STOCKTON MAMMOTH LAKES AND SAN BERNARDINO SEEK BANKRUPTCY PROTECTION

Two weeks ago, the city council of STOCKTON stopped bond payments, slashed employee health and retirement benefits and adopted a guerilla day to day, hand to mouth, survival budget. If this is happening, can bankruptcy be far behind? Sure enough, the city council announced that STOCKTON will become the nation’s largest city to seek protection under the bankruptcy code. STOCKTON actually follows in the footsteps of its neighbor, VALLEJO, which filed for bankruptcy reorganization in 2008 and has just recently successfully emerged from it. Bankruptcy for STOCKTON did not just suddenly come out of nowhere. The city has been negotiating with its creditors March 2012 under AB 506, a new California law requiring mediation before a municipality can file for reorganization of debt. In other words, mediated negotiations with creditors are necessary first steps required by law before the city can file bankruptcy. Mediation is where a third party, normally a retired judge, sits as a ‘coach’, to persuade both parties to arrive at an amicable settlement. However, the ‘mediator’ has no judicial or enforcement powers. The only ‘power’ he has to exercise is his wit and charm to massage a resolution that both parties agree to. If the parties do not agree, there is no resolution. I recently mediated a week before trial. For 3 hours, the mediator bounced back and forth between two rooms, one where my client and I were, and the other where the defendant and his lawyer were. After 3 hours, we did not come even close to a resolution. We decided to take our chances at trial where we expected a better chance of resolving the dispute.

Anyone who visits STOCKTON can see what the problem is. A new marina, high rise hotels and promenade surrounded by urban decay, a ghetto like atmosphere marred by violence with vast housing tracts of homes built at the city’s edges. This is a working class city of 300,000 with many areas that are blight stricken. The city attempted to reinvent itself with a lot of debt. When the housing bubble burst in several years ago, the city had the second highest rate of foreclosures in the country. Tax revenues went south and businesses, unable to turn a profit, closed in record numbers, further reducing revenues. The city manager compared the necessity of seeking bankruptcy protection to cutting off an arm to save the body. Well, let’s just say that cutting off a cancerous organ to save the body is a more appropriate comparison. If there is nothing wrong with the arm, why cut it off? Debt is the cancer that has to be removed to save the city through a bankruptcy surgery. All the mediation meetings must have affected the city manager’s ability to use the right metaphor.

Mammoth Lakes, a city of 7,000 also filed for bankruptcy two weeks ago. Those of you who snowboard and ski surely visit this city when it snows. It could not afford to pay a $43 million breach of contract judgment in a lawsuit brought by a developer. Not that the city did not want to pay the judgment, it just did not have the money to pay the amount. The city only has a little over $10 million in revenues. I mean the councilors will become homeless and mendicants just so the judgment can get paid. Every dollar collected by the city for the next four and a half years will have to be used to pay the judgment, and which too big to fail bank will take the risk of lending the city $45 million to continue operating? Their CEO, CFO and COO all have MBA and PHD’s from Harvard and Stanford business school so all of them should know that lending to this city is not risky enough. Lending to the city would fail the securitized collateral mortgage test which put all of us in this mess in the first place. Discussion on San Bernardino bankruptcy Part 2 will be released next week.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra,CA 91803.