er hear i ng ar gument f r om t he

par t i es, t he bankrupt cy cour t announced i t s deci si on on t he St ay

Mot i on at a hear i ng on J anuar y 20, 2015. Not i ng t hat t he Ci t y s

chapt er 9 case had unf ol ded over a per i od of t wo and a hal f

year s, t he bankrupt cy cour t went over i t s r at i onal e f or

conf i r mi ng t he Pl an, enunci at ed i n gr eat er det ai l i n i t s or al

f i ndi ngs and concl usi ons at t he Hear i ng. I t t hen addr essed t he

st andar ds f or t he i mposi t i on of a st ay pendi ng appeal .

I n l i ght of t he hi st or y of t he case, t he i ssues r ai sed, and

t he r el at i vel y def er ent i al st andar d of r evi ew as t o i t s f act

f i ndi ngs, t he bankrupt cy cour t concl uded t hat Frankl i n s

l i kel i hood of success on t he mer i t s on appeal was l ow. Not i ng

t hat Fr ankl i n s counsel st at ed i n ar gument t hat onl y money wasat i ssue, and I m conf i dent t hat t he Ci t y i s goi ng t o be ar ound,

and i t s st i l l goi ng t o have t he ci t i zenr y of a coupl e hundr ed

t housand peopl e, t he bankr upt cy cour t di d not see how

si gni f i cant or i r r epar abl e har m woul d come t o Frankl i n i n t he

absence of a st ay. On t he ot her hand, i t f ound t hat i mposi ng a

st ay pendi ng appeal woul d i mpose subst ant i al har m on the Ci t y and

i t s ot her credi t ors , i ncl udi ng ret i rees . Fi nal l y,t her e i s t he publ i c i nt er est . And, of cour se,muni ci pal i nsol vency i s a ver y compl i cat ed i ssue ofgr eat publ i c i nt er est , and t he est at e and muni ci pal i t yand j ust t he over al l syst em, capi t al mar ket syst em,r eal l y ar e ser ved by some def i ni t i ve r esol ut i on of

14


15/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

cases so t hat peopl e underst and t he rul es of t he gameand know exact l y what t hey r e f aci ng. . . . [ T] hepubl i c i nt er est i s ser ved by act ual l y bei ng abl e t oi mpl ement a pl an on whi ch peopl e can r el y.

Hr g Tr . J an. 20, 2015, at 23: 2- 8 and 16- 18. Accor di ngl y, t he

publ i c i nt er est mi l i t at ed agai nst i mposi ng a st ay.

Based on t hese f i ndi ngs and concl usi ons, t he bankrupt cy

cour t deni ed t he Mot i on f or St ay.

On Febr uary 27, 2015, t he bankr upt cy cour t i ssued an

Amended Opi ni on Regardi ng Conf i r mat i on and St atus of Cal PERS

( Amended Opi ni on) , suppl ement i ng i t s or al f i ndi ngs and

concl usi ons at t he Hear i ng. One of t he pur poses of t he Amended

Opi ni on was t o cl ar i f y t he st at us and amount s of Frankl i n s

secured and unsecured cl ai ms:

Frankl i n s unsecur ed cl ai m i s $30, 480, 190. 00. Thej udi ci al l y- det er mi ned secur ed cl ai m i s $4, 052, 000. 00,whi ch i s bei ng pai d i n f ul l . And, Frankl i n r ecei ves$2, 071, 435. 15 f r om a Reserve Fund f unded by bondpr oceeds and hel d by t he i ndent ur e t r ust ee undersect i on 5. 05 of t he bond i ndent ur e. Whi l e t he par t i esdi f f er about how t o char act er i ze t he Reserve Fund, t heyagr ee that Fr ankl i n ends up wi t h $6, 123, 435. 15 ( secur ed

cl ai m + Reser ve Fund) , pl us near l y 1% on i t s$30, 480, 190. 00 unsecur ed cl ai m. Hence, Fr ankl i n st ot al r ecover y f r om al l sour ces i s about 17. 5% ( not12%) .

Amended Opi ni on, at 1 n. 1. Ot herwi se, t he Amended Opi ni on

f ocused on Frankl i n s obj ect i on ar gument t hat t he Ci t y s pensi ons

coul d be modi f i ed and, i n l i ght of t hat pr emi se, t he Pl an shoul d

not be conf i r med i f t hey wer e not modi f i ed a pr emi se t hat t he

bankrupt cy cour t ul t i mat el y r ej ect ed. The bankrupt cy cour tr ei nf or ced i t s f i ndi ngs t hat Ci t y empl oyees and r et i r ees, t he

benef i ci ar i es of t he Ci t y s pensi on pl ans, shar ed t he pai n wi t h

t he capi t al mar ket s/ bond credi t or s. I t r ei t er at ed t hat t he Ci t y

15


16/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

t er mi nat ed i t s l i f et i me r et i r ee heal t h benef i t s pr ogr am t hr ough

t he Pl an and t hat Ci t y pensi on l i abi l i t i es wer e i ndi r ect l y but

subst ant i al l y reduced as a resul t of cur t ai l ed pay and cur t ai l ed

f ut ur e pay i ncr eases i n t he r enegot i at ed col l ect i ve bar gai ni ng

agr eement s. Amended Opi ni on, at 51. To f und t he Pl an, Ci t y

vot er s appr oved a sal es t ax i ncr ease i n t he gr eatest amount and

f or t he l ongest per i od per mi t t ed by Cal i f or ni a l aw. I d. at 53.

The bankr upt cy cour t r est at ed i t s concl usi ons t hat t he st andar ds

f or conf i r mat i on of t he Pl an i n chapt er 9 had been met and t hat

t he Pl an woul d be conf i r med.

On the same day, t he bankr upt cy cour t ent ered t he

Conf i r mat i on Or der . Frankl i n s pr evi ousl y f i l ed not i ce of appeal

i s deemed t i mel y under Rul e 8002( a) ( 2) .

Dur i ng t he br i ef i ng i n t hi s appeal , t he Ci t y f i l ed a mot i on

t o di smi ss t he appeal as equi t abl y moot ( Mot i on t o Di smi ss) .

Frankl i n f i l ed an opposi t i on t o t he Mot i on t o Di smi ss, t o whi ch

t he Ci t y r epl i ed. By or der ent er ed on Oct ober 14, 2015, t he

Mot i on t o Di smi ss was t aken under advi sement and r ef err ed t o thi spanel f or deci si on i n conj unct i on wi t h i t s di sposi t i on of t he

appeal .

II. JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on under 28 U. S. C.

1334 and 157( b) ( 2) ( A) , ( B) and ( L) . Except as ot her wi se

st at ed bel ow, we have j ur i sdi ct i on under 28 U. S. C. 158.

III. ISSUES

1. I s t hi s appeal equi t abl y moot i nsof ar as Frankl i n seeks

r ever sal of conf i r mat i on of t he Pl an?

2. I s i t possi bl e t o pr ovi de a r emedy t o Frankl i n i n t er ms

16


17/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

of i ncr easi ng t he payout on i t s unsecur ed cl ai m under t he Pl an?

3. Di d t he bankrupt cy cour t er r i n concl udi ng t hat t he Pl an

was proposed i n good f ai t h f or pur poses of 1129( a) ( 3) ?

4. Di d t he bankrupt cy cour t er r i n concl udi ng t hat t he

cl assi f i cat i on of Fr ankl i n s unsecur ed cl ai m was not unf ai r l y

di scr i mi nat or y f or pur poses of 1122( a) and 1123( a) ( 4) ?

5. Di d t he bankrupt cy cour t er r i n concl udi ng t hat t he Pl an

sat i sf i ed t he best i nt er est s of credi t or s t est i n 943( b) ( 7) ?

6. Di d t he bankrupt cy cour t er r i n concl udi ng t hat i t was

not r equi r ed t o di scount t he Ret i r ee Heal t h Benef i t Cl ai ms t o

pr esent val ue?

IV. STANDARDS OF REVIEW

We r evi ew our own j ur i sdi ct i on, i ncl udi ng quest i ons of

equi t abl e moot ness, de novo. El l i s v. Yu ( I n r e El l i s) , 523 B. R.

673, 677 ( 9t h Ci r . BAP 2014) . We r evi ew t he bankr upt cy cour t s

deci si on t o conf i r m t he Pl an f or an abuse of di scr et i on.

Mar shal l v. Mar shal l ( I n r e Mar shal l ) , 721 F. 3d 1032, 1045 ( 9t h

Ci r . 2013) ; Comput er Task Gr oup, I nc. v. Br ot by ( I n r e Br ot by) ,303 B. R. 177, 184 ( 9t h Ci r . BAP 2003) ( The ul t i mat e deci si on t o

conf i r m a reor gani zat i on pl an i s r evi ewed f or an abuse of

di scret i on. ) . We r evi ew t he bankr upt cy cour t s f i ndi ngs of f act

f or cl ear er r or and i t s concl usi ons of l aw de novo. Br oni t sky v.

Bea ( I n r e Bea) , 533 B. R. 283, 285 ( 9t h Ci r . BAP 2015) . De novo

means t hat we r evi ew a mat t er anew, as i f no deci si on pr evi ousl y

had been r endered. Dawson v. Marshal l , 561 F. 3d 930, 933 ( 9t hCi r . 2009) .

We must af f i r m t he bankrupt cy cour t s f act f i ndi ngs unl ess

we det er mi ne t hat t hose f i ndi ngs ar e ( 1) i l l ogi cal ,

17


18/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

( 2) i mpl ausi bl e, or ( 3) wi t hout suppor t i n i nf er ences t hat may

be dr awn f r om t he f act s i n t he r ecor d. Uni t ed St at es v.

Hi nkson, 585 F. 3d 1247, 1262 ( 9t h Ci r . 2009) ( en banc) .

A bankr upt cy cour t abuses i t s di scret i on i f i t appl i es an

i ncor r ect l egal st andar d or mi sappl i es t he cor r ect l egal

standar d, or i f i t s f act f i ndi ngs ar e i l l ogi cal , i mpl ausi bl e or

not suppor t ed by evi dence i n t he r ecor d. Tr af f i cSchool . com, I nc.

v. Edr i ver I nc. , 653 F. 3d 820, 832 ( 9t h Ci r . 2011) .

We may af f i r m t he deci si on of t he bankrupt cy cour t on any

basi s suppor t ed by t he r ecor d. See ASARCO, LLC v. Uni on Pac.

Co. , 765 F. 3d 999, 1004 ( 9t h Ci r . 2014) ; Shanks v. Dr essel , 540

F. 3d 1082, 1086 ( 9t h Ci r . 2008) .

V. DISCUSSION

A. Equi t abl e moot ness

I n t he Mot i on t o Di smi ss, t he Ci t y ar gues t hat we shoul d

di smi ss Frankl i n s appeal as equi t abl y moot . Fr ankl i n i ni t i al l y

r esponds t hat we shoul d not even consi der t he Mot i on t o Di smi ss

f or t wo r easons t hat we addr ess i n t ur n.1. Wai ver

Fi r st , Fr ankl i n ar gues t hat t he Ci t y wai ved i t s equi t abl e

moot ness argument because i t coul d and shoul d have r ai sed i t

ear l i er . I n suppor t of i t s ar gument , i t ci t es f ami l i ar aut hor i t y

t o t he ef f ect t hat an argument not made i n a part y s openi ng

br i ef i s deemed wai ved. See, e. g. , Mi l l er v. Fai r chi l d I ndus. ,

I nc. , 797 F. 2d 727, 738 ( 9t h Ci r . 1986) ( The Cour t of Appeal swi l l not or di nar i l y consi der mat t er s on appeal t hat ar e not

speci f i cal l y and di st i nct l y ar gued i n t he [ par t y s] openi ng

br i ef . ) .

18


19/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

The Ci t y r esponds t hat i t proper l y r ai sed t he equi t abl e

moot ness i ssue by mot i on. See Rul e 8013( a) ( 1) ( A r equest f or an

or der or ot her r el i ef i s made by f i l i ng a mot i on . . . . ) ; Ni nt h

Ci r cui t Rul e 27- 11; Rev Op Gr oup v. ML Manager LLC ( I n re

Mor t gages Lt d. ) ( Mor t gages I ) , 771 F. 3d 1211, 1214 ( 9t h Ci r .

2014) ( ML Manager i s al so ent i t l ed t o move t o di smi ss i n t hi s

cour t based on equi t abl e moot ness, r egar dl ess of t he deci si ons of

t he cour t s bei ng r evi ewed. ) ; Mot or Vehi cl e Cas. Co. v. Thor pe

I nsul at i on Co. ( I n r e Thor pe I nsul at i on Co. ) , 677 F. 3d 869, 879

n. 3 ( 9t h Ci r . 2012) ( Appel l ees cont ent i on on equi t abl e moot ness

i s not asser t ed wi t hi n i t s appel l at e br i ef , but was t he subj ect

of a separ at e mot i on t o di smi ss t he appeal as moot . . . . ) .

Fr ankl i n does not ar gue t hat i t was prej udi ced or har med by

t he Ci t y s r ai si ng t he equi t abl e moot ness i ssue i n t he Mot i on t o

Di smi ss, and we do not per cei ve any pr ej udi ce t o Fr ankl i n. As

r equest ed i n t he l ast sect i on of Frankl i n s opposi t i on, we ar e

consi der i ng t he Mot i on t o Di smi ss i n conj unct i on wi t h our over al l

di sposi t i on of t hi s appeal . Frankl i n and t he Ci t y bot h havet aken t he oppor t uni t y f or ext ensi ve f ur t her exposi t i on of t hei r

ar gument s i n t he paper s f i l ed i n suppor t of and i n opposi t i on t o

t he Mot i on t o Di smi ss, t hus suppl ement i ng t he al r eady subst ant i al

paper i ng of t hi s appeal t hr ough t he par t i es over si zed br i ef s.

And, even i f we bel i eved t hat t he Ci t y had wai ved t he i ssue, we

not e t hat equi t abl e moot ness r ai ses j ur i sdi ct i onal quest i ons t hat

we have an i ndependent dut y t o consi der sua spont e. See, e. g. ,Sahagun v. Landmark Fence Co. , I nc. ( I n r e Landmark Fence Co. ,

I nc. ) , 801 F. 3d 1099, 1102 ( 9t h Ci r . 2015) ; Hunt v. I mper i al

Mer chant Ser vs. , I nc. , 560 F. 3d 1137, 1141 ( 9t h Ci r . 2009) ,

19


20/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

quot i ng Demery v. Ar pai o, 378 F. 3d 1020, 1025 ( 9t h Ci r . 2004) .

I n t hese ci r cumst ances, we ar e not per suaded t hat t he Ci t y

wai ved equi t abl e moot ness as an i ssue by rai si ng i t t hr ough t he

Mot i on t o Di smi ss r at her t han i n i t s answer i ng br i ef .

2. Appl i cat i on of equi t abl e moot ness i n chapt er 9

Frankl i n next ar gues t hat t he equi t abl e moot ness doct r i ne

shoul d not appl y to appeal s i n chapt er 9 cases because [ i ] n t he

event of r ever sal of conf i r mat i on, t he Ci t y al ways wi l l be abl e

t o pr ovi de at l east some f r act i onal r el i ef wi t hout undul y or

i nequi t abl y i mpai r i ng t he r i ght s of other s. Appel l ant s

Obj ect i on to Mot i on t o Di smi ss t he Appeal as Equi t abl y Moot

( Obj ect i on) , at 2. Thus, Frankl i n ar gues t hat equi t abl e

moot ness shoul d not appl y i n chapt er 9 appeal s as a matter of

law, suppor t i ng i t s argument wi t h a fact-based rationale, and

t her ei n l i es t he r ub.

I n suppor t of i t s ar gument , Frankl i n ci t es t he opi ni on of

t he di st r i ct cour t f or t he Nor t her n Di st r i ct of Al abama on appeal

i n Bennet t v. J ef f er son Count y, Al abama, 518 B. R. 613 ( N. D. Al .2014) . I n J ef f er son Count y, t he cour t was concer ned t hat one of

t he cost s of f i nal i t y [ t hr ough appl i cat i on of equi t abl e moot ness]

i s t o al l ow a non- Ar t i cl e I I I cour t t o deci de i mpor t ant

const i t ut i onal quest i ons t hat pl ace subst ant i al f ut ur e

obl i gat i ons on t he ci t i zens of J ef f er son Count y wi t hout

r epr esent at i on. I d. at 637. Under cut t i ng i t s own r at i onal e,

t he cour t r ecogni zed and agr eed t hat some par t or par t s of t heConf i r mat i on Or der may be i mpossi bl e t o r ever se, but i t

never t hel ess concl uded t hat t he const i t ut i onal i ssues r ai sed wi t h

r espect t o the count y s cedi ng aut hor i t y t o set sewer r at es coul d

20


21/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

not be cut of f t hr ough t he appl i cat i on of equi t abl e moot ness.

I d. I t s ul t i mat e concl usi on was, I n l i ght of t he publ i c and

pol i t i cal i nt er est s at st ake i n any Chapt er 9 pr oceedi ngs, t he

cour t wi l l deny the Count y s appeal s t o equi t y to al l ow al l egedl y

unconst i t ut i onal pr ovi si ons of t he Conf i r mat i on Or der t o st and

wi t hout r evi ew. I d. at 638.

The di st r i ct cour t f or t he East er n Di st r i ct of Mi chi gan came

t o exact l y the opposi t e concl usi on i n t he appeal i n Dar r ah v.

Ci t y of Det r oi t , Mi chi gan ( I n r e Ci t y of Det r oi t , Mi chi gan) , 2015

WL 5697779 ( E. D. Mi ch, S. D. Sept . 29, 2015) . Af t er surveyi ng t he

l i mi t ed appl i cabl e aut hor i t i es, t he Ci t y of Det r oi t cour t

concl uded:

[ T] he [ equi t abl e moot ness] doct r i ne i s not concer nedwi t h t he speci f i c chapt er under whi ch t he debt or s casewas br ought . Rather , what mat t ers i s whether hear i ngt he bankrupt cy appeal coul d unr avel t he debt or s pl anand di st ur b t he r el i ance i nt er est s creat ed by i t .Because t he under l yi ng equi t abl e consi der at i ons ofpr omot i ng f i nal i t y and good f ai t h r el i ance on aj udgment [ appl y] wi t h equal f or ce t o a Chapt er 9bankr upt cy appeal , t he Cour t sees no r eason why thedoct r i ne shoul d not be appl i ed t o avoi d di st ur bi ng a

Chapt er 9 pl an of adj ust ment .I d. at *4. I t speci f i cal l y consi der ed and r ej ect ed t he

concl usi on of t he J ef f er son Count y cour t .

[ T] he i nt er est s of t he Ci t y [ of Det r oi t ] , i t s over100, 000 cr edi t or s, and i t s near l y 700, 000 r esi dent s i nr el yi ng on a f i nal j udgment cannot be mar gi nal i zed anddi smi ssed i n t he br oad br ush manner adopt ed by t heJ ef f er son County cour t . I f t he i nter est s of f i nal i t yand r el i ance ar e paramount t o a Chapt er 11 pr i vat ebusi ness ent i t y wi t h i nvest or s, shar ehol der s, andempl oyees, t hen t hese i nt er est s sur el y appl y wi t h

gr eat er f or ce t o t he Ci t y s Chapt er 9 Pl an, whi chaf f ect s t housands of cr edi t or s and r esi dent s.

I d. at *5.

Thi s panel and t he Ni nt h Ci r cui t appl i ed equi t abl e mootness

21


22/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

i n a chapt er 9 appeal i n Li onel v. Ci t y of Val l ej o, Cal i f or ni a

( I n r e Ci t y of Val l ej o, Cal i f or ni a) , 551 Fed. Appx. 339 ( 9t h Ci r .

Dec. 31, 2013) .

We ar e persuaded by t he reasoni ng of t he cour t i n Ci t y of

Det r oi t t hat equi t abl e moot ness has a l egi t i mat e r ol e t o pl ay i n

bankrupt cy r eor gani zat i on cases of al l t ypes, chapt er 11, chapt er

13 and chapt er 9 and f ol l ow t he cour se set i n I n r e Ci t y of

Val l ej o. Thi s appeal ar guabl y pr esent s a par adi gm case f or

consi der i ng appl i cat i on of equi t abl e moot ness i n a chapt er 9

cont ext because t he const i t ut i onal and pol i t i cal concer ns t hat

t r oubl ed t he cour t i n J ef f er son Count y ar e not pr esent : The

Ci t y s vot er s appr oved t he sal es t ax i ncr ease necessary to f und

t he Pl an i n advance of conf i r mat i on. Those who vot ed f or

appr oval of t he t ax i ncr ease di d so i n r el i ance on t he Ci t y s

ef f or t s t o conf i r m t he Pl an t o saf eguar d t he pr ovi si on of f ut ur e

muni ci pal servi ces. As t he bankrupt cy cour t not ed i n i t s Amended

Opi ni on:

By the t i me t he [ Ci t y s chapt er 9] case was f i l ed, t heCi t y had been pared down t o cor e f unct i ons and [ had]been r educed t o a si t uat i on i n whi ch such essent i alservi ces as pol i ce and f i r e wer e bei ng oper at ed bel owsust ai nabl e st andar ds. The mur der r at e had soar ed.Pol i ce r esponded onl y t o cr i mes i n pr ogr ess . A wr eckerhad t o accompany f i r e engi nes on emergency cal l s.

Amended Opi ni on, at 51. Several hundr ed t housand r esi dent s

depend on t he Ci t y t o pr ovi de f ut ur e ser vi ces, i ncl udi ng pol i ce

and f i r e pr ot ect i on. They have a l egi t i mat e concer n f or f i nal i t y

t hat i s ser ved by appr opr i at e appl i cat i on of equi t abl e moot ness.And, we not e t hat Frankl i n i s r ai si ng no const i t ut i onal i ssues i n

t hi s appeal , such as bedevi l ed t he cour t i n J ef f er son Count y.

For al l of t hese reasons, we concl ude, as a mat t er of l aw, t hat

22


23/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

t he equi t abl e moot ness doct r i ne can appr opr i at el y be appl i ed i n

chapt er 9 cases gener al l y and i n t hi s appeal speci f i cal l y.

3. St andar ds f or appl i cat i on of equi t abl e moot ness

For t unat el y, i n consi der i ng t he appl i cat i on of equi t abl e

moot ness, we benef i t f r om t he anal ysi s i n a number of r ecent

Ni nt h Ci r cui t deci si ons. An appeal i s equi t abl y moot i f t he

case pr esent s t r ansact i ons t hat ar e so compl ex or di f f i cul t t o

unwi nd t hat debt or s, credi t or s, and t hi r d par t i es ar e ent i t l ed

t o r el y on [ t he] f i nal bankr upt cy cour t or der . Mor t gages I ,

771 F. 3d at 1215, quot i ng I n r e Thor pe I nsul at i on Co. , 677 F. 3d

at 880. Accor di ngl y, t he equi t abl e moot ness doct r i ne f ocuses on

t he r el i ance and f i nal i t y concer ns of i nt er est ed par t i es i n a

bankrupt cy appeal , whet her par t i ci pat i ng i n t he appeal or not .

Equi t abl e moot ness occurs when a comprehensi ve change of

ci r cumst ances has occur r ed so as t o r ender i t i nequi t abl e f or

t hi s cour t t o consi der t he mer i t s of t he appeal . I n r e Thor pe

I nsul at i on Co. , 677 F. 3d at 880, quot i ng Tr one v. Rober t s Farms,

I nc. ( I n r e Rober t s Far ms, I nc. ) , 652 F. 2d 793, 798 ( 9t h Ci r .1981) . Unl i ke Ar t i cl e I I I moot ness, whi ch causes f eder al cour t s

t o l ack j ur i sdi ct i on and so t o have an inability t o pr ovi de

r el i ef , equi t abl e moot ness i s a j udge- cr eat ed doct r i ne t hat

r ef l ects an unwillingness t o pr ovi de r el i ef . J PMCC 2007- C1

Gr assl awn Lodgi ng, LLC v. Tr answest Resor t Pr ops. , I nc. ( I n r e

Tr answest Resor t Pr ops. , I nc. ) , 801 F. 3d 1161, 1167 ( 9th Ci r .

2015) ( emphasi s i n or i gi nal ) .The Ni nth Ci r cui t appl i es a f our - f act or t est t o det er mi ne

whet her an appeal f r om t he or der conf i r mi ng a pl an i s equi t abl y

moot :

23


24/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

[ 1] We wi l l l ook f i r st at whet her a st ay was sought , f orabsent t hat a par t y has not f ul l y pur sued i t s r i ght s.[ 2] I f a st ay was sought and not gai ned, we then wi l ll ook at whet her subst ant i al consummat i on of t he pl anhas occur r ed. [ 3] Next , we wi l l l ook t o t he ef f ect ar emedy may have on t hi r d part i es not bef ore t he cour t .[ 4] Fi nal l y, we wi l l l ook at whet her t he bankrupt cy

cour t can f ashi on ef f ect i ve r el i ef wi t hout compl et el yknocki ng the pr ops out f r om under t he pl an and ther ebycr eat i ng an uncont r ol l abl e si t uat i on f or t he bankrupt cycour t .

I n r e Thorpe I nsul at i on Co. , 677 F. 3d at 881. We exami ne each of

t hose f our f act or s as f ol l ows.

i ) Seeki ng a st ay

As not ed above, Frankl i n f i l ed i t s St ay Mot i on af t er t he

bankrupt cy cour t or al l y announced i t s f i ndi ngs and concl usi on

t hat t he Pl an woul d be conf i r med at t he Hear i ng but bef or e the

Conf i r mat i on Or der was ent ered. The bankr upt cy cour t hel d a

hear i ng on the St ay Mot i on and hear d ar gument f r om counsel f or

t he par t i es. At a hear i ng on J anuar y 20, 2015, t he bankrupt cy

cour t st at ed det ai l ed or al f i ndi ngs on t he r ecor d addr essi ng t he

f our f act or s f or consi der i ng a st ay pendi ng appeal as di scussed

i n Nken v. Hol der , 556 U. S. 418 ( 2009) , and determi ned t hatgr ant i ng t he St ay Mot i on was not war r ant ed. I n i t s repl y i n

suppor t of t he St ay Mot i on, Frankl i n conceded t hat i f no st ay i s

i ssued, Frankl i n wi l l not be i r r epar abl y har med. ( Emphasi s i n

or i gi nal . )

Based on t hi s r ecor d, whet her Fr ankl i n has pur sued wi t h

di l i gence al l avai l abl e r emedi es t o obt ai n a st ay of t he

Conf i r mat i on Or der , I n r e Rober t s Far ms, I nc. , 652 F. 2d at 798,i s ar guabl e, but at l east , Fr ankl i n has not f l unked t hi s f i r st

st ep. I d.

24


25/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

i i ) Subst ant i al consummat i on of t he Pl an

Sect i on 1101( 2) def i nes subst ant i al consummat i on as:

( A) t r ansf er of al l or substant i al l y al l of t hepr oper t y pr oposed by the pl an t o be t r ansf err ed;( B) assumpt i on by t he debt or or by t he successor t o t he

debt or under t he pl an of t he busi ness or of t hemanagement of al l or subst ant i al l y al l of t he pr oper t yt o be deal t wi t h by the pl an; and( C) commencement of di st r i but i on under t he pl an. 4

The Ci t y ar gues t hat t here can be no di sput e t hat t he Pl an

has been subst ant i al l y consummated based on the f ol l owi ng

act i ons: 1) The Ci t y has pai d t he $5. 1 mi l l i on r equi r ed t o be

pai d on Ret i r ee Heal t h Benef i t Cl ai ms, and al l but one of t he

payment checks had been cashed by r et i r ees. 2) The new l ease and

assi gnment s between Assur ed and the Ci t y wi t h respect t o t he 400

E. Mai n proper t y have been i mpl ement ed. 3) Agreement s and

document at i on t o memor i al i ze t he set t l ement s between the Ci t y and

NPFG have been f i nal i zed and si gned. 4) The Ci t y and Ambac have

execut ed an amended and r est at ed st i pul at i on and set t l ement

agr eement . 5) The Ci t y execut ed a new agr eement wi t h t he

Cal i f or ni a Depar t ment of Boat i ng and Wat er ways. 6) The Ci t yexecut ed new agr eement s wi t h t wo mi nor l eague spor t s t eams. The

Ci t y assert s t hat al l mandat ed payment s and t r ansact i ons t o

i mpl ement t he Pl an have been compl et ed.

I n i t s Obj ect i on, Frankl i n admi t s t hat , The Pl an became

ef f ect i ve and was consummated i n Febr uary 2015.

4 Al t hough 901 does not i ncor por at e 1101( 2) f orchapt er 9 cases, t he def i ni t i on st i l l i s usef ul i n t he equi t abl emoot ness anal ysi s as no anal ogous def i ni t i on i s set f or t h i n 902 Def i ni t i ons f or t hi s chapt er .

25


26/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

i i i ) The t hi r d and f our t h f actor s

The t hi r d consi der at i on i n t he t est f or equi t abl e moot ness

i s whet her t he r el i ef sought woul d bear undul y on i nnocent t hi r d

par t i es. I n r e Tr answest Resor t Pr ops. , I nc. , 801 F. 3d at 1169,

ci t i ng I n r e Thor pe I nsul at i on Co. , 677 F. 3d at 882; and Rev Op

Gr oup v. ML Manager LLC ( I n r e Mor t gages Lt d. ) ( Mor t gages I I ) ,

771 F. 3d 623, 629 ( 9t h Ci r . 2014) . I n anal yzi ng t hi s f act or , we

must det er mi ne whet her i t i s possi bl e t o [ al t er t he Pl an] i n a

way t hat does not af f ect t hi r d par t y i nt er est s t o such an extent

t hat t he change i s i nequi t abl e. I n r e Thor pe I nsul at i on Co. ,

677 F. 3d at 882. The f our t h, and most i mpor t ant , consi der at i on

. . . i s whet her t he bankrupt cy cour t coul d f ashi on equi t abl e

r el i ef wi t hout compl et el y undoi ng t he pl an. I n r e Tr answest

Resor t Pr ops. , I nc. , 801 F. 3d at 1171. Wher e equi t abl e r el i ef ,

t hough i ncompl et e, i s avai l abl e, t he appeal i s not moot . I n r e

Thor pe I nsul at i on Co. , 677 F. 3d at 883.

The Ci t y ar gues t hat r eversal of t he Conf i r mat i on Or der

woul d undermi ne t he set t l ement s t hat were so pai nst aki ngl ynegot i at ed over a per i od of year s wi t h t he Ci t y s l abor uni ons,

Cal PERS and t he Ci t y s pensi on pl an par t i ci pant s and r et i r ees,

and t he ot her capi t al mar ket s/ bond credi t or s, f r ust r at i ng t he

expectat i ons of credi t or const i t uenci es not par t i ci pat i ng i n t hi s

appeal and not bef or e t hi s panel . I t f ur t her woul d r equi r e

r evi si t i ng t he Ci t y s Long Range Fi nanci al Pl an ( LRFP) , whi ch

pr ovi ded subst ant i al evi dence t o suppor t t he f easi bi l i t y of t hePl an, consequent l y cal l i ng i nt o quest i on t he economi c

under pi nni ngs of t he Pl an and, ul t i mat el y, j eopar di zi ng t he

Ci t y s r ecover y. Mot i on t o Di smi ss, at 16. I n ot her wor ds,

26


27/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

r ever sal of t he Conf i r mat i on Or der woul d unl eash chaos bef or e t he

bankrupt cy cour t and make t he pr ocess f or r econst r uct i ng a

conf i r mabl e pl an of adj ust ment f or t he Ci t y unmanageabl e.

I n i t s Obj ecti on, Fr ankl i n assur es us t hat [ t ] he r el i ef

t hat Frankl i n seeks on appeal great er payment f r om t he Ci t y [ on

i t s unsecur ed cl ai m] woul d not i mpact any ot her const i t uency.

Obj ect i on, at 12. A f undament al pr emi se of t hi s appeal i s t hat

t he Ci t y can pay mor e t o Frankl i n wi t hout al t er i ng r ecover i es of

ot her cr edi t or s or ot her wi se unr avel i ng t he Pl an. Obj ect i on, at

1. We t ake Frankl i n at i t s wor d.

The Ni nth Ci r cui t has r epeatedl y emphasi zed t hat wher e a

credi t or i s appeal i ng conf i r mat i on of a pl an, but i s seeki ng

onl y money ( as i n t hi s appeal ) , i t i s gener al l y not i mpossi bl e

t o pr ovi de a r emedy. See, e. g. , I n r e Tr answest Resort Pr ops. ,

I nc. , 801 F. 3d at 1173 ( [ W] e see no r eason why, i f t he cour t

were t o devi se a r emedy that r equi r ed Reor gani zed Debt ors t o pay

Lender one dol l ar , f or exampl e, t he pl an woul d be undone. ) ; I n

r e Thor pe I nsul at i on Co. , 677 F. 3d at 883; Pl at i num Capi t al ,I nc. v. Syl mar Pl aza, L. P. ( I n r e Syl mar Pl aza, L. P. ) , 314 F. 3d

1070, 1074 ( 9t h Ci r . 2002) ( Even i f t he pl an has been

subst ant i al l y consummat ed, because Pl at i num s cl ai m i s onl y f or

monet ar y damages agai nst sol vent debt or s, t hi s i s not a case i n

whi ch i t woul d be i mpossi bl e t o f ashi on ef f ect i ve r el i ef . ) .

I n i t s f i ndi ngs i n suppor t of i t s deci si on t o deny t he St ay

Mot i on, t he bankr upt cy cour t consi dered what r emedi es mi ght beavai l abl e on r emand i n t hi s case:

The quest i on i s, coul d an [ appropr i at e] r emedy bef ashi oned t hat woul d not r equi r e r eel i ng back i n, f orexampl e, al l t he payment s t o r et i r ees, and I have no

27


28/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

di f f i cul t y per cei vi ng t he possi bi l i t y of any number ofl i kel y sol ut i ons . . . i n t he event of a r ever sal onappeal . Those sol ut i ons . . . most cer t ai nl y woul di nvol ve mor e money f or Frankl i n . . . . [ W] i t h i t sf i nances on mor e st abl e f oot i ng, i t s concei vabl e t hatsome addi t i onal f unds coul d be made avai l abl e t oFrankl i n i f t he appel l at e cour t put t he mat t er back t o

me, and t hat coul d be done wi t hout di st ur bi ng i n anyway the payment s t o r et i r ees; t hat i s, t he payment s t ot he ot her unsecur ed cr edi t or s.

Hr g Tr . J an. 20, 2015, at 20: 14- 18; 21: 3- 8.

Ar t i cl e XI I , Sect i on 3 of t he Pl an pr ovi des t hat t he

bankr upt cy cour t r et ai ns and has excl usi ve j ur i sdi ct i on t o

det er mi ne any and al l . . . cont est ed or l i t i gat ed mat t er s . . .

t hat ar e i nst i t ut ed by any hol der of a Cl ai m bef or e or af t er t he

Ef f ect i ve Dat e concer ni ng any mat t er based upon, ar i si ng out of ,

or r el at i ng t o t he Chapt er 9 case . . . . Ar t i cl e XI I , Secti on

8 of t he Pl an pr ovi des t hat t he bankrupt cy cour t r et ai ns and has

excl usi ve j ur i sdi ct i on t o consi der any modi f i cat i ons of t hi s

Pl an . . . . Ar t i cl e XI V, Sect i on B of t he Pl an pr ovi des:

I f any t er m or pr ovi si on of t hi s Pl an i s hel d by t heBankr upt cy Cour t or any ot her cour t havi ng

j ur i sdi ct i on, i ncl udi ng on appeal , i f appl i cabl e, t o bei nval i d, voi d, or unenf or ceabl e, t he Bankrupt cy Cour t ,i n each such case at t he el ect i on of and wi t h t heconsent of t he Ci t y, shal l have t he power t o al t er andi nt er pr et such t er m or pr ovi si on t o make i t val i d orenf or ceabl e t o t he maxi mum extent pr act i cabl e,consi st ent wi t h t he or i gi nal pur pose of t he t er m orpr ovi si on hel d t o be i nval i d, voi d, or unenf or ceabl e,and such t er m or pr ovi si on shal l t hen be appl i cabl e asal t er ed or i nt er pr et ed. Not wi t hst andi ng any suchhol di ng, al t er at i on, or i nt er pr et at i on, t he remai nderof t he t er ms and pr ovi si ons of t hi s Pl an shal l r emai ni n f ul l f or ce and ef f ect and shal l i n no way beaf f ect ed, i mpai r ed, or i nval i dat ed by such hol di ng,

al t er at i on, or i nt er pr et at i on.Pl an, at 58, 59 and 62. The conf i r med Pl an gi ves t he bankr upt cy

cour t al l of t he t ool s i t woul d need on r emand t o consi der a

modi f i cat i on t o the Pl an t o i ncr ease payment s t o Fr ankl i n on i t s

28


29/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

unsecured cl ai m.

The Ci t y ar gues t hat t hose provi si ons of t he conf i r med Pl an

ar e subj ect , among ot her t hi ngs, t o 904, whi ch pr ovi des t hat ,

Not wi t hst andi ng any power of t he cour t , unl ess t he debt or [ i . e. ,

t he Ci t y] consent s, . . . t he cour t may not , by any st ay, or der ,

or decr ee, i n t he case or ot her wi se, i nt er f er e wi t h ( 1) any of

t he pol i t i cal or gover nment al power s of t he debt or ; ( 2) any of

t he pr oper t y or r evenues of t he debt or ; or ( 3) t he debt or s use

or enj oyment of any i ncome- pr oduci ng pr opert y. I n other words,

on r emand, t he bankr upt cy cour t coul d not order t he Ci t y t o pay

any mor e money t o Fr ankl i n wi t hout t he Ci t y s consent .

That i s a gi ven i n l i ght of 904 s r equi r ement s. But 904

appl i ed t hr oughout t he pr ocess of negot i at i ons between t he Ci t y

and i t s cr edi t or s t hat r esul t ed i n t he set t l ement s i ncor por at ed

i n t he Pl an t hat r equi r ed t he Ci t y t o make mul t i - mi l l i on dol l ar

payment s to i t s cr edi t or s f r om i t s r evenues. We do not per cei ve

t hat f undament al st at ut or y l i mi t at i on as pr ecl udi ng a r emand t o

pr ovi de equi t abl e r el i ef i n t er ms of an adj ust ment of payment s t oFrankl i n. The Ci t y coul d consent or not t o such an adj ust ment ( s)

at var i ous poi nt s i n f ur t her negot i at i ons wi t h Fr ankl i n as i t

det er mi ned t o be appr opr i at e i n t he exer ci se of i t s sover ei gn

aut hor i t y.

Based on our r evi ew of t he recor d and t he Mot i on t o Di smi ss ,

t he Obj ect i on and t he Ci t y s r epl y, we concl ude t hat Frankl i n

at t empt ed to obt ai n a st ay of t he Conf i r mat i on Or der pendi ngappeal , but t he St ay Mot i on was deni ed, and the Pl an has been

subst ant i al l y consummated. To r everse t he Conf i r mat i on Or der at

t hi s poi nt woul d have a pot ent i al l y devast at i ng i mpact on

29


30/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

cr edi t or const i t uenci es whose set t l ement s wi t h t he Ci t y wer e

i ncor por ated i n t he Pl an and who ar e not appear i ng bef or e us i n

t hi s appeal . Rever si ng t he Conf i r mat i on Or der woul d knock t he

pr ops out f r omunder t he Pl an and woul d l eave t he bankr upt cy

cour t wi t h an unmanageabl e si t uat i on on r emand. Accordi ngl y, we

concl ude that Frankl i n s appeal of t he Conf i r mat i on Or der

general l y i s equi t abl y moot and must be di smi ssed.

However , we f ur t her concl ude that t o the extent Frankl i n

seeks t hr ough i t s appeal onl y a gr eat er payment on i t s unsecur ed

cl ai m, as i t concedes i n t he Obj ect i on, an ef f ect i ve r emedy i s

t heor et i cal l y possi bl e, and t hat cl ai m i s not equi t abl y moot .

Accor di ngl y, we wi l l pr oceed t o consi der t he i ssues t hat Frankl i n

r ai ses wi t h r espect t o t he payout on i t s unsecur ed cl ai m. 5

B. The r equi r ement t hat t he Pl an be pr oposed i n good f ai t h

Sect i on 1129( a) ( 3) , speci f i cal l y i ncor por at ed f or chapt er 9

cases i n 901( a) , r equi r es t hat a pl an of adj ust ment has been

pr oposed i n good f ai t h and not by any means f orbi dden by l aw. A

pl an i s pr oposed i n good f ai t h wher e i t achi eves a r esul tconsi st ent wi t h t he obj ect i ves and pur poses of t he [Bankrupt cy]

Code. I n r e Syl mar Pl aza, L. P. , 314 F. 3d at 1074, ci t i ng Ryan

v. Loui ( I n r e Cor ey) , 892 F. 2d 829, 835 ( 9t h Ci r . 1989) ; I n r e

5 We do not consi der Fr ankl i n s ar gument t hat t hebankrupt cy cour t er r ed i n i t s f or war d l ooki ng i nt er pr et at i on of 943( b) ( 3) , whi ch pr ovi des t hat al l amount s to be paid by t he

debt or or by any per son f or ser vi ces or expenses i n t he case ori nci dent t o t he pl an have been f ul l y di scl osed and ar er easonabl e. ( Emphasi s added. ) That i ssue has not hi ng t o dowi t h t he payment on Frankl i n s unsecur ed cl ai m pr ovi ded f or i nt he Pl an.

30


31/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

Madi son Hot el Assocs. , 749 F. 2d 410, 425 ( 7t h Ci r . 1994) .

Whet her t he Pl an was pr oposed i n good f ai t h i s a f act f i ndi ng i n

t he t ot al i t y of t he ci r cumst ances r evi ewed f or cl ear er r or .

Mar shal l v. Mar shal l ( I n r e Mar shal l ) , 721 F. 3d 1032, 1046 ( 9t h

Ci r . 2013) ( ci t at i ons omi t t ed) ; I n r e Syl mar Pl aza, L. P. , 314

F. 3d at 1074; St ol r ow v. St ol r ow s, I nc. ( I n r e St ol r ow s, I nc. ) ,

84 B. R. 167, 172 ( 9t h Ci r . BAP 1988) .

At t he out set , t he r ecor d r ef l ect s t hat t he Pl an was t he

pr oduct of extended negot i at i ons over a per i od of year s pr e- and

post pet i t i on r esul t i ng i n mul t i pl e col l ect i ve bar gai ni ng

agr eement s and set t l ement s wi t h cr edi t or const i t uenci es.

Frankl i n obj ect ed t o conf i r mat i on on good f ai t h gr ounds, ar gui ng

t hat t he Pl an was not pr oposed i n good f ai t h based on t he f act

t hat i t was r ecei vi ng essent i al l y a 1% payout on i t s unsecur ed

cl ai m when unsecur ed pensi on benef i t cl ai ms wer e not bei ng

al t er ed.

The bankrupt cy cour t began i t s good f ai t h anal ysi s wi t h i t s

concl usi on t hat Frankl i n s obj ect i on was based on a f aul t ypr emi se: The Pl an had a subst ant i al indirect i mpact on pensi ons

i n t hat 1) empl oyee compensat i on on whi ch pensi on benef i t s were

cal cul at ed had been r educed; 2) t he reduct i ons i n number s of Ci t y

empl oyees had a si gni f i cant ef f ect on pensi ons, as t her e wer e

f ewer peopl e ent i t l ed t o pensi ons i n t he f i r st pl ace; and 3)

pensi on benef i t s f or new Ci t y empl oyees had been reduced, wi t h

t hose r educt i ons i ncor por at ed i n t he Ci t y s col l ect i ve bar gai ni ngagr eement s.

[ T] he asser t i on t hat pensi ons are not af f ect ed by t he[ Pl an] i ncor r ect l y suggest s t hat empl oyees and r et i r eesar e not shar i ng t he pai n wi t h capi t al mar ket s

31


32/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

credi t or s. To t he cont r ar y, t he r eal i t y i s t hat t heval ue of what empl oyees and r et i r ees l ose under t he[ Pl an] i s gr eat er t han what capi t al mar ket s cr edi t or sl ose.

Amended Opi ni on, at 50. I t f ur t her t ook par t i cul ar not e of t he

obvi ousl y i nt ensi ve ar ms- l engt h negot i at i ons t hat occur r ed

dur i ng t he case over a per i od i n excess of t wo year s t o ar r i ve at

mat er i al pr ovi si ons of t he Pl an and r ef l ect ed t hat si gni f i cant

concessi ons have been made by vi r t ual l y al l of t he var i ous

par t i es i n i nt er est , not onl y on t he l abor si de but al so on t he

capi t al mar ket si de of t he equat i on. Hr g Tr . Oct . 30, 2014, at

36: 1- 9.

The bankrupt cy cour t al so not ed t hat one of t he f eatures of

t he agr eement s wi t h ot her capi t al mar ket cr edi t or s i s a

cont i ngent f und t hat i s avai l abl e i n a number of year s down t he

Pl an t hat i s desi gned t o pr ovi de f or addi t i onal payment i f t he

f i nances of t he Ci t y pr osper and . . . mor e t han 20 per cent of

t hat was r eser ved f or Frankl i n Funds i f i t wi shed t o t ake

advant age of i tbefore

the time of confirmation

. I t el ected nott o do t hat . . . . I d. at 36: 13- 20 ( emphasi s added) . Based on

t hose f i ndi ngs, t he bankrupt cy cour t f ound t hat t he Pl an had been

pr oposed i n good f ai t h and not by any means f orbi dden by l aw.

On appeal , Frankl i n ar gues t hat t he t r eat ment of i t s

unsecur ed cl ai m was unf ai r l y di scr i mi nat or y, and t he Ci t y

gerr ymandered t he Cl ass 12 general unsecur ed cl ass t o mi ni mi ze

Frankl i n s vot e agai nst conf i r mat i on of t he Pl an. Sect i on1122( a) pr ovi des t hat a pl an may pl ace a cl ai m . . . i n a

par t i cul ar cl ass onl y i f such cl ai m i s substant i al l y s i mi l ar t o

t he ot her cl ai ms . . . of such cl ass. Fr ankl i n s gener al

32


33/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

unsecur ed cl ai m was pl aced i n the cl ass of gener al unsecur ed

cl ai ms, Cl ass 12, consi st ent wi t h t he pl ai n l anguage of

1122( a) , and t he t r eat ment of i t s cl ai m was t he same as t he

t r eat ment of t he cl ai ms of al l ot her credi t or s i n Cl ass 12. The

Ni nt h Ci r cui t has concl uded t hat , [ T] he f act t hat a debt or

pr oposes a pl an i n whi ch i t avai l s i t sel f of an appl i cabl e

[ Bankrupt cy] Code pr ovi si on does not const i t ut e evi dence of bad

f ai t h. I n r e Syl mar Pl aza, L. P. , 314 F. 3d at 1075, quot i ng I n

r e PPI Ent er . ( U. S. ) , I nc. , 228 B. R. 339, 347 ( Bankr . D. Del .

1998) .

Mi ndf ul t hat we must af f i r m t he bankrupt cy cour t s f act

f i ndi ngs so l ong as any suppor t f or t hose f i ndi ngs can be f ound

i n i nf er ences t hat can be dr awn f r om t he r ecor d, we concl ude t hat

t he bankr upt cy cour t di d not cl ear l y er r i n i t s f i ndi ng t hat t he

Pl an was pr oposed i n good f ai t h and not by any means f orbi dden by

l aw.

C. Cl assi f i cat i on of cl ai ms

As not ed above, 1122( a) pr ovi des t hat cl ai ms can onl y bei ncl uded i n a par t i cul ar cl ass i n a r eor gani zat i on pl an i f t hey

ar e subst ant i al l y si mi l ar t o t he cl ai ms of ot her cl ass member s.

Sect i on 1123( a) ( 4) pr ovi des t hat t he t r eat ment f or each cl ai m i n

a par t i cul ar cl ass under a r eor gani zat i on pl an must be t he same

unl ess t he hol der of a par t i cul ar . . . cl ai m agr ees t o a l ess

f avor abl e t r eat ment . As wi t h 1129( a) ( 3) , 901( a)

speci f i cal l y i ncor por at es 1122 and 1123( a) ( 4) f or chapt er 9cases. The bankr upt cy cour t s f i ndi ng t hat a cl ai m i s or i s not

subst ant i al l y si mi l ar t o ot her cl ai ms, const i t ut es a f i ndi ng of

f act r evi ewabl e under t he cl ear l y er r oneous st andar d. Bar akat

33


34/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

v. Li f e I ns. Co. ( I n r e Bar akat ) , 99 F. 3d 1520, 1523 ( 9t h Ci r .

1996) , ci t i ng St eel case I nc. v. J ohnst on ( I n r e J ohnst on) , 21

F. 3d 323, 327 ( 9t h Ci r . 1994) .

Fr ankl i n s ar gument wi t h r espect t o cl assi f i cat i on of i t s

unsecur ed cl ai m st ar t s f r om t he pr oposi t i on t hat a pl an pr oponent

does not have unf et t er ed di scr et i on t o cl assi f y si mi l ar cl ai ms

separ at el y, r ecogni zi ng t hat equal i t y of t r eat ment among l i ke-

si t uat ed credi t or s i s one of t he pr i mar y obj ect i ves of t he

Bankrupt cy Code. See Begi er v. I nt er nal Revenue Ser vi ce, 496

U. S. 53, 58 ( 1990) ( Equal i t y of di st r i but i on among credi t or s i s

a cent r al pol i cy of t he Bankrupt cy Code. Accor di ng t o t hat

pol i cy, credi t or s of equal pr i or i t y shoul d r ecei ve pr o r at a

shar es of t he debt or s pr oper t y. ) . Fr ankl i n ci t es to us

aut hor i t i es f i ndi ng er r or i n t he separate c l assi f i cat i on of

cl ai ms wi t h s i mi l ar l i qui dat i on pr i or i t i es. See, e. g. , I n r e

Bar akat , 99 F. 3d at 1526; Phoeni x Mut ual Li f e I ns. Co. v.

Gr eyst one I I I J oi nt Vent ur e ( I n r e Gr eyst one I I I J oi nt Vent ur e) ,

995 F. 2d 1274, 1279 ( 5t h Ci r . 1992) ( [ T] hou shal t not cl assi f ysi mi l ar cl ai ms di f f er ent l y i n or der t o ger r ymander an af f i r mat i ve

vot e on a r eor gani zat i on pl an. ) ; Oxf or d Li f e I ns. Co. v. Tucson

Sel f - St or age, I nc. ( I n r e Tucson Sel f - St or age, I nc. ) , 166 B. R.

892, 898 ( 9t h Ci r . BAP 1994) . However , what Fr ankl i n f i nds

obj ect i onabl e i n t hi s case i s t hat i t s unsecur ed cl ai m was not

separ at el y cl assi f i ed but i nst ead was i ncl uded i n a cl ass of

gener al unsecur ed cr edi t or s wher e i t was out - vot ed.Cont r ar y t o Fr ankl i n s argument t hat t he bankrupt cy cour t

di sr egar ded st at ut or y pr ot ect i ons ( Appel l ant s Openi ng Br i ef ,

at 1) , t he bankr upt cy cour t began i t s anal ysi s of Frankl i n s

34


35/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

cl assi f i cat i on i ssues by quot i ng t he l anguage of 1122( a) . Hr g

Tr . Oct . 30, 2014, at 31: 11- 13. Gener al l y, 1122 al l ows pl an

pr oponent s br oad di scr et i on t o cl assi f y cl ai ms and i nt er est s

accor di ng t o t he par t i cul ar f act s and ci r cumst ances of each

case. I n r e Ci t y of Col o. Spr i ngs Spr i ng Cr eek Gen. I mpr ovement

Di st . , 187 B. R. 683, 687 ( Bankr. D. Col o. 1995) .

The bankrupt cy cour t f ound t hat t he capi t al mar ket s/ bond

cl ai ms wer e al l separ at el y cl assi f i ed, and t hat s appr opr i at e

because each one has i t s own uni que l egal r i ght s and st at us.

Hr g Tr . Oct . 30, 2014, at 31: 14- 15. Frankl i n char act er i zes t he

unsecur ed cl ai ms of ot her capi t al mar ket s/ bond cr edi t or s as

si mi l ar l y si t uat ed ( Appel l ant s Openi ng Br i ef , at 64- 65) , but

i t s argument gl osses over t he f act s t hat Assur ed, NPFG and Ambac

al l had di f f er ent col l at er al secur i ng at l east par t s of t he

Ci t y s r espect i ve obl i gat i ons t o t hem, and t he Ci t y ul t i mat el y

ent er ed i nt o gl obal set t l ement s wi t h al l t hr ee. [ A] s a gener al

r ul e each hol der of an al l owed cl ai m secur ed by a secur i t y

i nt er est i n speci f i c pr oper t y of t he debt or shoul d be pl aced i n asepar at e cl ass. 7 Col l i er on Bankrupt cy 1122. 03[ 3] [ c] ( Al an

N. Resni ck & Henr y J . Sommer eds. , 16t h ed. ) . By set t l i ng wi t h

t he capi t al mar ket s/ bond cr edi t or s ot her t han Frankl i n, t he Ci t y

avoi ded a number of pot ent i al l y pr ot r act ed, expensi ve and r i sky

val uat i on pr oceedi ngs wi t h r espect t o Ci t y pr oper t i es t hat

pr esent ed pr obl emat i c val uat i on i ssues, i ncl udi ng t he St ewar t

Eber har dt Bui l di ng, t he Ci t y s mai n pol i ce st at i on, t wo f i r est at i ons and a l i br ar y br anch. Thr ough a combi nat i on of

di f f er ent di sposi t i on ar r angement s f or t hei r col l at er al and

di f f erent payment t erms f or t he secur ed and unsecur ed port i ons of

35


36/51

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1819

20

21

22

23

24

2526

27

28

t he Ci t y s debt s t o each bond credi t or , i ncl udi ng di f f er ent

per cent age r ecover i es, separ at e cl assi f i cat i on of t he bond

cr edi t or cl ai ms made l egi t i mate busi ness and economi c sense. See

I n r e Bar akat , 99 F. 3d at 1526. The bankrupt cy cour t di d not

cl ear l y er r i n so f i ndi ng.

The bankrupt cy cour t f ur t her f ound t hat general unsecur ed

cl ai ms, i ncl udi ng not onl y t he Ret i r ee Heal t h Benef i t Cl ai ms and

Frankl i n s unsecur ed cl ai m but al so l eave buyout cl ai ms, t he

cl ai m of Mi chael A. Cobb and ot her mi scel l aneous unsecur ed

cl ai ms, wer e al l i n t he same spot and wer e pr oper l y i ncl uded i n

Cl ass 12. 6 Frankl i n gr udgi ngl y admi t s t hat t he Pl an s t r eat ment

of Cl ass 12 cl ai ms super f i ci al l y i s t he same [ f or al l cl ass

members] a meager payment of l ess t han one penny on t he

dol l ar , but ar gues t hat t r eat ment of Ret i r ee Heal t h Benef i t

Cl ai ms under Cl ass 12 cannot be anal yzed separ at el y f r om t he

t r eat ment of Cal PERS and pensi on pl an par t i ci pant s ( uni mpai r ed,

100% payment ) i n Cl ass 15. We di sagr ee f or t he f ol l owi ng

6 Frankl i n ar gues that because i t s unsecur ed cl ai m coul dhave been pai d at l east i n par t f r om r est r i ct ed PFF s, i t sunsecur ed cl ai m i s not subst ant i al l y si mi l ar t o t he Ret i r eeHeal t h Benef i t Cl ai ms f or 1122( a) pur poses. PFF s ar echarges l evi ed on new devel opment s t o def r ay a por t i on ofi nf r ast r uct ur e expenses. See Cal . Gov t Code 66000 et seq.Whi l e t he Ci t y pot ent i al l y coul d have used PFF s t o pay debtser vi ce t o Fr ankl i n, i t had no legal obl i gat i on t o use PFF s t opay Frankl i n, whi ch Frankl i n does not cont est . Accor di ngl y,Frankl i n s ci t at i ons t o Wel l s Far go Bank, N. A. v. Loop 76, LLC

( I n r e Loop 76, LLC) , 465 B. R. 525 ( 9t h Ci r . BAP 2012) ( wher e t hesubj ect cr edi t or had a t hi r d par t y guar ant ee sour ce of r ecover yf or i t s unsecur ed cl ai m) , and St eel case, I nc. v. J ohnst on ( I n r eJ ohnst on) , 140 B. R. 526 ( 9t h Ci r . BAP 1992) ( where t he subj ectcr edi t or had a secur ed cl ai m agai nst t he asset s of anot her ent i t yt o pay i t s unsecur ed cl ai m i n t he debt or s case) , ar e i napposi t e.

36

Date post:	01-Mar-2018
Category:	Documents
Upload:	scribd-government-docs
View:	215 times
Download:	0 times

In re: City of Stockton, California, 9th Cir. BAP (2015)

Documents