In October 2011, California passed AB 506 which established prerequisites before a municipality is eligible to file for protection under Chapter 9 of the United States Bankruptcy Code. Under AB 506, any entity seeking to file under Chapter 9 must first engage a mediator to negotiate with creditors for a 60-day neutral evaluation process, unless it declares that a “fiscal emergency” prohibits engaging in such a process. 

Mammoth Lakes and Stockton are the first instances in which this mediator process has been put into practice.  Both cases offer insight into the type of individuals likely to be chosen as neutral evaluators, how these neutral evaluators function and the efficacy of the AB 506 process.

Mammoth Lakes

Once it became clear that Mammoth Lakes would be unable to satisfy its outstanding debts, it sent a letter to interested parties requesting their participation in the neutral evaluation process.  About half of the interested parties agreed to participate, although Mammoth  Lakes Land Acquisition LLC (MLLA), Mammoth Lakes’ single largest creditor, chose to abstain.  District Court Judge David Coar was selected as the neutral evaluator.

Judge Coar has had a multi-faceted legal career as an associate professor and associate dean of DePaul University College of Law; a U.S. Trustee; a Bankruptcy Judge; and a District Court Judge for the District Court for the Northern District of Illinois.

The 60-day neutral evaluation period concluded without resolution, but the town was able to establish a framework for a potential plan of reorganization.

When Mammoth Lakes entered Chapter 9, the  presiding bankruptcy court judge appointed Judge Elizabeth Perris, Chief Judge of the Bankruptcy Court for the District of Oregon, to serve as judicial mediator to continue the pre-petition mediation process in parallel to the bankruptcy proceeding.  Within a month of filing, the mediation process resulted in a settlement between Mammoth Lakes and MLLA.  Because MLLA chose not to participate in the AB 506 process, it is unclear whether the pre-bankruptcy negotiations played any critical role in the settlement.

Stockton

Nearly all of the invited interested parties agreed to participate in Stockton’s neutral evaluation process and selected Judge Ralph Mabey to serve as mediator.  Like Judge Coar, Judge Mabey has had an accomplished and varied legal career.  In addition to serving as a United States Bankruptcy Judge, Judge Mabey is a professor at the Reuben Clark Law School, Brigham Young University and has served as Chair of the American College of Bankruptcy.

Like Mammoth Lakes, Stockton’s neutral evaluation process ended with a Chapter 9 filing, but this does not  mean that the process was a failure.  It may have set the groundwork for a more efficient bankruptcy process, providing an opportunity for the parties to clarify their positions and discover potential common ground.  Whether the pre-bankruptcy negotiations were effective in shortening the Chapter 9 process remains to be seen.

Judge Mabey has also appointed Judge Perris to be the judicial mediator in the Stockton bankruptcy case.  Like Mammoth Lakes, the mediation will run in parallel to the Chapter 9 bankruptcy proceeding.

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