UPDATE: Court Rejects CalPERS’ Efforts to Lift Stay In San Bernardino Case

In a ruling predicted by the Restructuring Review Blog last month, Judge Meredith A. Jury of the U.S. Bankruptcy Court for the Central District of California rejected arguments by CalPERS that the Bankruptcy Court should lift the automatic stay and require San Bernardino to pay pension obligations owed to the pension fund. In re City of San Bernardino, California, Case No. 12‑blk‑28006‑MJ, (Bankr. C.D. Cal. Dec. 21, 2012) (Docket No. 299).

Judge Jury focused specifically on the fact that lifting the stay would serve as an immediate “death knell” for San Bernardino’s ability to exit chapter 9. She also expressed concern that lifting the automatic stay would have a “snowballing” effect and necessitate consideration of numerous lift stay motions from similarly situated creditors.

The Court rejected a number of CalPERS’ arguments, holding, inter alia:

  • The City’s violation of applicable state labor law does not per se constitute cause to lift the automatic stay.
  • Administrative expense priority is not grounds to lift the automatic stay.  However, the Court held that to the extent CalPERS does have valid administrative claims, it would need to be paid in cash in full as part of any plan.

Judge Jury based her decision on practical considerations, including the effect that CalPERS’ enforcement action would have on the City’s ability to exit chapter 9.  While acknowledging that the City’s failure to contribute to the pension system could cast doubt on the actuarial soundness of CalPERS’ pension plans, the Court found that the effect on the City of lifting the automatic stay would be more immediate and devastating. Noting the City’s current financial straits, the Court found that granting the lift stay motion would further inhibit the City’s ability to pay its employees.

The Court declined to rule on several of the novel arguments raised by CalPERS, including that

  • CalPERS was acting consistent with its “police powers” which are not subject to the automatic stay.
  • CalPERS is safe harbored from the automatic stay under the protections for state actions afforded by section 903 of the Bankruptcy Code.

Thus, the Bankruptcy Court demurred on serious consideration of the balance between state and federal law for now, but appeared to suggest any valid administrative claim will need to be paid in full as part of any plan. While this conclusion is not controversial, it could put pressure on the City as part of any plan process to pay a claim that could grow as large as $20 million.