Ch. 9 Appeals May Open Doors for Distressed Cities

January 8, 2014 – In The News

Michael Sweet was quoted in the Law360 article "Ch. 9 Appeals May Open Doors for Distressed Cities." While the full text can be found in the January 8, 2014, issue of the Law360, a synopsis is noted below.

With the city of San Bernardino heading to the Ninth Circuit for a ruling on its Chapter 9 eligibility, and Detroit preparing for its own potential legal battle, bankruptcy attorneys say judges are likely to give the benefit of the doubt to the cities, not the pension funds challenging the bankruptcies.

Decisions by appellate courts on these matters will most likely provide guidance for lower courts on how strictly to apply eligibility requirements.

“It certainly would be a significant ruling if the Ninth Circuit did reverse [U.S. Bankruptcy] Judge [Meredith A.] Jury’s decision,” said Michael Sweet. “Not only would it be relevant in Stockton, but it could be — while not binding as to Detroit — it could be persuasive in an appeal of that eligibility decision.”

“Having said that, I think it’s unlikely that we’re going to see the judge overruled,” he said. “I think Judge Jury gave a well-reasoned decision, and I think that it will be hard for the circuit to find a basis to reverse.”

The judge overseeing Detroit’s bankruptcy recently held in his decision on the city’s eligibility that although it did not show that it negotiated in good faith with creditors, it was impractical to expect it to do so due to the large volume of creditors. According to Sweet, with good faith negotiations being difficult for cities with large numbers of creditors, “impracticability” has become a viable fallback argument for eligibility.