All items from Bankruptcy and Restructuring Blog

By Adam McNeile
Conventional wisdom says that it is nearly impossible to obtain a discharge of student loan debt in bankruptcy. Indeed, Section 523(a)(8) expressly excepts student loans from discharge, unless the exception of such indebtedness from discharge would impose an undue hardship upon the debtor. But two recent developments may signal that this bedrock principle is eroding – i.e., (i) the Seventh Circuit's affirmance of a bankruptcy court's ruling that an impoverished but otherwise healthy woman's student loan debts were dischargeable, and (ii) the recent introduction of a Congressional bill that would make it easier to discharge privately issued student loan debt.
Seventh Circuit's Decision Allowing Dischargeability
In Krieger v. Educ. Credit Mgmt. Corp., 2013 U.S. App. LEXIS 7202 (7th Cir. Apr. 10, 2013), the court of appeals examined the facts and circumstances related to a $25,000 student loan obligation owed by Ms. Krieger, a 53-year-old woman, and concluded that the bankruptcy court did not err when it determined that Krieger qualified for a hardship discharge of her student loan.
In arriving at its conclusion, the court of appeals explained that Ms. Krieger "is essentially out of the money economy and living a rural, subsistence life[,]" and her circumstances were unlikely to change at any point in the future.

By Danielle Kennedy
Round one of the fight between the City of Stockton, California and its creditors is finally over. On April 1, 2013, Bankruptcy Judge Christopher M. Klein held that Stockton satisfied the eligibility requirements for a Chapter 9 debtor.
Back on June 28, 2012, Stockton filed a petition seeking to adjust its debts under Chapter 9 of the United States Bankruptcy Code.
Stockton’s bond insurers (who guaranteed payment of pension obligation bonds) objected to Stockton’s petition. The bond insurers (joined by the indenture trustee for the Stockton Public Finance Authority bondholders) argued that Stockton failed to satisfy its burden of demonstrating that it: (i) is insolvent, (ii) complied with its pre-filing negotiation obligation, (iii) negotiated in “good faith,” and (iv) filed its bankruptcy petition in good faith. After conducting discovery, the bond insurers filed supplemental objections claiming that the “evidence demonstrated that the City entered bankruptcy intending to spread losses disproportionately among a subset of creditors so that it could protect its largest creditor, CalPERS, and the related pensions of the very City employees making this improper decision.”

By Blanka Wolfe 
In a recent decision, In re Castleton Plaza, LP, 2013 WL 537269 *1 (Feb. 14, 2013), the Seventh Circuit held that the absolute priority rule – which requires that creditors be paid in full before equity holders receive anything on account of their equity interests under a plan of reorganization – applies equally to the “insiders” of a debtor. In so holding, the Seventh Circuit is accused of extending the scope of the absolute priority rule to the point that it threatens the ability of debtors to reorganize. However, the Court’s holding merely requires that any non-consensual reorganization plan that leaves creditors unpaid and proposes to distribute equity to insiders be subject to competition, as mandated by the U.S. Supreme Court in Bank of American National Trust & Savings Ass’n v. 203 North LaSalle St. P’ship, 526 U.S. 434 (1999). This competition requirement preserves the Bankruptcy Code’s priority scheme to ensure that creditors are paid before equity holders, and protects creditors from creative efforts by equity holders to funnel value to insiders in the face of creditor dissent.

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.