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.