United States: City Of Stockton: Bankruptcy Court Holds That Rule 9019 Does Not Apply To Chapter 9 Debtors

Last Updated: February 7 2013
Article by Mark C. Ellenberg, John J. Rapisardi, Lary Stromfeld, Douglas S. Mintz, Douglas P. Cohan and Thomas Curtin

Most Read Contributor in United States, October 2018

On January 30, 2013, Judge Christopher Klein of the Bankruptcy Court for the Eastern District of California held that, pursuant to section 904 of the Bankruptcy Code, a municipal debtor is not required to seek court approval to enter into settlements with and make settlement payments to prepetition creditors during the pendency of its chapter 9 case. The decision demonstrates the broad scope of section 904 and the free reign that a municipal debtor enjoys under that section during the pendency of its chapter 9 case. In re City of Stockton, Cal., Case No. 12-32118 (Bankr. E.D. Cal. Jan. 30, 2013).


The dispute at issue centered on a proposed settlement with a citizen who had a tort claim against the city's police department for alleged police brutality. The City agreed to pay that citizen $55,000 and, in exchange, the citizen would drop the lawsuit. In October 2012, the City filed a motion requesting that any settlement reached between a debtor and creditor need not be approved by the bankruptcy court.

The bondholders challenged the debtor's motion, arguing that Rule 9019 of the Federal Rules of Bankruptcy Procedure applies to chapter 9 and requires that a debtor seek court approval to enter into settlements with creditors. Among other things, the bondholders argued that chapter 9 "is not a one way street," that a debtor should be required to act in good faith during the pendency of its case, and that creditors should have a right to object to these settlements prior to the debtor's filing of its plan of adjustment. Absent such a policing mechanism, the bondholders contended that a municipal debtor would be free to pay its favored creditors prior to even proposing its plan of adjustment, and that unfavored creditors could potentially be left impaired under the plan of adjustment. According to the bondholders, such a result would be inequitable because the debtor could potentially spend all of its revenues to satisfy its favored creditors' claims.

CalPERS and the City both contended that Rule 9019 is not applicable because section 904 of the Bankruptcy Code expressly prohibits the court from interfering with the debtor's use of its property and revenues. Because a settlement payment necessarily involves the debtor's use of its treasury, the City and CalPERS maintained that a settlement and settlement payment would clearly fall within the purview of section 904. Put simply, the City argued that the Court had to "stay out of the city's business." CalPERS and the City also argued that creditors are protected by the provisions of chapter 9 that govern the confirmation of a plan of adjustment and, therefore, it would be premature to afford the creditors a right to object to the debtor's settlements.

Court's Decision

In ruling from the bench, Judge Klein stated that the dispute presented an "interesting, tricky question." The Court determined that the real issue in this case was whether section 904 permits Stockton to enter into settlements and make payments thereunder, notwithstanding the requirements of Rule 9019.

The Court concluded that rule 9019 is not applicable to chapter 9 debtors because of the jurisdictional limitations imposed on the court by section 904. Section 904 provides that, absent the consent of a chapter 9 debtor, a bankruptcy court "may not ... interfere with any political or governmental powers of the debtor ... [and] any property or revenues of the debtor." According to the Court, a settlement and settlement payment would fall within the purview of section 904 because it would necessarily involve the use of the debtor's property and revenues. Based on the plain language of section 904, the Court determined that a debtor may seek court approval and submit itself to the jurisdiction of the court. However, pursuant to section 904, the debtor is not required to seek approval to enter into settlements with creditors.

The Court held that it may only address the terms of a settlement in the context of confirming a plan of adjustment. The Court found that, if the terms of a settlement are indeed unfair, then it would likely cast into doubt the confirmability of the plan of adjustment. The Court pointed to certain provisions of the Code, which it viewed as a source of protection for the bondholders, including (i) section 943(b)(7), which requires that a plan be in the best interests of creditors and be feasible; (ii) section 1129(a)(2), which requires that the "proponent of the plan compl[y] with the applicable provisions of this title"; and (iii) section 1129(a)(3), which requires a debtor to file its plan in good faith. If the Court found that a prospective plan of adjustment violated any of these provisions, Judge Klein stated that he could reject the plan of adjustment and force the City to draft a plan that would be more acceptable. Furthermore, the Court noted that, if a plan of adjustment is not confirmable because the debtor entered into unfair settlements with other prepetition creditors, the bondholders would be permitted to seek dismissal of the case pursuant to section 930(a)(5).

Finally, the Court was not persuaded by the bondholders' policy arguments that they should have the right to dispute and adjudicate settlement terms prior to the confirmation of a plan of adjustment. At the hearing, the bondholders noted that there is a possibility that there will be little to no money left when the City's plan of adjustment is proposed. In such a scenario, there would be no purpose to objecting to the plan. The Court stated that this would be a compelling argument in chapter 11, but not in chapter 9. The Court noted that in chapter 11 there is a distinct possibility that a corporate debtor could be moribund, completely collapse and leave creditors with nothing to recover under a plan of reorganization. In contrast, the Court found that a chapter 9 debtor, particularly one as large as Stockton, would survive and would not collapse, as it can rely on a reliable source of revenue from its citizens.

Judge Klein indicated that a written opinion on this matter will be forthcoming.


While ultimately consistent with the plain language of the Bankruptcy Code, the decision highlights the tension between the Tenth Amendment safeguards incorporated into chapter 9 and the general equitable principles underpinning other provisions of the Bankruptcy Code. Given creditors' limited ability to challenge a municipal debtor's actions during the pendency of a chapter 9 case, the Court's decision emphasizes the importance of the good faith standards pertaining to eligibility and confirmation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions