San Bernardino Ruled Eligible to File for Bankruptcy Protection
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San Bernardino Ruled Eligible to File for Bankruptcy Protection

September 9, 2013

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After months of uncertainty, a judge in federal bankruptcy court gave the city of San Bernardino permission to file for bankruptcy help last week, according to a report from the New York Times.

According to sources, the ruling from Judge Meredith Jury establishes that the city is legally eligible to file for bankruptcy, which makes it more likely that the city will be able to cut legacy costs in order to recover its financial health.

The city initially tried to file for Chapter 9 bankruptcy last summer, saying that the burden of excessive pension obligations kept it from meeting its daily operational expenses.

But San Bernardino’s attempt to file bankruptcy was met with strong opposition from the California Public Employees’ Retirement System ("Calpers"), which is a very powerful collection of retired state workers.

Calpers and its attorneys argued that the city shouldn’t be able to treat retired workers as it treated other creditors. Indeed, many companies and municipalities turn to bankruptcy attorneys in order to cut legacy costs.

The opposition also argued that the city failed to provide proper paperwork to the bankruptcy court, and that San Bernardino officials had negligently ignored signs of financial distress for several years.

But Judge Jury said that past financial mistakes, even if true, didn’t preclude city officials from seeking bankruptcy help today, and also mentioned that a bankruptcy plan is effectively the city’s "only hope."

The judge also noted that all of the working-class city’s 10,000 creditors would be better off if the bankruptcy was allowed to proceed. She also said the "citizens of this city deserve a chance."

The stakes were very high in this decision, as San Bernardino, a city about 60 miles east of Los Angeles, is home to 240,000 residents and owes money to thousands of retired workers. But a similar dispute brewing in Detroit could dwarf this decision. =

In July, Detroit became the largest city in American history to file for bankruptcy help, but public unions in Michigan have challenged the city’s’ ability to file for debt relief.

A Michigan judge is scheduled to begin hearing oral arguments on the matter on September 18, and it’s almost certain that Detroit’s bankruptcy attorneys will cite the recent decision in California to support their claim.


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