in re: city of stockton, california, 9th cir. bap (2015)
TRANSCRIPT
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7/25/2019 In re: City of Stockton, California, 9th Cir. BAP (2015)
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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.
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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) .
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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
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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
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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:
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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) :
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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 .
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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
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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
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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
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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
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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 .
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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
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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
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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
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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
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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 ,
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( 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 . ) .
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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) ,
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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
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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
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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
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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 :
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[ 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.
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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 .
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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,
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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