By Aaron Kleven
The bankruptcy of the largest U.S. city to file a chapter 9 bankruptcy petition has yielded a decision with serious implications for municipal creditors. Specifically, the United States Bankruptcy Court for the Eastern District of California overruled the objections asserted by retired employees of the City of Stockton, California and authorized the City to suspend the retiree’s health benefits during the City’s Chapter 9 case. Ass’n of Retired Employees of the City of Stockton, et al. v. City of Stockton, California (In re City of Stockton), 56 Bankr.Ct.Dec. 250 (Bankr. E.D. Cal.). Bankrutcy Judge Klein acknowledged the potential hardship to the retirees, but citing Section 904 of the Bankruptcy Code stated that the court has no power to interfere with the property or revenues of the debtor during Chapter 9.
Stockton joined a growing trend by filing for Chapter 9 protection on June 28, 2012. During course of its bankruptcy case, the City implemented a new budget, which featured significant spending cuts, including a unilateral reduction of existing retiree health benefits. In response, the Association of Retired Employees of the City of Stockton, along with other retirees, filed an adversary proceeding as a class action with the Bankruptcy Court, seeking to enjoin the suspension of the retiree’s health benefits.