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Pension exceptionalism doctrine questioned in Stockton bankruptcy

The City of Stockton, which is in California, has been under federal bankruptcy protection for approximately two years. It seems that it will exit soon, but for now, its pension system, Calpers, is holding up the process. Calpers is California’s public pension system for municipal employees. Previously, it had seemed that in bankruptcy, debts to Calpers could not be reduced according to an October 1, 2014 New York Times article. However, that viewpoint has been challenged. Who challenged the city’s debt to Calpers and why?

In municipal bankruptcies, as well as in some corporate bankruptcies, officials and lawyers attempt to restructure the debt the municipality owes so that it can exit the bankruptcy in safe economic standing. In order to make sure creditors are treated fairly, the law says that one creditor should not be treated differently as another similar creditor. Franklin Templeton Investments held $36 million of Stockton’s debt. After negotiations, the city was going to pay less than 1% of the debt owed to Franklin Tempelton. However, the mutual fund then argued that $4 million of their debt was secured debt, so the city needed to pay that $4 million. This argument comes as Calpers claims they have a $1.6 billion lien on Stockton. When a bank, a company or government has a lien on something, it means that they have secured debt, equivalent to debt on something physical that cannot be wiped out. Why does secured debt matter?

For a while, it looked like the Calpers pension fund would get special treatment and Stockton’s debt to the fund would not be reduced. Then, Franklin Templeton argued that their secured debt should not be treated differently and be paid less than one penny for each dollar owed while the pension fund would exit bankruptcy whole.

The bankruptcy just took a twist, however. The Bankruptcy Court Judge said that he would give a ruling on October 30th explaining if Stockton can exit bankruptcy or if further measures are necessary. He is studying Calpers, state and federal laws. He expressed that once Stockton declared bankruptcy, then its finances were under federal laws because bankruptcy is a federal right and a federally-administered right. That would mean that Calpers could not maintain a lien on the city, despite the fact that it had state laws to protect itself in situations like these. However, federal laws typically trump state laws. Thus, if the bankruptcy judge decides to interpret the laws this way, then Calpers could charge a $1.6 billion fee to the city to leave the program, but could not hold special status in its bankruptcy with a lien. Therefore, it will be very important for future decisions to see how the judge interprets the law. If pensions can be cut, then so can other creditor’s holdings. Pension funds may no longer be sacrosanct in bankruptcies, especially when there are other ways to fund a pension plan.

If you are considering filing for personal bankruptcy, then you should speak to a qualified bankruptcy lawyer. Whether you have credit card debt, medical debt or you are behind in a loan payment, you may qualify for a Chapter 7 bankruptcy, which wipes out most types of debt, giving you a fresh financial start. Jayson Lutzky is an attorney with over 31 years of experience. He offers free in person initial consultations at his Bronx, New York office. Call 718-329-9500 to set up a no obligation appointment. Visit www.MyNewYorkCityLawyer.com to learn more about the bankruptcy process.

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