What If California Could File Bankruptcy?

David S. White
Principal of the Law Firm of David S. White & Associates, West Los Angeles, specializing in litigation, arbitration and mediation of real-estate-related disputes and litigation since 1977; www.dswlawyers.com

Just think: if California could seek the protection of the Bankruptcy Court, let’s assume that states can actually do this for a moment, a Bankruptcy Judge could then oversee the knawing, energy-sapping, Gordian Knot of a $42Billion deficit, crushing contractual and pension obligations, and the imminent lack of financing opportunities facing this state as our credit rating plummets. What could a Bankruptcy Judge do that our Legislature and Governor cannot?

For one thing, if California could file a Petition in Bankruptcy under Chapter 9, Title 11 of the United States Code, a chapter of the United States Bankruptcy Code available only to “municipalities,” it might rescue our state from financial oblivion when we have simply run out of options to restructure our debts. That is the essence of why our federal Constitution provides for Bankruptcy as a remedy in the first place – to give the Debtor another chance.

Orange County, California famously used Chap. 9 in 1994, when it made some really bad and risky investments that went south. Cleveland almost filed Bankruptcy under Chap. 9 in 1978 when it got into a spat with a local utility and Mayor Dennis Kucinich was in charge. Cleveland Trust Company, the long-time creditor of the city had required all of the city’s debts be paid in full, forcing the city into default, after news of Kucinich’s refusal to sell the city utility.

Kucinich hung tough and the dispute was resolved short of Bankruptcy. Cleveland, interestingly, had a problem similar to California’s where Cleveland’s municipal debts were just carried over from year to year, pending future payment, until Kucinich made a public announcement that he would not sell the City’s utility to absolve the debt, which had suddenly been called for payment.

If California could somehow stretch the reach of Chap. 9 of the Bankruptcy Code, an option written exclusively for “municipalities,” to include it, being a state, California too could file Chap. 9 Bankruptcy and seek the protection of the Bankruptcy Court to reorganize its financial affairs and debt structure, including California’s contractual obligations of all kinds. The Bankruptcy Judge would appoint a Trustee for the Debtor’s Estate – literally, all of California’s financial mess – one, big, fat whopper of a bankruptcy which would make the $650 Billion Lehman Bros. Bankruptcy case pending Back East, some now say the largest ever, look like your neighbors’ kids’ corner Lemonade Stand.

The Trustee would then be endowed by the Bankruptcy Code with the power to reject or accept or restructure existing contracts. This means that California, with the stroke of a Bankruptcy Judge’s pen, would be no longer bound by its pension, union, and other contractual obligations, leaving open lots of room for negotiation and giving this state back some serious leverage for bargaining its way out of the current financial disaster. It also means that our state Legislators and Governor would no longer have to agree on a budget because the Bankruptcy Judge will order the budget, and will keep doing so for many decades to come – a humbling comeuppance for those in Sacramento who have stopped being rational about the impending financial Trainwreck that California is speeding toward.

I know; I know – California is not a “municipality” and the Chap. 9 Bankruptcy Code language cannot be twisted that far – even by those Silver-Tongued-Devil-Creative-Lawyers. Not so fast there. “Municipality” has already been stretched to include: the Washington Public Power Supply System (WPPSS), who did it in 1983, when the idea of constructing planned nuclear reactors cratered – financially, that is.

The West Jefferson Amusement and Public Park Authority, owner of ‘VisionLand Park,’ now known as ‘Alabama Adventure Theme Park, 2002,’ did it when it did not have enough revenue to handle its debt. Pierce County (WA) Housing Authority did it in 2008, when residents’ mold lawsuits got the better of them. Even the tiny, but enterprising, town of Moffett, Oklahoma, which had more cows than people (Pop. 179, per 2000 Census), filed Chap. 9 Bankruptcy after the Oklahoma Attorney General prohibited local gendarmes from giving speeding tickets to people driving by on U.S. Highway 64 – Moffett had been generating revenue from running a speed trap so that it could manage some $200,000 in debts incurred by its former, profligate mayor.

Where there’s a will, there’s a way when it comes to the law, which is a living, dynamic thing that must evolve over time to meet civilization’s demands. The law is not a static thing – cases in the later 19th century were all about railroads, which dotted the landscape back then, but today play a much smaller role. When automobiles were first popularized in the early 20th Century, the law adapted quickly to provide Rules of the Road and to adjudicate disputes arising out of situations that previously had never existed. As famously written by Supreme Court Justice Benjamin N. Cardozo: ““Existing rules and principles can give us our present location, our bearings, our latitude and longitude. The inn that shelters for the night is not the journey’s end. The law, like the traveler, must be ready for the morrow. It must have a principle of growth.”

And, if the Courts hold that “municipality” cannot be stretched far enough to include the state of California, then perhaps Chap. 9 of the Bankruptcy Code can be amended to expand the definition of “municipality” to get this important job done and keep California’s ship of state from going the way of the Titanic. After all, if California was a separate country, our economy would be 7th largest in the world – opening the doors of the Bankruptcy Court for our 35 million residents and such a huge economy may be the only option we have left. What do you think?

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