Franklin Appeals Stockton Bankruptcy Confirmation

Franklin filed an appeal of Stockton's bankruptcy confirmation this week.  I hope that my previous prediction that Stockton's plan would be rejected in Court will continue to be wrong. 

Franklin claims that Judge Klein's ruling included 4 errors:

1. It incorrectly interpreted the Best Interest of Creditors Test.

2. The classification of Creditors was discriminatory and unlawful.  [The City's plan grouped Franklin's claim "class 12" with the retiree health plan claim.]

3. The plan was proposed in Bad Faith.

4.  The City has not adequately disclosed payments and fees related to the case.

 

I find the second argument most compelling, and it is a big reason why I originally thought the Court would reject the plan.  Of course, I am not a lawyer.  According to Judge Klein, Stockton's classification scheme does not discriminate illegally, and the appellate court may agree.

 

Below is an excerpt on this topic from Franklin's appeal.

 

"Disparate And Discriminatory Classification And Treatment. Franklin also established that

the Plan’s classification scheme – in which Franklin’s unsecured claim was classified together with

part of the claims of City retirees (health benefit claims but not pension claims) and separately from

the claims of all of the City’s other bondholders – had only one purpose: to enable the City to avoid

the “cramdown” requirements of section 1129(b)(1) of the Bankruptcy Code. By improperly

gerrymandering Franklin’s unsecured claim into a class whose other members (the retirees) had

committed to vote to accept the Plan due to the promise of unimpaired pensions, the Plan violates the

strictures of section 1122(a) of the Bankruptcy Code. In re Barakat, 99 F.3d 1520, 1525 (9th

Cir. 1996) (plan violates section 1122 where “the classifications are designed to manipulate class

voting”) (quoting In re Holywell Corp., 913 F.2d 873, 880 (11th Cir. 1990)). The Court erred in

concluding otherwise.

The Court also erred in disregarding the disparate treatment of Class 12 claims and creditors

holding Class 12 claims. Specifically, the Court turned a blind eye to the direct linkage under the

Retirees Settlement between the retirees’ recovery in Class 12 and the City’s agreement to leave the

retirees’ pensions unimpaired. While nominally providing a sub-1% recovery to all claims within

Class 12, the Plan actually provides retirees with a recovery of somewhere between 53% and 70%

 

due to the fact that, as quid pro quo for the sub-1% “settlement” of Retiree Health Benefit Claims,

the City agreed to pay pensions in full. As many cases cited by Franklin establish, that treatment

violates section 1123(a)(4), which requires that claims and creditors in the same class receive the

same treatment. The Court erred by disregarding that authority.

Finally, the Court erred by failing to consider the undeniably unfair discrimination against

Franklin’s unsecured claim. Had the Court properly rejected the City’s gerrymandered classification

and disparate treatment of Franklin’s unsecured claim, it would have concluded that the sub-1%

payment on that claim unfairly discriminated against Franklin in comparison to the Plan’s 50%-70%

payment of retiree claims and 52% to 100% payment of other City bonds, including the wholly unsecured Pension Obligation Bonds. This legal error is likely to lead independently to reversal."

North San Joaquin Valley Regional Assessment Conference, November 19 in Modesto

On Wednesday November 19, the Business Forecasting Center is organizing a forum in Modesto to share the results of a project we have been working on for the past year with regional leaders and the general public.  In addition, to Dr. Pogue and myself with Powerpoints of data on the regional economic system, there will be panel discussions with leaders from inside the region, and some guests from the Bay Area and Sacramento to discuss how the North San Joaquin Valley fits within the mega-region and how collaboration between counties can work for economic development.

The half day event is free, but you must pre-register.  Click here for more information and registration.

Also, the Modesto Bee published a Q&A with me this morning related to the event.

Regional Differences in Valley Air Pollution Could Drive Changes in Regulatory Approach

The Fresno Bee article linked below features an important regional environmental-economic issue that is often under the radar.
Clovis and Bakersfield, with dirtiest of dirty air, complicate Valley’s pollution battle

Read more here: http://www.fresnobee.com/2014/11/08/4223458_clovis-and-bakerfield-with-dirtiest.html?rh=1#storylink=cpy

The article talks about air pollution hot spots that cause the entire Valley to be out of attainment with federal standards, and how air pollution regulators are looking to focus on pollution "hot spots".   The graph below, borrowed from a regional data brief from California Forward, illustrates the regional disparities.

Overall, the North San Joaquin Valley (San Joaquin, Stanislaus, Merced) has less than 1/3 the number of unhealthy air days as Fresno, Tulare, and Kern, and is actually better than Sacramento, and far better than LA and the Inland Empire.

The NSJV complains about the regulatory costs and poor image that comes from being associated being grouped with the South.  The South Valley complains that much of their pollution isn't local, but is blown in from the North.

Some clips from the Fresno Bee article

“If those places do not attain the standard, the Valley won’t attain,” district executive director Seyed Sadredin said. “We’re not talking about backing off on the pollution reduction in other parts of the Valley. But we’re seeing that these two hot spots need more attention.”To focus on Clovis and Bakersfield, officials will need to deal with regional politics, doubts from air activists and probably state and federal air agencies...

Historically, the politics have involved the Valley’s northern tier of counties — San Joaquin, Stanislaus and Merced. Their air is cleaner than counties to the south, but they feel they need to speak up for their share of the $150 million in federal and state grants the district gets each year.

The money helps replace diesel engines, fireplace inserts, gasoline-powered lawnmowers and pay for many other incentive-based cleanup programs. Thousands of old diesel engines and diesel-powered vehicles have been replaced with this kind of money.

Stanislaus County Supervisor Bill O’Brien, an air district board member, defends the northern counties.

“We can’t just take the money from one area and give it another,” said O’Brien, whose family owns O’Brien’s Market, based in Modesto. “If the hot spot is around Fresno or Bakersfield, then we might want to talk about different rules and different ways of raising money in those areas to spend there.”