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(Illinois) State Supreme Court says retiree health benefits are protected by constitution
Source: AFSCME Council 31 - Illinois
"In a major victory for state of Illinois and state university retirees, the Illinois Supreme Court has reversed a lower court’s dismissal of lawsuits challenging SB 1313, which effectively repealed promised retiree health care benefits. One of the suits was brought by AFSCME and its union partners – the IFT, the FOP and INA.
The court found that health care benefits for retired state and university employees are protected by the pension protection clause of the state constitution (Article XIII, Section 5) and cannot be diminished or impaired. The court sent the case back to Circuit Court for further proceedings.
“Giving the language of article XIII, section 5, its plain and ordinary meaning, all of these benefits, including subsidized health care, must be considered to be benefits of membership in a pension or retirement system of the State and, therefore, within that provision’s protections,” the court wrote in its opinion.
"The Supreme Court ruled today that men and women who work to provide essential public services – protecting children from abuse, keeping criminals locked up, caring for the most vulnerable and more – can count on the Illinois Constitution to mean what it says," Council 31 Executive Director Henry Bayer said. "Retirement security, including affordable health care and a modest pension, cannot be revoked by politicians.
"Unions representing public employees and retirees have stood virtually alone against political and corporate-funded attacks on retirement security," Bayer added. "Time and again we have urged legislators to respect the constitution they are sworn to uphold, and to work together with us to develop fair and constitutional solutions to the state's very real fiscal challenges. We remain ready to work in good faith with anyone to do so."
The opinion, and its validation of the pension protection clause, is an encouraging sign as AFSCME and other unions seek to overturn laws that would cut pension benefits for state of Illinois and state university retirees (SB 1 –Public Act 98-599) and City of Chicago retirees (SB 1922)."
Read more: http://www.afscme31.org/news/state-supreme-court-says-retiree-health-benefits-are-protected-by-constitution
This could have HUGE implications for Detroit, Michigan retirees.....if they can change their votes --- to NO on the Grand Bargain--- before July 11th.
Illinois Supreme Court Ruling on Pension Benefits Could Change the Landscape of Detroit's Grand Bargain Deal
"The Supremacy Clause. According to Cornell University Law School, the Clause confirms in, "Article VI, Paragraph 2 of the Constitution... that the federal constitution, and federal law generally, take precedence over state laws, and even state constitutions." Scary language when City of Detroit retirees in less than a week are facing a life altering decision.
The open question is if these former and current workers vested in Detroit's Pension Plans vote yes to a 4.5% cut to monthly annuity income, or face upwards of a 27% reduction or more by voting no.
Furthermore, U.S. Sixth Circuit Court Bankruptcy Judge Steven Rhodes could pull a "trump card" of sorts if retirees were to deny what is known as the "Grand Bargain" using a Austerity focus safety net -- Supremacy. Or will he?
The decision made on Thursday, July 3, 2014 over the course of a busy holiday weekend in S.E. Michigan was heard like an ant crawling across a floor. Pretty much, not at all. Yet, the Illinois Supreme Court ruling was ground shaking.
As another state facing what the austerity hyper-focus call a pension short-fall, a bi-partisan Illnois State Legislator voted to diminish a core benefit retirees via Unionized contracts approved in good faith.
Public Act 97-695 of 2012 allowed the Illinois to charge retired workers for health care insurance premiums, which many did not have to pay depending on how long they worked for the state.Legal challenges to the Public Act took nearly two years to land within Illinois' Supreme Court Docket.
After a thorough review in a 6 to 1 strong majority decision, the state court decided to affirm language in Article 14, Section 9 of Illinois Constitution -- setting a possible future U.S. Supreme Court Case in motion, whether or not City of Detroit Retirees vote yes or no to its' Grand Bargain plan."
READ MORE: http://www.reachoutjobsearch.com/2014/07/oped-llinois-supreme-court-ruling-on.html#ixzz36iK6ZG00
46 replies
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Thank you! 
Interesting. You forgot the rest of that quote. Specifically, how the 401K market was introduced by President RONALD REAGAN to transfer monies out of Public and Private Pensions (which were historically better protected from losses) than the 401K Marketplace. Also, how most Americans who are NOT educated in Economics or Finance have little to no idea how their 401K works -- with the exception of a Statement they might read or not 4 times a year.
Or how the 401K Marketplace needed revenue to "play" with from America's Consumers which they manipulate at will by insider trading to met profitability expectations of their highest shareholders. Finally, how the 401K marketplace in reality is a ponzi scheme which Generation X in particular will face SHOCK and AWE when they realize the monies they believed where in these "accounts" disappeared or have been greatly diminished.
Considering the FACT the 401K system is not protected from excessive losses and it is unknown if the Federal Government in 20-30 years will be able to cover any massive losses from 401K's via its' Pension Benefit Guaranty Corporation.....it's amazing you and folks like you defend a system that was started by a REPUBLICAN President to erode the Public and Private Pension Annuity System.
Meanwhile, continue if you must to reply as I have little to no time for the defenders of Austerity. Have a lovely day 
.
K&R!
OS
Think we would know a bit more than YOU about Detroit's Bankruptcy and Illinois is not. In fact, this important occurrence is clearly defined in the SECOND ARTICLE above. Open your eyes, scroll and CLICK (or better yet, don't bother since reading before commenting is not a strong suit)--- to learn facts and evidence, we are WELL aware of.
Have a nice day.....
Bankruptcy is a Federal Area of the law, but the US Supreme Court has ruled that since Municipalities are creations of the state they are in, they can ONLY file Federal Bankruptcy IF PERMITTED BY STATE LAW. If State Law does NOT give them permission, then Federal Municipality Bankruptcy is NOT open to them.
Chapter 9 of the Bankruptcy Code was originally Chapter IX of the previous Bankruptcy Act of 1897 (Chapter IX was added in 1934). That act was ruled to be Unconstitutional for it interfered with how a STATE can regulate its municipalities. In 1938 Congress re-passed Chapter IX, but this time made it clear that a municipality can only file if permitted under State Law. This was approved by the US Supreme Court and was retained when in 1976 when the Present Bankruptcy Code Replaced the Bankruptcy Act.
§ 904. Limitation on jurisdiction and powers of court
Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with--
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the debtor's use or enjoyment of any income-producing property.
Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with--
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the debtor's use or enjoyment of any income-producing property.
If the filing is NOT permitted under State law, the filing must be dismissed. This follows both Supreme Court Ruling on this issue and the decision of other Bankruptcy Courts.
In the case of Detroit the Michigan State Courts have ruled, that under Michigan Law, local municipality can NOT file Federal Bankruptcy for it is NOT permitted under Michigan law. The State Courts says this is true even if the State Agreed to Detroit filing the Bankruptcy.
For more details, see City of Stockton et al vs City of Stockton, a 2012 case out of California which goes into the history of Chapter 9. That Decision (a copy of which is below) ruled it could NOT issue a court order to continue Pension payments during the Bankruptcy (But also ruled that the Pension holders did have a claim, just that the Court could NOT enter a Court Order while a plan was bring written). It is clear under California law that California Municipalities can file Bankruptcy, thus that was NOT discussed in the Opinion. I include the opinion for its history of the Municipal Bankruptcy AND THE RULING BY THE US SUPREME COURT THAT A MUNICIPALITY CAN ONLY FILE BANKRUPTCY IF PERMITTED BY STATE LAW. It is still an open question in Michigan if under State Law local Municipalities can file FEDERAL MUNICIPAL BANKRUPTCY.
Side Note: Decision of the Courts of the US are NOT copy-writable, but HOW they are set up for printing, notes etc can be. Thus I tried to remove ALL such notes in the following opinion, leaving only what the Bankruptcy Judge wrote. Since the opinion is NOT copy written it can be printed in full. I have tried to remove all Lexis reference numbers (Which are Copywritable) but the text is free to the public:
In re: CITY OF STOCKTON, CALIFORNIA, Debtor. ASSOCIATION OF RETIRED EMPLOYEES OF THE CITY OF STOCKTON, a Nonprofit California Corporation, SHELLEY GREEN, PATRICIA HERNANDEZ, REED HOGAN, GLENN E. MATTHEWS, PATRICK L. SAMSELL, ALFRED J. SIEBEL, BRENDA JO TUBBS, TERI WILLIAMS, on Behalf of Themselves and Others Similarly Situated, Plaintiffs, v. CITY OF STOCKTON, CALIFORNIA, Defendant.
Case No. 12-32118-C-9, Adversary No. 12-2302
UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF CALIFORNIA
478 B.R. 8; 2012 Bankr. LEXIS 3660; 68 Collier Bankr. Cas. 2d (MB) 333; 56 Bankr. Ct. Dec. 250
August 6, 2012, Decided
August 6, 2012, Filed
KLEIN, Bankruptcy Judge:
The retired employees of the City of Stockton want this court to order the City to keep paying for their health benefits during this chapter 9 case. The difficulty is that 11 U.S.C. § 904 forbids the court from using any of its powers to "interfere with" property or revenues of a chapter 9 debtor. Accordingly, although the City's unilateral interim reduction of retiree health benefit payments may lead to tragic hardships for individuals in the interval before their claims are redressed in a chapter 9 plan of adjustment, the motion for injunctive relief must be DENIED. No relief being available and determining that this is an "arising in" core proceeding under 28 U.S.C. § 1334(b) and § 157(b)(2), the adversary proceeding will be DISMISSED.
Procedural Posture
This adversary proceeding was filed as a class action by the Association of Retired Employees of the City of Stockton ("ARECOS"
and eight retirees on July 10, 2012, together with an Application for Temporary Restraining Order ("TRO" or Preliminary Injunction or in the Alternative Relief From Stay.
The retirees contend they have vested contractual rights that are protected from impairment by the Contracts Clause of the United States Constitution, a similar clause in the California Constitution, and by other provisions of California law.
The complaint, the application for injunctive relief, and the supporting papers conspicuously omit reference to § 904, which operates as an anti-injunction statute and bars the court, without the municipality's consent, from interfering with its political or governmental powers, property or revenues, and use or enjoyment of income-producing property..
The court set the TRO/preliminary injunction hearing for July 23, 2012, and ordered the parties to brief the question of the effect of § 904 on this adversary proceeding. It further ordered the City to state whether, as permitted by § 904, it consents to this court resolving the interim health benefit payment dispute. Notice was also given that the court might dismiss the adversary proceeding on its own motion if it concludes that § 904 prevents all of the relief being sought.
At the July 23 hearing, the parties addressed all facets of the adversary proceeding, questions of jurisdiction, and judicial authority. The City did not consent to permit this court to resolve the interim health benefit payment dispute. This decision announces and explains the court's ruling.
Facts
The City of Stockton filed this chapter 9 case on June 28, 2012. The questions of the City's eligibility for chapter 9 relief and whether to order relief are the subject of a separate process progressing under a schedule fixed by the court.
The Stockton City Council adopted a budget for the Fiscal Year commencing July 1, 2012, that, by state law, must be balanced. The required balance was achieved by cutting costs, including unilaterally reducing retiree health benefits.
This adversary proceeding seeks: an injunction prohibiting the City from implementing the retiree health benefit reduction; a declaration that the changes are unlawful; and an order compelling the City to pay for the retiree health benefit for all retirees entitled to it as of July 1, 2012; and attorney fees.1
For purposes of the present analysis (but without deciding the question), the retiree health benefits are regarded as bargained-for and vested contractual rights.
Persons whose benefits have been reduced may file proofs of claim that must be addressed in a plan of adjustment under the standards prescribed in the Bankruptcy Code for confirming plans.
Discussion
Since the complaint relies on the supposed inability of the City to impair contracts, we begin with basic points of constitutional law and history that give context to the § 904 limitation on the court's authority. Then the focus shifts to how the plaintiffs' due process rights are protected, and thence to the jurisdictional and procedural status of this proceeding.
I
This adversary proceeding is premised at bottom on the Contracts Clause of the United States Constitution: "No State shall ... pass any ... Law impairing the Obligation of Contracts." U.S. Const., art. I, § 10, cl. 1.
Counsel clarified in open court that an immutable Contracts Clause is the centerpiece of plaintiffs' case. The first cause of action is: "Impairment of Contract — U.S. Constitution" and alleges that in "unilaterally changing the terms of the Retiree Health Benefit, the City impaired contractual obligations, in violation of Article I section of the United States Constitution and 42 U.S.C. § 1983." Complaint, ¶ 56. The other causes of action flow from that premise.2 The premise is flawed.
While the Contracts Clause is a key navigational star in the firmament of our Constitution and economic universe, it is subject to being eclipsed by the Bankruptcy Clause: "The Congress shall have Power to ... establish ... uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const., art. I, § 8, cl. 4.
Significantly, the Contracts Clause bans a state from making a law impairing the obligation of contract; it does not ban Congress from making a law impairing the obligation of contract. This asymmetry is no accident.
The Bankruptcy Clause necessarily authorizes Congress to make laws that would impair contracts. It long has been understood that bankruptcy law entails impairment of contracts. Sturges v. Crowninshield, 17 U.S.(4 Wheat.) 122, 191, 4 L. Ed. 529 (1819).
In Sturges, the Supreme Court reasoned that Congress "is expressly vested with the power of passing bankrupt laws, and is not prohibited from passing laws impairing the obligation of contracts, and may, consequently, pass a bankrupt law which does impair it; whilst the states have not reserved the power of bankrupt laws, and are expressly prohibited from passing laws impairing the obligation of contracts." Id.
In 1936, the Supreme Court noted that the "especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned — to change, modify, or impair the obligation of their contracts." Ashton v. Cameron Cnty. Water Improvement Dist. No. 1, 298 U.S. 513, 530, 56 S. Ct. 892, 80 L. Ed. 1309 (1936).
Again, in its 1938 decision validating the second municipal insolvency statute, the Court explained that the "natural and reasonable remedy through composition" is not available under state law "by reason of the restriction imposed by the Federal Constitution upon the impairment of contracts by state legislation" but the "bankruptcy power is competent to give relief." Hence, a state, by authorizing a municipality to file a case, legitimately "invites the intervention of the bankruptcy power to save its agency which the State itself is powerless to rescue." United States v. Bekins, 304 U.S. 27, 54, 58 S. Ct. 811, 82 L. Ed. 1137 (1938).
In other words, while a state cannot make a law impairing the obligation of contract, Congress can do so. The goal of the Bankruptcy Code is adjusting the debtor-creditor relationship. Every discharge impairs contracts. While bankruptcy law endeavors to provide a system of orderly, predictable rules for treatment of parties whose contracts are impaired, that does not change the starring role of contract impairment in bankruptcy.
It follows, then, that contracts may be impaired in this chapter 9 case without offending the Constitution. The Bankruptcy Clause gives Congress express power to legislate uniform laws of bankruptcy that result in impairment of contract; and Congress is not subject to the restriction that the Contracts Clause places on states. Compare U.S. Const. art. I, § 8, cl. 4, with § 10, cl. 1. Hence, the key premise of the centerpiece of this lawsuit rests on infirm constitutional ground.
The federal bankruptcy power also, by operation of the Supremacy Clause, trumps the similar contracts clause in the California state constitution. U.S. Const. Art. VI, cl. 2; Cal. Const. Art. I, § 9 ("A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed." ; Int'l Bhd. of Elec. Workers, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262, 268-70 (E.D. Cal. 2010), aff'g, 403 B.R. 72, 76-77 (Bankr. E.D. Cal. 2009). For the same reason, the plaintiffs' other theories also fall.
In sum, even if the plaintiffs' benefits are vested property interests, the shield of the Contracts Clause crumbles in the bankruptcy arena.
II
A delicate state-federal relationship of mutual sovereigns in which the Tenth Amendment looms large provides the framework for municipal bankruptcy and gives context to this dispute.
A
A pair of chapter 9 provisions honors state-federal balance by reserving certain state powers and by correlatively limiting the powers of the federal court: 11 U.S.C. §§ 903 and 904.
1
903 reserves to the state the power to control political and governmental powers, as well as expenditures:
§ 903. Reservation of State power to control municipalities
This chapter does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise, but —
(1) a State law prescribing a method of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition; and
(2) a judgment entered under such a law may not bind a creditor that does not consent to such composition.
11 U.S.C. § 903.
This reservation is limited by the Supremacy Clause. A state cannot rely on the § 903 reservation of state power to condition or to qualify, i.e. to "cherry pick," the application of the Bankruptcy Code provisions that apply in chapter 9 cases after such a case has been filed. Mission Indep. School Dist. v. Texas, 116 F.2d 175, 176-78 (5th Cir. 1940) (chapter IX); Vallejo, 403 B.R. at 75-76; In re City of Stockton, 475 B.R. 720, 2012 Bankr. LEXIS 3234, 2012 Westlaw 2905523 at *4 - *5 (Bankr. E.D. Cal. 2012) ("Stockton I" ; In re Cnty. of Orange, 191 B.R. 1005, 1021 (Bankr. C.D. Cal. 1996).
While a state may control prerequisites for consenting to permit one of its municipalities (which is an arm of the state cloaked in the state's sovereignty) to file a chapter 9 case, it cannot revise chapter 9. Stockton I, 2012 Bankr. LEXIS 3234, at *4 - *5. For example, it cannot immunize bond debt held by the state from impairment. Mission Indep. School Dist., 116 F.2d at 176-78.
2
Section 904 complements § 903. In view of the inability of a state to control or condition chapter 9 proceedings after the municipal case is filed with the state's permission, § 904 imposes limits on the federal court to assure that powers reserved to the states are honored:
Limitation on jurisdiction and powers of court
Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with —
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the debtor's use or enjoyment of any income-producing property.
11 U.S.C. § 904.
As the construction of § 904 is central to the instant matter, its history is important.
The statutory limit on the authority of the court that is now § 904 has been enacted four times. Each revision has reduced the latitude within which the court can act. The limit has come to be described as "absolute."
The overall goal is a balance that does not offend the Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States, or to the people." U.S. Const. amend. X.
B
The evolution of the limit on court authority in what is now § 904 — from 1934 to its current version — is instructive. Perceived defects in the limit were a basis for invalidating the first municipal bankruptcy law as unconstitutional. Ever since, Congress has keep a weather eye on the constitutionality problem.
1
The first enactment of the limit on court authority was in the first municipal bankruptcy law in 1934:
The judge ... (11) shall not, by any order or decree, in the proceeding or otherwise, interfere with (a) any of the political or governmental powers of the taxing district, or (b) any of the property or revenues of the taxing district necessary in the opinion of the judge for essential governmental purposes, or (c) any income-producing property, unless the plan of readjustment so provides.
Bankruptcy Act § 80(c)(11), Act of May 24, 1934, 48 Stat. 801 (emphasis supplied).
The Supreme Court disapproved the 1934 statute as an unconstitutional interference with the sovereignty of a state on two theories. First, structurally, municipal bankruptcy was an impossible contradiction of federalism. Second, the particular statutory terms might enable the federal government to impose its will on an unwilling sovereign state. Ashton, 298 U.S. at 532.
Although the Bekins Court repudiated Ashton's structural objection when validating the 1937 municipal bankruptcy act, the second Ashton rationale has endured and has influenced Congress always to confine its exercise of the bankruptcy power to measures that do not usurp state sovereignty.
2
Congress reacted to Ashton in 1937 by reenacting the municipal bankruptcy provisions with revisions designed to reduce the opportunity for excessive federal control over state sovereignty. Act of Aug. 16, 1937, 50 Stat. 653.
One significant change was deletion of the phrase "in the opinion of the judge" so as to make the concept of "property or revenues necessary for essential services" less dependant on the subjective view of a federal judge.
The revised provision, with that deletion and with shifts in nomenclature from "taxing district" to "petitioner" and "plan of arrangement" to "plan of composition," was otherwise unchanged:
The judge ... shall not, by any order or decree, in the proceeding or otherwise, interfere with (a) any of the political or governmental powers of the petitioner; or (b) any of the property or revenues of the petitioner necessary for essential governmental purposes; or (c) any income-producing property, unless the plan of composition so provides.
Bankruptcy Act § 83(c), Act of Aug. 16, 1937, 50 Stat. 657.
The Supreme Court validated the 1937 municipal bankruptcy statute in Bekins, reasoning that it was a cooperative enterprise by state and federal sovereigns that was carefully drawn so as not to infringe state sovereignty. Bekins, 304 U.S. at 51. It emphasized that a state "retains control of its fiscal affairs" and that "no control or jurisdiction over that property and those revenues of the petitioning agency necessary for essential governmental purposes is conferred" on the federal court. Id.
3
The third version of the statutory limit on court authority-was part of a modernization of former Bankruptcy Act chapter IX in 1976. Act of Apr. 8, 1976, Pub. L. 94-260, 90 Stat. 315.
The statutory limit changed in three important respects. First, the municipality could consent to exercise of otherwise-prohibited federal judicial authority. Second, it was clarified that the limitation applied to stays, including automatic stays. Third, the qualification "necessary for essential government services" was deleted from the ban on interference with property or revenues of the debtor.
This 1976 version, new Bankruptcy Act § 82(c), provided:
(c) Limitation. — Unless the petitioner consents or the plan so provides, the court shall not, by any stay, order or decree, in the case or otherwise, interfere with —
(1) any of the political or governmental powers of the petitioner;
(2) any of the property or revenues of the petitioner; or
(3) the petitioner's use or enjoyment of any income-producing property.
Bankruptcy Act § 82(c), Act of Apr. 8, 1976, 90 Stat. 316.
Congress made plain that it was preserving the strict limitation on judicial interference with political or governmental powers, property or revenue, or income-producing property based on Ashton and Bekins and their progeny: the Supreme Court and Courts of Appeals have "made it very clear that the jurisdiction of the court is strictly limited to disapproving or to approving and carrying out a proposed composition. The bill follows these holdings and retains the limitation on the court's power." H.R. Rep. No. 94-260, 94th Cong., 1st Sess., at 9-10, reprinted in 1976 USCCAN at 547-48.3
The deletion of the phrase "necessary for essential government services" from § 82(c) (2) aimed to broaden the limitation. The words "necessary" and "essential" invited unnecessary litigation. The "governmental services" language reflected an obsolete distinction between governmental and proprietary functions that the Supreme Court abolished in 1946. The phrase overlapped and confused the related ban on judicial interference with income-producing property.4
Third, the limitation, on interference with any income-producing property, seems to deprive the qualification "essential for necessary governmental services" of any effect. Under one, the court is denied the power to interfere with property necessary for governmental services; under the other, the court may not interfere with any income-producing property. There is conceivably a third category of property, non-income-producing property that is not necessary for essential governmental services, but the existence of that category does not warrant the potential for litigation that exists with the old language. In any case, no constitutional problem is anticipated, because the power of the court to interfere with the petitioner is further limited by the change.
H.R. Rep. No. 94-260, 94th Cong., 1st Sess., at 18, reprinted in 1976 USCCAN at 556 (footnote omitted).
4
The 1976 version was reenacted in 1978 as 11 U.S.C. § 904 with the addition of the preambular phrase "Notwithstanding any power of the court."
This additional limiting language forbids resort to a federal court's inherent or equitable powers. It reflects reinvigorated sensitivity in 1978 by Congress to the need to avoid unnecessary intrusions of state sovereignty in order to obviate the risk of invalidation by the Supreme Court.
That heightened concern stemmed, in part, from the Supreme Court's then-recent invocation of the Tenth Amendment to invalidate part of a labor statute. Nat'l League of Cities v. Usery. 426 U.S. 833, 842-52, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976), overruled, Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 531, 105 S. Ct. 1005, 83 L. Ed. 2d 1016 (1985).
Usery worried the drafters of the Bankruptcy Code. The House Committee noted, the "Usery case underlines the need for this limitation on the court's powers" and added that § 904 "makes clear that the court may not interfere with the choices a municipality makes as to what services and benefits it will provide to its inhabitants." H.R. Rep. No. 95-595, at. 398. Even though later overruled,. Usery is a reminder that the Tenth Amendment is a brooding presence over the chapter 9 landscape.
C
The message derived from this history regarding the power of this court to interfere with the City's actions regarding retiree health benefits compels the conclusion that § 904 prevents any federal court from doing what the plaintiffs request, regardless of whether the City's action is fair or unfair.
The concern has constitutional proportions. Chapter 9 passed constitutional muster on the basis that the federal bankruptcy power be exercised at the request of, but not at the expense of, the sovereign state in an exercise of cooperation among sovereigns. Bekins, 304 U.S. at 51-53 (here "we have cooperation to provide a remedy for a serious condition in which the States alone were unable to afford relief." .
As a state-federal cooperative enterprise conducted in delicate circumstances in which state sovereignty must be respected, Congress has been sedulous to assure that the bankruptcy power not be used in municipal insolvencies in a manner that oversteps delicate state-federal boundaries.
The entire structure of chapter 9 has been influenced by this pervasive concern to preserve the niceties of the state-federal relationship. The foundation involves multiple levels of consent. No chapter 9 case can be filed other than a voluntary case filed by the municipality with the consent of the state. 11 U.S.C. § 109(c)(2). The municipality consents by filing the voluntary case. 11 U.S.C. § 301, incorporated by § 901(a). Consent is implicit in the restriction that only the municipality can propose a plan of adjustment. 11 U.S.C. § 941. Another consent is the express consent recognized in § 904 that the City has declined to give in this proceeding. 11 U.S.C. § 904.
Other provisions further the Constitutional restriction against encroaching on state sovereignty. For example, the Bankruptcy Code's restrictions on use, sale, or lease of property do not apply in chapter 9. Compare 11 U.S.C. § 901(a), with id. § 363. Nor is there provision for a trustee or examiner in a chapter 9 case. Compare 11 U.S.C. § 901(a), with id. § 1104.
In the overall construct, § 904 performs the role of the clean-up hitter in baseball. Its preambular language "otwithstanding any power of the court, ... the court may not, by any stay, order, or decree, in the case or otherwise ..." is so comprehensive that it can only mean that a federal court can use no tool in its toolkit — no inherent authority power, no implied equitable power, no Bankruptcy Code § 105 power, no writ, no stay, no order — to interfere with a municipality regarding political or governmental powers, property or revenues, or use or enjoyment of income-producing property. 11 U.S.C. § 904. As a practical matter, the § 904 restriction functions as an anti-injunction statute — and more.
In short, the § 904 limitation on the court's authority is absolute, with only the two exceptions stated in § 904: consent; and provision in a plan of adjustment (which can only be proposed by the municipality). 6 Collier on Bankruptcy ¶ 904.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011) ("Collier" .
III
The plaintiffs contend that § 904 does not apply and does not prevent the relief sought. They say they challenge only the role of the City as employer, not as governmental regulator, and that neither § 904(1) nor § 904(3) is implicated. While that argument is weak, § 904(2) is dispositive.
A
Conceding that the § 904(2) prohibition on interfering with the debtor's "property or revenues" poses an obstacle, plaintiffs argue5 that their relief would be an innocuous preservation of the status quo that would not directly interfere with City property or revenues, and would not indirectly interfere with revenues, because the retirees' rights to the health benefit is fixed and immutable. That argument is not persuasive.
Coercively preserving a status quo that entails payment of money from the City treasury interferes with the City's choice to suspend such payments. The contents of the City treasury are "property or revenues" within the meaning of §. 904(2).
It is impossible to envision how granting the plaintiffs' prayer for an "order compelling the City to maintain the Retiree Health Benefit with respect to ARECOS members and Class Plaintiffs and all other City of Stockton retirees entitled to the Retiree Health Benefit as of July 1, 2012," and to pay attorney's fees, would not require the payment of money from the City's property or revenues. In fact, payment would be required.
It follows that the relief sought is barred by § 904(2) as an interference with the City's "property or revenues."
B
That a TRO was issued in the Orange County chapter 9 case does not compel the conclusion that a TRO is permitted here. The TRO in that case required that certain employees who had nominally been "permanently" laid off instead be treated as "temporarily" laid off, and required the parties to meet and confer to work out their differences. Orange Cnty. Emps. Ass'n v. Cnty. of Orange (In re Cnty. of Orange), 179 B.R. 177, 185 (Bankr. C.D. Cal. 1995) ("Orange County" .. It does not appear the "property or revenues" were being interfered with; it also was noted that the parties thereafter settled apparently before a monetary consequence ensued. Id. at 185, n.21.
Another distinction is that the Orange County TRO related to the process of assuming or rejecting unexpired collective bargaining agreements as § 365 executory contracts. 11 U.S.C. § 365; NLRB v. Bildisco & Bildisco, 465 U.S. 513, 521-23, 104 S. Ct. 1188, 79 L. Ed. 2d 482 (1984) ("Bildisco" ; Orange County, 179 B.R. at 183.
1
The formal statutory analysis is as follows. The § 365 executory contract provisions apply in chapter 9 cases by virtue of § 901(a). 11 U.S.C. § 901(a), incorporating id. § 365.
Sovereign immunity of a municipality is abrogated as to § 901. 11 U.S.C. § 106(a)(1).6 All chapter 1 provisions, including § 106(a)(1), apply in chapter 9. 11 U.S.C. § 103(f).7
Since § 901(a) lists sections from chapters other than chapters 1 or 9 that apply in chapter 9 cases, including § 365, it follows that the municipality's sovereign immunity is abrogated with respect to executory contracts.
In other words, the municipality's voluntary act of filing a chapter 9 case triggers two relevant consequences. First, the municipality consents, within the meaning of § 904, to interference by a federal court as to the Bankruptcy Code provisions that apply in chapter 9 cases. Vallejo, 403 B.R. at 75-76; In re Cnty. of Orange, 191 B.R. at 1021. Second, sovereign immunity is voluntarily abrogated to the extent provided in § 106.
In short, the naked fact of the issuance of a TRO in Orange County regarding a § 365 issue did not necessarily offend § 904, even though the rationale for that TRO seems dubious.8 The county consented under § 904 to federal judicial interference in the form of assessing the merits of § 365 assumption or rejection of executory contracts and waived its sovereign immunity by virtue of § 106 regarding executory contracts.
2
Here, the retiree health benefits are not executory contracts. Performance does not remain due to some extent, on both sides — there are no reciprocal obligations with performance due by both parties. Bildisco, 465 U.S. at 522 n.6.
The retirees insist they have performed their side of the bargain: "The City already exercised its political discretion to provide the Benefit and accepted the full performance by the Retirees of their services to the City to earn the Benefit." Supplemental Brief, at 3. And, "Each of the ARECOS members and Class Plaintiffs have satisfied their obligations under their respective contracts with the City." Complaint, ¶ 60.
Under any definition of a § 365 executory contract, the plaintiffs' prior full performance means they have no executory contract. So viewed, the Orange County TRO regarding an executory contract is inapposite to the question of the effect of § 904(2) on the City's interim cost cutting.
To the contrary, and it is hereby so held, § 904(2) prevents this court from granting the relief requested in this proceeding.
3
Plaintiffs' counsel agreed at oral argument that plaintiffs want the court to impose, by way of its injunctive power, the equivalent of the provisions of Bankruptcy Code § 1114 relating to "Payment of insurance benefits to retired employees" in chapter 11 cases even though § 1114 is not specifically made applicable in chapter 9 cases. 11 U.S.C. § 1114.
Section 1114 was enacted in 1988 to provide procedures and standards for modifying, retiree insurance benefits during a chapter 11 case. The basic rule for chapter 11 is that retiree insurance payments must continue to be made timely during the case unless and Until the court approves a modification. 11 U.S.C. § 1114(g). Modification requires compliance with a prescribed negotiation process and prescribed standards to be applied by the court. 11 U.S.C. §§ 1114(f)-(h).
The retiree insurance benefits provisions were modeled on § 1113, which was adopted in 1984 following the Supreme Court's Bildisco decision that collective bargaining agreements are executory contracts eligible for rejection under § 365 and that they may be unilaterally rejected or modified before formal rejection is approved by the court. Bildisco, 465 U.S. at. 521-27. New § 1113 imposed rejection procedures and standards for chapter 11 cases that were more stringent than the rejection standards prescribed in Bildisco.
But neither § 1113 nor § 1114 is designated in § 901(a) as applicable in chapter 9 cases. 11 U.S.C. § 901(a) (omitting § 1113 and § 1114).
Contentions that the absence of § 1113 from § 901(a) should be disregarded as an accident and that courts should apply § 1113 in chapter 9, instead of the Bildisco standards, have regularly been rejected. The judicial consensus is that Bildisco controls rejection of collective bargaining agreements in chapter 9 cases. Vallejo, 432 B.R. at 270-72, aff'g Vallejo, 403 B.R. at 77-78; Orange County, 179 B.R. at 183. This court agrees.
The delicate constitutional balance that has loomed large over municipal bankruptcy ever since Ashton further cautions against taking liberties to cure perceived legislative mistakes. In chapter 9, where Congress has been careful to observe the delicacies of the state-federal relationship, it is particularly appropriate to leave to Congress, not the courts, the decision to revise § 901(a).. See Vallejo, 432 B.R. at 272.
The logic focused on the structure of chapter 9, and the attendant importance of § 901(a) in the context of Congress taking care not to overstep the Tenth Amendment constraint, applies as much to § 1114 as to § 1113. The omission of § 1114 from § 901(a) warrants the conclusion, for the same reasons as articulated in the Vallejo and Orange County decisions, that § 1114 does not apply in chapter 9 cases.
To be sure, this conclusion appears to leave a gap in chapter 9 cases in the sense that some retiree insurance benefits are protected from modification by Bildisco's § 365 rejection standards because they are included in collective bargaining agreements, while others are not. In reality, any gap is less than meets the eye in view of the Bildisco holding that it is not an unfair labor practice for a debtor unilaterally to modify a collective bargaining agreement during the interval between the filing of the case and the formal rejection of the executory-contract. Bildisco, 465 U.S. at 527-34. In other words, regardless of whether the retiree insurance benefit is part of an executory contract or not, the benefit can be modified or suspended during the pendency of the case.
IV
The argument that the City has imposed a plan of adjustment without meeting fundamental requirements of due process, and in circumvention of plan confirmation standards, relies on the false premise that the City's so-called "Pendency Plan" adopted for use during the chapter 9 case is a plan of adjustment.
A
The pendency plan is not a plan of adjustment. A formal plan of adjustment must be filed as such, either with the petition or at such later time as the court fixes. 11 U.S.C. §941. No plan was filed with the petition in this case. No plan has yet been filed. This court has not yet fixed a time for filing such a plan. If and when such a plan is filed, the confirmation of the plan will be considered under the standards prescribed by the statute. 11 U.S.C. § 943.
Rather, the pendency plan is an interim survival mechanism that enables the financially embarrassed municipality, in the political and governmental judgment of its governing body, to continue to provide what it deems to be essential governmental services during the interval between the filing of a chapter 9 case and the confirmation of a plan of adjustment.
Suspending payment of various obligations during a case under the Bankruptcy Code is a routine aspect of the reorganization process. When the Supreme Court clarified in Bildisco that it is not an unfair labor practice for a chapter 11 debtor unilaterally to implement changes to a collective bargaining agreement — i.e. unilaterally to breach it — before the bankruptcy court acts on a § 365 motion to reject the contract, it necessarily determined that such unilateral changes do not offend due process. Bildisco, 465 U.S. at 527-34. The rationale is that upon filing a chapter 11 case, the debtor becomes "empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing." Id. at 528.
Unilaterally-modified contracts are dealt with, as the Supreme Court explained, through conventional bankruptcy law provisions that entitle the victim of a breach of a prepetition obligation to file a proof of claim that will be dealt with in the ordinary claims process and receive the priority provided by the Bankruptcy Code. Id. at 530 n.12. It is most unlikely that the Supreme Court, after having impliedly endorsed the process in Bildisco, would regard it as inconsistent with due process.
This analysis applies in chapter 9 as § 365 applies in municipality cases. 11 U.S.C. § 901(a), incorporating id. § 365.
The plaintiffs have prepetition claims that, under their own theory of the case, are not executory contracts as they fully performed their bargains before bankruptcy. As noted, they may file proofs of claim on account of their retiree health benefits that will be addressed and valued during the claims adjustment process. 11 U.S.C. §§ 501-02. In addition, any claim that appears on the list of creditors that the City must file is deemed "filed," and hence "allowed," if not listed as disputed, contingent, or unliquidated, 11 U.S.C. § 925.
The plan of adjustment, when it is filed, will be confirmed only if it meets the pertinent statutory confirmation standards. 11 U.S.C. § 943. The plaintiffs will be entitled to accept or reject the plan. 11 U.S.C. § 1126(a), incorporated by § 901(a); Fed. R. Bankr. P. 3018. They also will be entitled to object to confirmation. Fed. R. Bankr. P. 3020(b).
The right to present claims, have them evaluated, to accept or reject the plan, and to object to confirmation is all the process that is due.
B
The real remedy for the plaintiffs lies in participating in the process of formulating a plan of adjustment. As this court has previously explained, the lessons of recent chapter 9 cases teach that successful plans of adjustment are most likely to be achieved by the parties in interest all coming to the table and participating in bona fide negotiations. Stockton I, 2012 Bankr. LEXIS 3234, 2012 Westlaw 2905523 at *9. Every issue that is resolved by agreement will enhance the prospects for a successful plan of adjustment.
To that end, the court has appointed a judge as standing mediator for this case to facilitate a negotiated solution.
In short, even if injunctive relief were permitted, this court is persuaded that injunctive relief is neither necessary nor appropriate to vindicate the rights of the plaintiffs.
V
Having concluded that injunctive relief is not available as a matter of law and, in any event, is not necessary and not appropriate, the alternative of relief from the automatic stay under 11 U.S.C. § 362 warrants discussion.
The City is correct that plaintiffs' request for stay relief is procedurally incorrect. Stay relief is a matter of general interest to all creditors (not merely the parties to this adversary proceeding) that needs to be presented by motion in the parent chapter 9 case with appropriate notice. See Fed. R. Bankr. P. 4001(a) & 9014. If the court were inclined to grant the relief, it would insist upon procedurally proper notice.
Nevertheless, the court is obliged to construe the rules of procedure so as to secure the just, speedy, and inexpensive determination of every case and proceeding. Fed. R. Bankr. P. 1001. Here, analysis of why relief from the automatic stay is not warranted may obviate a subsequent wild goose chase.
The logic of plaintiffs' request is that, if the bankruptcy court does not have authority to interfere with the City's property or revenues by virtue of § 904, then they should be allowed to go to a forum that does have such authority — i.e., the California state courts. Sometimes, as with a personal injury tort action, that is a good solution. But here it would be fundamentally at odds with basic policy underlying chapter 9.
The core of a chapter 9 case is adjustment of the debtor-creditor relationship. The plaintiffs here are creditors. They want two things: a judgment that their health benefit claims are valid and an order compelling the City to maintain payments for those benefits. Those issues are central to the debtor-creditor relationship to be dealt with, along with every other unhappy creditor, in the collective chapter 9 proceeding.
No separate judicial proceeding is needed to determine the validity of prepetition claims. In this case, a filed proof of claim will be "deemed allowed" unless someone objects, as will a claim listed by the City without being designated as disputed, contingent, or unliquidated. 11 U.S.C. §§ 502(a) & 925.
Any objection to a claim will be litigated in this court under established procedures that honor due process without extensive and expensive satellite litigation. Fed. R. Bankr. P. 3007. Resort to state court would be wasteful of everyone's resources and introduce unnecessary delay and confusion.
For a plan of adjustment to be confirmed as to a class of claims that has not accepted the plan, it must be "fair and equitable" and "not discriminate unfairly." 11 U.S.C. § 1129(b)(1), incorporated by id. § 901(a).
If no plan is confirmed, the case must be dismissed in which event the parties are restored to the prebankruptcy status quo. 11 U.S.C. § 349, incorporated by id. § 901(a).
As to the question of a state court compelling the City to pay for benefits during the chapter 9 case, there is another jurisdictional quandary. All City property, wherever located, as of the commencement of the case is in the exclusive jurisdiction of the United States District Court of which this bankruptcy court is a unit. 28 U.S.C. §§ 151 & 1334(e)(1). This exclusive jurisdiction could make it difficult to enforce a state-court order requiring payment, and raises fascinating jurisprudential complexities that are best left to another day.
The timing of payment on account of claims is important to the plaintiffs. The sooner there is agreement regarding their treatment in the collective chapter 9 case, the sooner they will salvage something out of this financial predicament.
Accordingly, the bankruptcy policy of favoring a collective proceeding to work out a comprehensive solution to municipal insolvency counsels against permitting nonbankruptcy litigation that would materially interfere with the reorganization process.
The request for relief from stay will be denied. If the request were to be revived, it would have to be presented in a procedurally correct manner.
VI
Having established that there will be no TRO, no injunction, and no relief from the automatic stay, as well as having established that the claims-adjudication procedure within the collective chapter 9 case is adequate to establish and vindicate the legitimate interests of the plaintiffs, the question becomes what is left of this adversary proceeding?
The answer is: nothing is left of the adversary proceeding.
The court gave notice that "if this court concludes at or after the July 23, 2012, hearing that 11 U.S.C. § 904 denies jurisdiction to any court exercising authority over the chapter 9 case of the Defendant, then this adversary proceeding will be dismissed on the court's own motion." Order Setting Hearing and Mandatory Briefing Schedule at 2-3. The phrase "any court" refers to any federal trial or appellate judge.
The § 904 question having been answered with a conclusion that the court lacks authority, and it being plain that nothing is left in controversy in this adversary proceeding that is not more appropriately resolved through conventional bankruptcy procedures, the adversary proceeding is appropriate to dismiss.
VII
The final question is whether this court is permitted to enter an order dismissing the adversary proceeding. The answer turns on a two-step analysis focused on the subject-matter jurisdiction statute, 28 U.S.C. § 1334, and then on bankruptcy's judicial administration allocation, 28 U.S.C. § 157.
A
Since who the plaintiffs are and what they want influences the analysis at each level, the starting point is to clarify their status in the bankruptcy case.
The plaintiffs are "creditors" who have "claims" against the debtor. Specifically, a "creditor" includes a person with a "claim" against the debtor that arose before the order for relief. 11 U.S.C. § 101(10)(A).9
The plaintiffs' asserted right to require the City to continue to pay for health benefits based on their prebankruptcy contractual rights are "claims." 11 U.S.C. § 101(5).10
B
Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334(b), which confers jurisdiction on the district court over "all civil proceedings arising under title 11, or arising in or related to cases under title 11."
This bankruptcy court exercises § 1334 jurisdiction as a "unit" of the district court of which this bankruptcy judge is a "judicial officer of the district court." 28 U.S.C. § 151.
The allocation of authority as between district judges and bankruptcy judges is governed by 28 U.S.C. § 157. A bankruptcy judge may "hear and determine" and may "enter appropriate orders and judgments" in core proceedings. 28 U.S.C. § 157(b)(1).
In non-core proceedings that are otherwise "related to" a case under title 11, a bankruptcy judge may "hear" but not "determine" the matter, leaving the latter function to a district judge after considering the bankruptcy judge's proposed findings and conclusions and reviewing de novo matters to which a party has timely and specifically objected. 28 U.S.C. § 157(c) (1).11 The parties, however, may consent to have a bankruptcy judge "hear and determine" such a proceeding.
The court has an independent duty to determine the core/non-core status of a proceeding and is not bound by allegations of the parties. 28 U.S.C. § 157(b)(3).12
C
Starting with subject-matter jurisdiction, the problem is which category of § 1334(b): "arising under" title 11; "arising in" a case under title 11; or "related to" cases under title 11.
The plaintiffs' allegation that this -action is "related to" a case under title 11 is presented as a naked conclusion with no facts in support. The syntax of § 1334(b) appears to make the "related to" category a residual catchall to include matters that are not necessarily part of the bankruptcy case. But the fringes of this category have led to considerable litigation. 1 Collier ¶ 3.01 . The tendency to overuse this category has been criticized. See Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory, 41 Wm. & Mary L. Rev. 743, 862-920 (2000) (arguing "related to" category is narrower than commonly assumed). Now that waters are roiling in the wake of Stern v. Marshall, 131 S.Ct. 2594, 180 L. Ed. 2d 475 (2011), interests of efficient judicial administration make it important to focus carefully on the § 1334(b) categories.
In this adversary proceeding, the counts in the complaint assert rights against the City under nonbankruptcy law that might be considered in a court of general jurisdiction, but the reality is that this action would not exist in the absence of this chapter 9 case. Without the federal bankruptcy power to impair contracts, the City's unilateral reduction of retiree health benefits would not be attempted in the first place. In other words, but for the existence of this chapter 9 case, there would be no justiciable dispute. It follows that this dispute is too close to the heart of the bankruptcy case to be regarded as merely "related to" a case under title 11. The jurisdictional allegation in the complaint is rejected as incorrect.
The question then becomes whether this dispute "arises under title 11" or "arises in a case under title 11."
The "arising under" § 1334(b) category has heretofore been understood to mean causes of action that are created by the Bankruptcy Code. 1 Collier ¶ 3.01 . The difficulty here is that under the conventional view, the complaint does not invoke bankruptcy law; the Bankruptcy Code involvement occurs when § 904 swoops in from nowhere-mentioned-in-the-complaint to bar the injunction. While the City's unilateral interim action is permitted to occur during a bankruptcy case, title 11 does not specifically authorize the interim action. Nor are any of the plaintiffs' causes of action created by title 11. In these circumstances, the fit with the "arising under" category is uncomfortable; the "arising in" category may be the better fit. 1 Collier ¶ 3 . 01 .
The third § 1334(b) category is the proceeding "arising in" a case under title 11. The parameters of this intermediate category have been poorly outlined in the case law and deserve more careful attention. It is argued in the academic literature that, based on historical jurisprudence, more cases qualify as "arising in" a case under title 11 than commonly assumed. Brubaker, 41 Wm. & Mary L. Rev. at. 755, 859-62, 914 n.599.
Regardless, of whether the outer dimensions of § 1334(b) "arising in" jurisdiction may be uncertain, existing case law discerns such jurisdiction as including proceedings that, while not based on a right created by title 11, would not exist outside of bankruptcy. Harris v. Wittman (In re Harris), 590 F.3d 730, 737 (9th Cir. 2009); Maitland v. Mitchell (In re Harris Pine Mills, Inc.), 44 F.3d 1431, 1434 (9th Cir. 1995) ; Eastport Assoc. v. City of Los Angeles (In re Eastport Assoc.), 935 F.2d 1071, 1076 (9th Cir. 1991); Wood v. Wood (In re Wood). 825 F.2d 90, 97 (5th Cir. 1987); Menk v. LaPaglia (In re Menk), 241 B.R. 896, 909 (9th Cir. BAP 1999). It is sometimes said that "arising in" relates to the "administration" of the case. E.g. Wood, 825 F.2d at 97; 1 Collier ¶ 3.01 .
Here, the plaintiff creditors allege nonbankruptcy theories to attack interim measures regarding their claims taken under the authority of bankruptcy law in the course of administration of the case. The basis of the injunction complaint involves the debtor-creditor relationship between the parties and calls into question the enforceability of bankruptcy doctrines. Such a dispute comfortably fits within the established judicial construction of the § 1334(b) "arises in" category. 28 U.S.C. § 1334(b); Harris. 590 F.3d at 737-38; Menk, 241 B.R. at, 909. It is also sufficient (but not necessary) that the outcome is affected by a section of the Bankruptcy Code — § 904.
Accordingly, this proceeding "arises in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b).
D
The next task is to determine whether the proceeding qualifies as a core proceeding. Sixteen examples of core proceedings are listed at 28 U.S.C. § 157(b)(2)(A)-(P). The list is not limiting. 11 U.S.C. § 102(3); 1 Collier ¶ 3.02. As the definitions overlap and are nonexclusive, the sixteen categories are not mutually exclusive and fall into five general categories: (1) matters of administration; (2) avoidance actions; (3) matters concerning property of the estate; (4) omnibus categories; and (5) chapter 15 cases. 1 Collier ¶ 3.02 . The first and fourth categories are implicated in this instance.
This lawsuit is a core proceeding on three adequate, independent grounds: §§ 157(b)(2)(A), (B), and (O).
Since the gravamen of the complaint challenges interim actions being taken by the City in the course of administering the case, it qualifies as a core proceeding on that basis. 28 U.S.C. § 157(b) (2) (A) ; 1 Collier ¶ 3 . 02 .
The determination that the plaintiffs are "creditors" who have "claims" against the debtor implicates core proceeding status regarding "allowance or disallowance of claims" of creditors. 28 U.S.C. § 157(b)(2)(B). Thus, the demand for a declaratory judgment that plaintiffs have a vested property interest is merely a premature request that this court determine that their claims are allowed; this is the essential routine of the claims administration process.
Finally, this chapter 9 involves the adjustment of financial relations between the City and all of its creditors, including the plaintiffs, in a process that will culminate in a chapter 9 plan of adjustment. As such, this proceeding that focuses on the relationship between debtor City and creditor plaintiffs is a core proceeding as an "other proceeding" affecting the "adjustment of the debtor-creditor or the equity security holder relationship." 28 U.S.C. § 157(b)(2)(O); Harris, 590 F.3d at 738-40; 1 Collier ¶ 3.02 .
Therefore, this entire dispute is a "core proceeding" that "arises in" this chapter 9 case that a bankruptcy judge may "hear and determine" and "enter appropriate orders and judgments" pursuant to 28 U.S.C. § 157(b)(1).
The appropriate order in this instance is an order dismissing this adversary proceeding. The dismissal will be without prejudice to further prosecution of the plaintiffs' claims in the routine course of the reorganization and claims administration process, which process does not ordinarily require an adversary proceeding.
Conclusion
For the reasons stated, Bankruptcy Code § 904 forbids the injunction requested. Settled bankruptcy law permits the City to implement interim contractual modifications before the confirmation of a chapter 9 plan of adjustment but such revisions do not, as a matter of law, become permanent unless and Until made part of a confirmed plan of adjustment or otherwise voluntarily agreed. The plaintiffs' substantive claims will be more expeditiously fixed and determined in accordance with principles of due process without the need for this adversary proceeding. Stay relief is inappropriate because the nature of the dispute is integral to the adjustment of the debtor-creditor relationship that policy dictates occur in a single forum.
The remedy for the plaintiffs is to participate in the process of negotiating their treatment under a chapter 9 plan.
This is a core proceeding that "arises in" the chapter 9 case and would not exist "but for" the chapter 9 case.
Accordingly, orders will be entered DENYING the motion for TRO and preliminary injunction and declining to afford relief from the automatic stay.
This adversary proceeding will be DISMISSED, without prejudice to the prosecution by the plaintiffs of their various claims through conventional bankruptcy procedure.
Dated: August 6, 2012.
/s/ Christopher M. Klein Click for Enhanced Coverage Linking Searches
UNITED STATES BANKRUPTCY JUDGE
Case No. 12-32118-C-9, Adversary No. 12-2302
UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF CALIFORNIA
478 B.R. 8; 2012 Bankr. LEXIS 3660; 68 Collier Bankr. Cas. 2d (MB) 333; 56 Bankr. Ct. Dec. 250
August 6, 2012, Decided
August 6, 2012, Filed
KLEIN, Bankruptcy Judge:
The retired employees of the City of Stockton want this court to order the City to keep paying for their health benefits during this chapter 9 case. The difficulty is that 11 U.S.C. § 904 forbids the court from using any of its powers to "interfere with" property or revenues of a chapter 9 debtor. Accordingly, although the City's unilateral interim reduction of retiree health benefit payments may lead to tragic hardships for individuals in the interval before their claims are redressed in a chapter 9 plan of adjustment, the motion for injunctive relief must be DENIED. No relief being available and determining that this is an "arising in" core proceeding under 28 U.S.C. § 1334(b) and § 157(b)(2), the adversary proceeding will be DISMISSED.
Procedural Posture
This adversary proceeding was filed as a class action by the Association of Retired Employees of the City of Stockton ("ARECOS"
and eight retirees on July 10, 2012, together with an Application for Temporary Restraining Order ("TRO" or Preliminary Injunction or in the Alternative Relief From Stay.
The retirees contend they have vested contractual rights that are protected from impairment by the Contracts Clause of the United States Constitution, a similar clause in the California Constitution, and by other provisions of California law.
The complaint, the application for injunctive relief, and the supporting papers conspicuously omit reference to § 904, which operates as an anti-injunction statute and bars the court, without the municipality's consent, from interfering with its political or governmental powers, property or revenues, and use or enjoyment of income-producing property..
The court set the TRO/preliminary injunction hearing for July 23, 2012, and ordered the parties to brief the question of the effect of § 904 on this adversary proceeding. It further ordered the City to state whether, as permitted by § 904, it consents to this court resolving the interim health benefit payment dispute. Notice was also given that the court might dismiss the adversary proceeding on its own motion if it concludes that § 904 prevents all of the relief being sought.
At the July 23 hearing, the parties addressed all facets of the adversary proceeding, questions of jurisdiction, and judicial authority. The City did not consent to permit this court to resolve the interim health benefit payment dispute. This decision announces and explains the court's ruling.
Facts
The City of Stockton filed this chapter 9 case on June 28, 2012. The questions of the City's eligibility for chapter 9 relief and whether to order relief are the subject of a separate process progressing under a schedule fixed by the court.
The Stockton City Council adopted a budget for the Fiscal Year commencing July 1, 2012, that, by state law, must be balanced. The required balance was achieved by cutting costs, including unilaterally reducing retiree health benefits.
This adversary proceeding seeks: an injunction prohibiting the City from implementing the retiree health benefit reduction; a declaration that the changes are unlawful; and an order compelling the City to pay for the retiree health benefit for all retirees entitled to it as of July 1, 2012; and attorney fees.1
FOOTNOTES
1 The prayer in the complaint seeks:
1. A temporary, preliminary and permanent injunction prohibiting the City from implementing the changes to the Retiree Health Benefit;
2. A declaration under 28 U.S.C. § 2201 (The Declaratory Relief Act) that the City Retirees have a vested property interest in the Retiree Health Benefit and that the City's proposed changes eliminating the Retiree Health Benefit are unlawful;
3. An order compelling the City to maintain the Retiree Health Benefit with respect to the ARECOS' members and Class Plaintiffs and all other City of Stockton retirees entitled to the Retiree Health Benefit as of July 1, 2012.
4. For an award of reasonable attorney's fees and costs under California Civil Code §§ 1021.5 and 1033.5; California Government Code §§ 800 and 31536; 42 U.S.C. § 1988, and any other statute or rule of law authorizing such an award; and
Complaint, Prayer for Relief (catchall omitted).
1 The prayer in the complaint seeks:
1. A temporary, preliminary and permanent injunction prohibiting the City from implementing the changes to the Retiree Health Benefit;
2. A declaration under 28 U.S.C. § 2201 (The Declaratory Relief Act) that the City Retirees have a vested property interest in the Retiree Health Benefit and that the City's proposed changes eliminating the Retiree Health Benefit are unlawful;
3. An order compelling the City to maintain the Retiree Health Benefit with respect to the ARECOS' members and Class Plaintiffs and all other City of Stockton retirees entitled to the Retiree Health Benefit as of July 1, 2012.
4. For an award of reasonable attorney's fees and costs under California Civil Code §§ 1021.5 and 1033.5; California Government Code §§ 800 and 31536; 42 U.S.C. § 1988, and any other statute or rule of law authorizing such an award; and
Complaint, Prayer for Relief (catchall omitted).
For purposes of the present analysis (but without deciding the question), the retiree health benefits are regarded as bargained-for and vested contractual rights.
Persons whose benefits have been reduced may file proofs of claim that must be addressed in a plan of adjustment under the standards prescribed in the Bankruptcy Code for confirming plans.
Discussion
Since the complaint relies on the supposed inability of the City to impair contracts, we begin with basic points of constitutional law and history that give context to the § 904 limitation on the court's authority. Then the focus shifts to how the plaintiffs' due process rights are protected, and thence to the jurisdictional and procedural status of this proceeding.
I
This adversary proceeding is premised at bottom on the Contracts Clause of the United States Constitution: "No State shall ... pass any ... Law impairing the Obligation of Contracts." U.S. Const., art. I, § 10, cl. 1.
Counsel clarified in open court that an immutable Contracts Clause is the centerpiece of plaintiffs' case. The first cause of action is: "Impairment of Contract — U.S. Constitution" and alleges that in "unilaterally changing the terms of the Retiree Health Benefit, the City impaired contractual obligations, in violation of Article I section of the United States Constitution and 42 U.S.C. § 1983." Complaint, ¶ 56. The other causes of action flow from that premise.2 The premise is flawed.
FOOTNOTES
2 The second paragraph, of the complaint states the theory:
2. This action seeks a temporary restraining order and declaratory and injunctive relief to stop the City from cutting health insurance premium payments for its retired employees. Termination of these health benefits is unlawful because the benefits are a form of deferred compensation which the City's retirees have already earned; therefore, the retirees have a vested right to these benefits protected by the contract clauses of the United States and California Constitutions. Moreover, if the City is permitted to terminate retiree health benefits as planned, it will immediately endanger the lives of scores of elderly and ill retirees and their dependents who are financially unable to purchase health insurance. This Court's intervention is desperately needed to forestall preventable, imminent harm.
Complaint, ¶2.
2 The second paragraph, of the complaint states the theory:
2. This action seeks a temporary restraining order and declaratory and injunctive relief to stop the City from cutting health insurance premium payments for its retired employees. Termination of these health benefits is unlawful because the benefits are a form of deferred compensation which the City's retirees have already earned; therefore, the retirees have a vested right to these benefits protected by the contract clauses of the United States and California Constitutions. Moreover, if the City is permitted to terminate retiree health benefits as planned, it will immediately endanger the lives of scores of elderly and ill retirees and their dependents who are financially unable to purchase health insurance. This Court's intervention is desperately needed to forestall preventable, imminent harm.
Complaint, ¶2.
While the Contracts Clause is a key navigational star in the firmament of our Constitution and economic universe, it is subject to being eclipsed by the Bankruptcy Clause: "The Congress shall have Power to ... establish ... uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const., art. I, § 8, cl. 4.
Significantly, the Contracts Clause bans a state from making a law impairing the obligation of contract; it does not ban Congress from making a law impairing the obligation of contract. This asymmetry is no accident.
The Bankruptcy Clause necessarily authorizes Congress to make laws that would impair contracts. It long has been understood that bankruptcy law entails impairment of contracts. Sturges v. Crowninshield, 17 U.S.(4 Wheat.) 122, 191, 4 L. Ed. 529 (1819).
In Sturges, the Supreme Court reasoned that Congress "is expressly vested with the power of passing bankrupt laws, and is not prohibited from passing laws impairing the obligation of contracts, and may, consequently, pass a bankrupt law which does impair it; whilst the states have not reserved the power of bankrupt laws, and are expressly prohibited from passing laws impairing the obligation of contracts." Id.
In 1936, the Supreme Court noted that the "especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned — to change, modify, or impair the obligation of their contracts." Ashton v. Cameron Cnty. Water Improvement Dist. No. 1, 298 U.S. 513, 530, 56 S. Ct. 892, 80 L. Ed. 1309 (1936).
Again, in its 1938 decision validating the second municipal insolvency statute, the Court explained that the "natural and reasonable remedy through composition" is not available under state law "by reason of the restriction imposed by the Federal Constitution upon the impairment of contracts by state legislation" but the "bankruptcy power is competent to give relief." Hence, a state, by authorizing a municipality to file a case, legitimately "invites the intervention of the bankruptcy power to save its agency which the State itself is powerless to rescue." United States v. Bekins, 304 U.S. 27, 54, 58 S. Ct. 811, 82 L. Ed. 1137 (1938).
In other words, while a state cannot make a law impairing the obligation of contract, Congress can do so. The goal of the Bankruptcy Code is adjusting the debtor-creditor relationship. Every discharge impairs contracts. While bankruptcy law endeavors to provide a system of orderly, predictable rules for treatment of parties whose contracts are impaired, that does not change the starring role of contract impairment in bankruptcy.
It follows, then, that contracts may be impaired in this chapter 9 case without offending the Constitution. The Bankruptcy Clause gives Congress express power to legislate uniform laws of bankruptcy that result in impairment of contract; and Congress is not subject to the restriction that the Contracts Clause places on states. Compare U.S. Const. art. I, § 8, cl. 4, with § 10, cl. 1. Hence, the key premise of the centerpiece of this lawsuit rests on infirm constitutional ground.
The federal bankruptcy power also, by operation of the Supremacy Clause, trumps the similar contracts clause in the California state constitution. U.S. Const. Art. VI, cl. 2; Cal. Const. Art. I, § 9 ("A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed."
; Int'l Bhd. of Elec. Workers, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262, 268-70 (E.D. Cal. 2010), aff'g, 403 B.R. 72, 76-77 (Bankr. E.D. Cal. 2009). For the same reason, the plaintiffs' other theories also fall.
In sum, even if the plaintiffs' benefits are vested property interests, the shield of the Contracts Clause crumbles in the bankruptcy arena.
II
A delicate state-federal relationship of mutual sovereigns in which the Tenth Amendment looms large provides the framework for municipal bankruptcy and gives context to this dispute.
A
A pair of chapter 9 provisions honors state-federal balance by reserving certain state powers and by correlatively limiting the powers of the federal court: 11 U.S.C. §§ 903 and 904.
1
903 reserves to the state the power to control political and governmental powers, as well as expenditures:
§ 903. Reservation of State power to control municipalities
This chapter does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise, but —
(1) a State law prescribing a method of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition; and
(2) a judgment entered under such a law may not bind a creditor that does not consent to such composition.
11 U.S.C. § 903.
This reservation is limited by the Supremacy Clause. A state cannot rely on the § 903 reservation of state power to condition or to qualify, i.e. to "cherry pick," the application of the Bankruptcy Code provisions that apply in chapter 9 cases after such a case has been filed. Mission Indep. School Dist. v. Texas, 116 F.2d 175, 176-78 (5th Cir. 1940) (chapter IX); Vallejo, 403 B.R. at 75-76; In re City of Stockton, 475 B.R. 720, 2012 Bankr. LEXIS 3234, 2012 Westlaw 2905523 at *4 - *5 (Bankr. E.D. Cal. 2012) ("Stockton I"
; In re Cnty. of Orange, 191 B.R. 1005, 1021 (Bankr. C.D. Cal. 1996).
While a state may control prerequisites for consenting to permit one of its municipalities (which is an arm of the state cloaked in the state's sovereignty) to file a chapter 9 case, it cannot revise chapter 9. Stockton I, 2012 Bankr. LEXIS 3234, at *4 - *5. For example, it cannot immunize bond debt held by the state from impairment. Mission Indep. School Dist., 116 F.2d at 176-78.
2
Section 904 complements § 903. In view of the inability of a state to control or condition chapter 9 proceedings after the municipal case is filed with the state's permission, § 904 imposes limits on the federal court to assure that powers reserved to the states are honored:
Limitation on jurisdiction and powers of court
Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with —
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the debtor's use or enjoyment of any income-producing property.
11 U.S.C. § 904.
As the construction of § 904 is central to the instant matter, its history is important.
The statutory limit on the authority of the court that is now § 904 has been enacted four times. Each revision has reduced the latitude within which the court can act. The limit has come to be described as "absolute."
The overall goal is a balance that does not offend the Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States, or to the people." U.S. Const. amend. X.
B
The evolution of the limit on court authority in what is now § 904 — from 1934 to its current version — is instructive. Perceived defects in the limit were a basis for invalidating the first municipal bankruptcy law as unconstitutional. Ever since, Congress has keep a weather eye on the constitutionality problem.
1
The first enactment of the limit on court authority was in the first municipal bankruptcy law in 1934:
The judge ... (11) shall not, by any order or decree, in the proceeding or otherwise, interfere with (a) any of the political or governmental powers of the taxing district, or (b) any of the property or revenues of the taxing district necessary in the opinion of the judge for essential governmental purposes, or (c) any income-producing property, unless the plan of readjustment so provides.
Bankruptcy Act § 80(c)(11), Act of May 24, 1934, 48 Stat. 801 (emphasis supplied).
The Supreme Court disapproved the 1934 statute as an unconstitutional interference with the sovereignty of a state on two theories. First, structurally, municipal bankruptcy was an impossible contradiction of federalism. Second, the particular statutory terms might enable the federal government to impose its will on an unwilling sovereign state. Ashton, 298 U.S. at 532.
Although the Bekins Court repudiated Ashton's structural objection when validating the 1937 municipal bankruptcy act, the second Ashton rationale has endured and has influenced Congress always to confine its exercise of the bankruptcy power to measures that do not usurp state sovereignty.
2
Congress reacted to Ashton in 1937 by reenacting the municipal bankruptcy provisions with revisions designed to reduce the opportunity for excessive federal control over state sovereignty. Act of Aug. 16, 1937, 50 Stat. 653.
One significant change was deletion of the phrase "in the opinion of the judge" so as to make the concept of "property or revenues necessary for essential services" less dependant on the subjective view of a federal judge.
The revised provision, with that deletion and with shifts in nomenclature from "taxing district" to "petitioner" and "plan of arrangement" to "plan of composition," was otherwise unchanged:
The judge ... shall not, by any order or decree, in the proceeding or otherwise, interfere with (a) any of the political or governmental powers of the petitioner; or (b) any of the property or revenues of the petitioner necessary for essential governmental purposes; or (c) any income-producing property, unless the plan of composition so provides.
Bankruptcy Act § 83(c), Act of Aug. 16, 1937, 50 Stat. 657.
The Supreme Court validated the 1937 municipal bankruptcy statute in Bekins, reasoning that it was a cooperative enterprise by state and federal sovereigns that was carefully drawn so as not to infringe state sovereignty. Bekins, 304 U.S. at 51. It emphasized that a state "retains control of its fiscal affairs" and that "no control or jurisdiction over that property and those revenues of the petitioning agency necessary for essential governmental purposes is conferred" on the federal court. Id.
3
The third version of the statutory limit on court authority-was part of a modernization of former Bankruptcy Act chapter IX in 1976. Act of Apr. 8, 1976, Pub. L. 94-260, 90 Stat. 315.
The statutory limit changed in three important respects. First, the municipality could consent to exercise of otherwise-prohibited federal judicial authority. Second, it was clarified that the limitation applied to stays, including automatic stays. Third, the qualification "necessary for essential government services" was deleted from the ban on interference with property or revenues of the debtor.
This 1976 version, new Bankruptcy Act § 82(c), provided:
(c) Limitation. — Unless the petitioner consents or the plan so provides, the court shall not, by any stay, order or decree, in the case or otherwise, interfere with —
(1) any of the political or governmental powers of the petitioner;
(2) any of the property or revenues of the petitioner; or
(3) the petitioner's use or enjoyment of any income-producing property.
Bankruptcy Act § 82(c), Act of Apr. 8, 1976, 90 Stat. 316.
Congress made plain that it was preserving the strict limitation on judicial interference with political or governmental powers, property or revenue, or income-producing property based on Ashton and Bekins and their progeny: the Supreme Court and Courts of Appeals have "made it very clear that the jurisdiction of the court is strictly limited to disapproving or to approving and carrying out a proposed composition. The bill follows these holdings and retains the limitation on the court's power." H.R. Rep. No. 94-260, 94th Cong., 1st Sess., at 9-10, reprinted in 1976 USCCAN at 547-48.3
FOOTNOTES
3 And:
Subsection (c) repeats and broadens the limitation in section 83(c), paragraph 1, of current law on the power granted to the court under subsection (b) and elsewhere in the chapter, by prohibiting any interference by the court, by any order or decree, in any of the political or governmental powers of the petitioner; any of the property or revenues of the petitioner, or which is used or enjoyed by the petitioner. The Committee feels that this limitation is required by Ashton and Bekins , which defined the limits of Congress' power under the bankruptcy clause, and the extent to which Congress may grant power to the courts to assist in the management of the affairs of a distressed municipality.
H.R. Rep. No. .94-260, 94th Cong., 1st Sess., at 18, reprinted in 1976 USCCAN at 556.
3 And:
Subsection (c) repeats and broadens the limitation in section 83(c), paragraph 1, of current law on the power granted to the court under subsection (b) and elsewhere in the chapter, by prohibiting any interference by the court, by any order or decree, in any of the political or governmental powers of the petitioner; any of the property or revenues of the petitioner, or which is used or enjoyed by the petitioner. The Committee feels that this limitation is required by Ashton and Bekins , which defined the limits of Congress' power under the bankruptcy clause, and the extent to which Congress may grant power to the courts to assist in the management of the affairs of a distressed municipality.
H.R. Rep. No. .94-260, 94th Cong., 1st Sess., at 18, reprinted in 1976 USCCAN at 556.
The deletion of the phrase "necessary for essential government services" from § 82(c) (2) aimed to broaden the limitation. The words "necessary" and "essential" invited unnecessary litigation. The "governmental services" language reflected an obsolete distinction between governmental and proprietary functions that the Supreme Court abolished in 1946. The phrase overlapped and confused the related ban on judicial interference with income-producing property.4
FOOTNOTES
4 "The House Committee explained:
The second change broadens the limitation by eliminating the phrase "necessary for essential governmental services" from the second paragraph of the subsection. The phrase was deleted for three reasons. First, the words "necessary" and "essential" were conducive to litigation. Second, and more importantly, the Supreme Court in New York v. United States, 326 U.S. 572, 66 S. Ct. 310, 90 L. Ed. 326, 1946-1 C.B. 285, abolished the distinction between governmental and proprietary functions. Thus, it is now appropriate to prohibit interference by the court in any of the municipalities' functions, for they are all equally governmental functions.
4 "The House Committee explained:
The second change broadens the limitation by eliminating the phrase "necessary for essential governmental services" from the second paragraph of the subsection. The phrase was deleted for three reasons. First, the words "necessary" and "essential" were conducive to litigation. Second, and more importantly, the Supreme Court in New York v. United States, 326 U.S. 572, 66 S. Ct. 310, 90 L. Ed. 326, 1946-1 C.B. 285, abolished the distinction between governmental and proprietary functions. Thus, it is now appropriate to prohibit interference by the court in any of the municipalities' functions, for they are all equally governmental functions.
Third, the limitation, on interference with any income-producing property, seems to deprive the qualification "essential for necessary governmental services" of any effect. Under one, the court is denied the power to interfere with property necessary for governmental services; under the other, the court may not interfere with any income-producing property. There is conceivably a third category of property, non-income-producing property that is not necessary for essential governmental services, but the existence of that category does not warrant the potential for litigation that exists with the old language. In any case, no constitutional problem is anticipated, because the power of the court to interfere with the petitioner is further limited by the change.
H.R. Rep. No. 94-260, 94th Cong., 1st Sess., at 18, reprinted in 1976 USCCAN at 556 (footnote omitted).
4
The 1976 version was reenacted in 1978 as 11 U.S.C. § 904 with the addition of the preambular phrase "Notwithstanding any power of the court."
This additional limiting language forbids resort to a federal court's inherent or equitable powers. It reflects reinvigorated sensitivity in 1978 by Congress to the need to avoid unnecessary intrusions of state sovereignty in order to obviate the risk of invalidation by the Supreme Court.
That heightened concern stemmed, in part, from the Supreme Court's then-recent invocation of the Tenth Amendment to invalidate part of a labor statute. Nat'l League of Cities v. Usery. 426 U.S. 833, 842-52, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976), overruled, Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 531, 105 S. Ct. 1005, 83 L. Ed. 2d 1016 (1985).
Usery worried the drafters of the Bankruptcy Code. The House Committee noted, the "Usery case underlines the need for this limitation on the court's powers" and added that § 904 "makes clear that the court may not interfere with the choices a municipality makes as to what services and benefits it will provide to its inhabitants." H.R. Rep. No. 95-595, at. 398. Even though later overruled,. Usery is a reminder that the Tenth Amendment is a brooding presence over the chapter 9 landscape.
C
The message derived from this history regarding the power of this court to interfere with the City's actions regarding retiree health benefits compels the conclusion that § 904 prevents any federal court from doing what the plaintiffs request, regardless of whether the City's action is fair or unfair.
The concern has constitutional proportions. Chapter 9 passed constitutional muster on the basis that the federal bankruptcy power be exercised at the request of, but not at the expense of, the sovereign state in an exercise of cooperation among sovereigns. Bekins, 304 U.S. at 51-53 (here "we have cooperation to provide a remedy for a serious condition in which the States alone were unable to afford relief."
.
As a state-federal cooperative enterprise conducted in delicate circumstances in which state sovereignty must be respected, Congress has been sedulous to assure that the bankruptcy power not be used in municipal insolvencies in a manner that oversteps delicate state-federal boundaries.
The entire structure of chapter 9 has been influenced by this pervasive concern to preserve the niceties of the state-federal relationship. The foundation involves multiple levels of consent. No chapter 9 case can be filed other than a voluntary case filed by the municipality with the consent of the state. 11 U.S.C. § 109(c)(2). The municipality consents by filing the voluntary case. 11 U.S.C. § 301, incorporated by § 901(a). Consent is implicit in the restriction that only the municipality can propose a plan of adjustment. 11 U.S.C. § 941. Another consent is the express consent recognized in § 904 that the City has declined to give in this proceeding. 11 U.S.C. § 904.
Other provisions further the Constitutional restriction against encroaching on state sovereignty. For example, the Bankruptcy Code's restrictions on use, sale, or lease of property do not apply in chapter 9. Compare 11 U.S.C. § 901(a), with id. § 363. Nor is there provision for a trustee or examiner in a chapter 9 case. Compare 11 U.S.C. § 901(a), with id. § 1104.
In the overall construct, § 904 performs the role of the clean-up hitter in baseball. Its preambular language "otwithstanding any power of the court, ... the court may not, by any stay, order, or decree, in the case or otherwise ..." is so comprehensive that it can only mean that a federal court can use no tool in its toolkit — no inherent authority power, no implied equitable power, no Bankruptcy Code § 105 power, no writ, no stay, no order — to interfere with a municipality regarding political or governmental powers, property or revenues, or use or enjoyment of income-producing property. 11 U.S.C. § 904. As a practical matter, the § 904 restriction functions as an anti-injunction statute — and more.
In short, the § 904 limitation on the court's authority is absolute, with only the two exceptions stated in § 904: consent; and provision in a plan of adjustment (which can only be proposed by the municipality). 6 Collier on Bankruptcy ¶ 904.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011) ("Collier"
.
III
The plaintiffs contend that § 904 does not apply and does not prevent the relief sought. They say they challenge only the role of the City as employer, not as governmental regulator, and that neither § 904(1) nor § 904(3) is implicated. While that argument is weak, § 904(2) is dispositive.
A
Conceding that the § 904(2) prohibition on interfering with the debtor's "property or revenues" poses an obstacle, plaintiffs argue5 that their relief would be an innocuous preservation of the status quo that would not directly interfere with City property or revenues, and would not indirectly interfere with revenues, because the retirees' rights to the health benefit is fixed and immutable. That argument is not persuasive.
FOOTNOTES
5 Supplemental Brief in Support of Application for Temporary Restraining Order and Preliminary Injunction or in the Alternative Relief From Stay, at 3 ("Retirees simply seek an order to preserve the status quo by prohibiting the City from unilaterally modifying Plaintiffs' vested and constitutionally-protected right to their earned benefits." .
5 Supplemental Brief in Support of Application for Temporary Restraining Order and Preliminary Injunction or in the Alternative Relief From Stay, at 3 ("Retirees simply seek an order to preserve the status quo by prohibiting the City from unilaterally modifying Plaintiffs' vested and constitutionally-protected right to their earned benefits."
.
Coercively preserving a status quo that entails payment of money from the City treasury interferes with the City's choice to suspend such payments. The contents of the City treasury are "property or revenues" within the meaning of §. 904(2).
It is impossible to envision how granting the plaintiffs' prayer for an "order compelling the City to maintain the Retiree Health Benefit with respect to ARECOS members and Class Plaintiffs and all other City of Stockton retirees entitled to the Retiree Health Benefit as of July 1, 2012," and to pay attorney's fees, would not require the payment of money from the City's property or revenues. In fact, payment would be required.
It follows that the relief sought is barred by § 904(2) as an interference with the City's "property or revenues."
B
That a TRO was issued in the Orange County chapter 9 case does not compel the conclusion that a TRO is permitted here. The TRO in that case required that certain employees who had nominally been "permanently" laid off instead be treated as "temporarily" laid off, and required the parties to meet and confer to work out their differences. Orange Cnty. Emps. Ass'n v. Cnty. of Orange (In re Cnty. of Orange), 179 B.R. 177, 185 (Bankr. C.D. Cal. 1995) ("Orange County"
.. It does not appear the "property or revenues" were being interfered with; it also was noted that the parties thereafter settled apparently before a monetary consequence ensued. Id. at 185, n.21.
Another distinction is that the Orange County TRO related to the process of assuming or rejecting unexpired collective bargaining agreements as § 365 executory contracts. 11 U.S.C. § 365; NLRB v. Bildisco & Bildisco, 465 U.S. 513, 521-23, 104 S. Ct. 1188, 79 L. Ed. 2d 482 (1984) ("Bildisco"
; Orange County, 179 B.R. at 183.
1
The formal statutory analysis is as follows. The § 365 executory contract provisions apply in chapter 9 cases by virtue of § 901(a). 11 U.S.C. § 901(a), incorporating id. § 365.
Sovereign immunity of a municipality is abrogated as to § 901. 11 U.S.C. § 106(a)(1).6 All chapter 1 provisions, including § 106(a)(1), apply in chapter 9. 11 U.S.C. § 103(f).7
FOOTNOTES
6 The section provides, in relevant part:
(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
(1) Sections ..., 901, 922, 926, 928, 929, 944, ... .
11 U.S.C. § 106(a) (1)..
7 The section provides:
(f) Except as provided in section 901 of this title, only chapters 1 and 9 of this title apply in a case under such chapter 9.
11 U.S.C. § 103(f).
6 The section provides, in relevant part:
(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
(1) Sections ..., 901, 922, 926, 928, 929, 944, ... .
11 U.S.C. § 106(a) (1)..
7 The section provides:
(f) Except as provided in section 901 of this title, only chapters 1 and 9 of this title apply in a case under such chapter 9.
11 U.S.C. § 103(f).
Since § 901(a) lists sections from chapters other than chapters 1 or 9 that apply in chapter 9 cases, including § 365, it follows that the municipality's sovereign immunity is abrogated with respect to executory contracts.
In other words, the municipality's voluntary act of filing a chapter 9 case triggers two relevant consequences. First, the municipality consents, within the meaning of § 904, to interference by a federal court as to the Bankruptcy Code provisions that apply in chapter 9 cases. Vallejo, 403 B.R. at 75-76; In re Cnty. of Orange, 191 B.R. at 1021. Second, sovereign immunity is voluntarily abrogated to the extent provided in § 106.
In short, the naked fact of the issuance of a TRO in Orange County regarding a § 365 issue did not necessarily offend § 904, even though the rationale for that TRO seems dubious.8 The county consented under § 904 to federal judicial interference in the form of assessing the merits of § 365 assumption or rejection of executory contracts and waived its sovereign immunity by virtue of § 106 regarding executory contracts.
FOOTNOTES
8 Orange County has been criticized as implying that a municipality cannot unilaterally breach collective bargaining agreements before formal rejection. 6 Collier ¶ 901.04 . While the decision is opaque and the need for a TRO unclear, the actual terms of the TRO requiring that certain employees laid off "permanently" be deemed laid off only "temporarily" (the difference relating to seniority and grievance procedures), and requiring the parties to meet and confer, did not directly affect the County treasury. It is consistent with a court controlling a process preliminary to consideration of the reasonable-efforts-to-negotiate-voluntary-modification prong of Bildisco test for § 365 rejection, 465 U.S. at 526-27, that applies collective bargaining agreements. It is not necessarily inconsistent with Bildisco, which permitted contracts to be modified on an interim basis, subject to later § 365 review. 465 U.S. at 527-34. Absent agreement, such contracts ultimately must be rejected with damages dealt with in the claims process or assumed cum onere.
8 Orange County has been criticized as implying that a municipality cannot unilaterally breach collective bargaining agreements before formal rejection. 6 Collier ¶ 901.04 . While the decision is opaque and the need for a TRO unclear, the actual terms of the TRO requiring that certain employees laid off "permanently" be deemed laid off only "temporarily" (the difference relating to seniority and grievance procedures), and requiring the parties to meet and confer, did not directly affect the County treasury. It is consistent with a court controlling a process preliminary to consideration of the reasonable-efforts-to-negotiate-voluntary-modification prong of Bildisco test for § 365 rejection, 465 U.S. at 526-27, that applies collective bargaining agreements. It is not necessarily inconsistent with Bildisco, which permitted contracts to be modified on an interim basis, subject to later § 365 review. 465 U.S. at 527-34. Absent agreement, such contracts ultimately must be rejected with damages dealt with in the claims process or assumed cum onere.
2
Here, the retiree health benefits are not executory contracts. Performance does not remain due to some extent, on both sides — there are no reciprocal obligations with performance due by both parties. Bildisco, 465 U.S. at 522 n.6.
The retirees insist they have performed their side of the bargain: "The City already exercised its political discretion to provide the Benefit and accepted the full performance by the Retirees of their services to the City to earn the Benefit." Supplemental Brief, at 3. And, "Each of the ARECOS members and Class Plaintiffs have satisfied their obligations under their respective contracts with the City." Complaint, ¶ 60.
Under any definition of a § 365 executory contract, the plaintiffs' prior full performance means they have no executory contract. So viewed, the Orange County TRO regarding an executory contract is inapposite to the question of the effect of § 904(2) on the City's interim cost cutting.
To the contrary, and it is hereby so held, § 904(2) prevents this court from granting the relief requested in this proceeding.
3
Plaintiffs' counsel agreed at oral argument that plaintiffs want the court to impose, by way of its injunctive power, the equivalent of the provisions of Bankruptcy Code § 1114 relating to "Payment of insurance benefits to retired employees" in chapter 11 cases even though § 1114 is not specifically made applicable in chapter 9 cases. 11 U.S.C. § 1114.
Section 1114 was enacted in 1988 to provide procedures and standards for modifying, retiree insurance benefits during a chapter 11 case. The basic rule for chapter 11 is that retiree insurance payments must continue to be made timely during the case unless and Until the court approves a modification. 11 U.S.C. § 1114(g). Modification requires compliance with a prescribed negotiation process and prescribed standards to be applied by the court. 11 U.S.C. §§ 1114(f)-(h).
The retiree insurance benefits provisions were modeled on § 1113, which was adopted in 1984 following the Supreme Court's Bildisco decision that collective bargaining agreements are executory contracts eligible for rejection under § 365 and that they may be unilaterally rejected or modified before formal rejection is approved by the court. Bildisco, 465 U.S. at. 521-27. New § 1113 imposed rejection procedures and standards for chapter 11 cases that were more stringent than the rejection standards prescribed in Bildisco.
But neither § 1113 nor § 1114 is designated in § 901(a) as applicable in chapter 9 cases. 11 U.S.C. § 901(a) (omitting § 1113 and § 1114).
Contentions that the absence of § 1113 from § 901(a) should be disregarded as an accident and that courts should apply § 1113 in chapter 9, instead of the Bildisco standards, have regularly been rejected. The judicial consensus is that Bildisco controls rejection of collective bargaining agreements in chapter 9 cases. Vallejo, 432 B.R. at 270-72, aff'g Vallejo, 403 B.R. at 77-78; Orange County, 179 B.R. at 183. This court agrees.
The delicate constitutional balance that has loomed large over municipal bankruptcy ever since Ashton further cautions against taking liberties to cure perceived legislative mistakes. In chapter 9, where Congress has been careful to observe the delicacies of the state-federal relationship, it is particularly appropriate to leave to Congress, not the courts, the decision to revise § 901(a).. See Vallejo, 432 B.R. at 272.
The logic focused on the structure of chapter 9, and the attendant importance of § 901(a) in the context of Congress taking care not to overstep the Tenth Amendment constraint, applies as much to § 1114 as to § 1113. The omission of § 1114 from § 901(a) warrants the conclusion, for the same reasons as articulated in the Vallejo and Orange County decisions, that § 1114 does not apply in chapter 9 cases.
To be sure, this conclusion appears to leave a gap in chapter 9 cases in the sense that some retiree insurance benefits are protected from modification by Bildisco's § 365 rejection standards because they are included in collective bargaining agreements, while others are not. In reality, any gap is less than meets the eye in view of the Bildisco holding that it is not an unfair labor practice for a debtor unilaterally to modify a collective bargaining agreement during the interval between the filing of the case and the formal rejection of the executory-contract. Bildisco, 465 U.S. at 527-34. In other words, regardless of whether the retiree insurance benefit is part of an executory contract or not, the benefit can be modified or suspended during the pendency of the case.
IV
The argument that the City has imposed a plan of adjustment without meeting fundamental requirements of due process, and in circumvention of plan confirmation standards, relies on the false premise that the City's so-called "Pendency Plan" adopted for use during the chapter 9 case is a plan of adjustment.
A
The pendency plan is not a plan of adjustment. A formal plan of adjustment must be filed as such, either with the petition or at such later time as the court fixes. 11 U.S.C. §941. No plan was filed with the petition in this case. No plan has yet been filed. This court has not yet fixed a time for filing such a plan. If and when such a plan is filed, the confirmation of the plan will be considered under the standards prescribed by the statute. 11 U.S.C. § 943.
Rather, the pendency plan is an interim survival mechanism that enables the financially embarrassed municipality, in the political and governmental judgment of its governing body, to continue to provide what it deems to be essential governmental services during the interval between the filing of a chapter 9 case and the confirmation of a plan of adjustment.
Suspending payment of various obligations during a case under the Bankruptcy Code is a routine aspect of the reorganization process. When the Supreme Court clarified in Bildisco that it is not an unfair labor practice for a chapter 11 debtor unilaterally to implement changes to a collective bargaining agreement — i.e. unilaterally to breach it — before the bankruptcy court acts on a § 365 motion to reject the contract, it necessarily determined that such unilateral changes do not offend due process. Bildisco, 465 U.S. at 527-34. The rationale is that upon filing a chapter 11 case, the debtor becomes "empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing." Id. at 528.
Unilaterally-modified contracts are dealt with, as the Supreme Court explained, through conventional bankruptcy law provisions that entitle the victim of a breach of a prepetition obligation to file a proof of claim that will be dealt with in the ordinary claims process and receive the priority provided by the Bankruptcy Code. Id. at 530 n.12. It is most unlikely that the Supreme Court, after having impliedly endorsed the process in Bildisco, would regard it as inconsistent with due process.
This analysis applies in chapter 9 as § 365 applies in municipality cases. 11 U.S.C. § 901(a), incorporating id. § 365.
The plaintiffs have prepetition claims that, under their own theory of the case, are not executory contracts as they fully performed their bargains before bankruptcy. As noted, they may file proofs of claim on account of their retiree health benefits that will be addressed and valued during the claims adjustment process. 11 U.S.C. §§ 501-02. In addition, any claim that appears on the list of creditors that the City must file is deemed "filed," and hence "allowed," if not listed as disputed, contingent, or unliquidated, 11 U.S.C. § 925.
The plan of adjustment, when it is filed, will be confirmed only if it meets the pertinent statutory confirmation standards. 11 U.S.C. § 943. The plaintiffs will be entitled to accept or reject the plan. 11 U.S.C. § 1126(a), incorporated by § 901(a); Fed. R. Bankr. P. 3018. They also will be entitled to object to confirmation. Fed. R. Bankr. P. 3020(b).
The right to present claims, have them evaluated, to accept or reject the plan, and to object to confirmation is all the process that is due.
B
The real remedy for the plaintiffs lies in participating in the process of formulating a plan of adjustment. As this court has previously explained, the lessons of recent chapter 9 cases teach that successful plans of adjustment are most likely to be achieved by the parties in interest all coming to the table and participating in bona fide negotiations. Stockton I, 2012 Bankr. LEXIS 3234, 2012 Westlaw 2905523 at *9. Every issue that is resolved by agreement will enhance the prospects for a successful plan of adjustment.
To that end, the court has appointed a judge as standing mediator for this case to facilitate a negotiated solution.
In short, even if injunctive relief were permitted, this court is persuaded that injunctive relief is neither necessary nor appropriate to vindicate the rights of the plaintiffs.
V
Having concluded that injunctive relief is not available as a matter of law and, in any event, is not necessary and not appropriate, the alternative of relief from the automatic stay under 11 U.S.C. § 362 warrants discussion.
The City is correct that plaintiffs' request for stay relief is procedurally incorrect. Stay relief is a matter of general interest to all creditors (not merely the parties to this adversary proceeding) that needs to be presented by motion in the parent chapter 9 case with appropriate notice. See Fed. R. Bankr. P. 4001(a) & 9014. If the court were inclined to grant the relief, it would insist upon procedurally proper notice.
Nevertheless, the court is obliged to construe the rules of procedure so as to secure the just, speedy, and inexpensive determination of every case and proceeding. Fed. R. Bankr. P. 1001. Here, analysis of why relief from the automatic stay is not warranted may obviate a subsequent wild goose chase.
The logic of plaintiffs' request is that, if the bankruptcy court does not have authority to interfere with the City's property or revenues by virtue of § 904, then they should be allowed to go to a forum that does have such authority — i.e., the California state courts. Sometimes, as with a personal injury tort action, that is a good solution. But here it would be fundamentally at odds with basic policy underlying chapter 9.
The core of a chapter 9 case is adjustment of the debtor-creditor relationship. The plaintiffs here are creditors. They want two things: a judgment that their health benefit claims are valid and an order compelling the City to maintain payments for those benefits. Those issues are central to the debtor-creditor relationship to be dealt with, along with every other unhappy creditor, in the collective chapter 9 proceeding.
No separate judicial proceeding is needed to determine the validity of prepetition claims. In this case, a filed proof of claim will be "deemed allowed" unless someone objects, as will a claim listed by the City without being designated as disputed, contingent, or unliquidated. 11 U.S.C. §§ 502(a) & 925.
Any objection to a claim will be litigated in this court under established procedures that honor due process without extensive and expensive satellite litigation. Fed. R. Bankr. P. 3007. Resort to state court would be wasteful of everyone's resources and introduce unnecessary delay and confusion.
For a plan of adjustment to be confirmed as to a class of claims that has not accepted the plan, it must be "fair and equitable" and "not discriminate unfairly." 11 U.S.C. § 1129(b)(1), incorporated by id. § 901(a).
If no plan is confirmed, the case must be dismissed in which event the parties are restored to the prebankruptcy status quo. 11 U.S.C. § 349, incorporated by id. § 901(a).
As to the question of a state court compelling the City to pay for benefits during the chapter 9 case, there is another jurisdictional quandary. All City property, wherever located, as of the commencement of the case is in the exclusive jurisdiction of the United States District Court of which this bankruptcy court is a unit. 28 U.S.C. §§ 151 & 1334(e)(1). This exclusive jurisdiction could make it difficult to enforce a state-court order requiring payment, and raises fascinating jurisprudential complexities that are best left to another day.
The timing of payment on account of claims is important to the plaintiffs. The sooner there is agreement regarding their treatment in the collective chapter 9 case, the sooner they will salvage something out of this financial predicament.
Accordingly, the bankruptcy policy of favoring a collective proceeding to work out a comprehensive solution to municipal insolvency counsels against permitting nonbankruptcy litigation that would materially interfere with the reorganization process.
The request for relief from stay will be denied. If the request were to be revived, it would have to be presented in a procedurally correct manner.
VI
Having established that there will be no TRO, no injunction, and no relief from the automatic stay, as well as having established that the claims-adjudication procedure within the collective chapter 9 case is adequate to establish and vindicate the legitimate interests of the plaintiffs, the question becomes what is left of this adversary proceeding?
The answer is: nothing is left of the adversary proceeding.
The court gave notice that "if this court concludes at or after the July 23, 2012, hearing that 11 U.S.C. § 904 denies jurisdiction to any court exercising authority over the chapter 9 case of the Defendant, then this adversary proceeding will be dismissed on the court's own motion." Order Setting Hearing and Mandatory Briefing Schedule at 2-3. The phrase "any court" refers to any federal trial or appellate judge.
The § 904 question having been answered with a conclusion that the court lacks authority, and it being plain that nothing is left in controversy in this adversary proceeding that is not more appropriately resolved through conventional bankruptcy procedures, the adversary proceeding is appropriate to dismiss.
VII
The final question is whether this court is permitted to enter an order dismissing the adversary proceeding. The answer turns on a two-step analysis focused on the subject-matter jurisdiction statute, 28 U.S.C. § 1334, and then on bankruptcy's judicial administration allocation, 28 U.S.C. § 157.
A
Since who the plaintiffs are and what they want influences the analysis at each level, the starting point is to clarify their status in the bankruptcy case.
The plaintiffs are "creditors" who have "claims" against the debtor. Specifically, a "creditor" includes a person with a "claim" against the debtor that arose before the order for relief. 11 U.S.C. § 101(10)(A).9
FOOTNOTES
9 "Creditor" is defined in the Bankruptcy Code:
(10) The term "creditor" means —
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;
(B) entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of this title; or
(C) entity that has a community claim.
11 U.S.C. § 101(10).
9 "Creditor" is defined in the Bankruptcy Code:
(10) The term "creditor" means —
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;
(B) entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of this title; or
(C) entity that has a community claim.
11 U.S.C. § 101(10).
The plaintiffs' asserted right to require the City to continue to pay for health benefits based on their prebankruptcy contractual rights are "claims." 11 U.S.C. § 101(5).10
FOOTNOTES
10 "Claim" is defined in the Bankruptcy Code:
(5) The term "claim" means —
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
11 U.S.C. § 101(5).
10 "Claim" is defined in the Bankruptcy Code:
(5) The term "claim" means —
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
11 U.S.C. § 101(5).
B
Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334(b), which confers jurisdiction on the district court over "all civil proceedings arising under title 11, or arising in or related to cases under title 11."
This bankruptcy court exercises § 1334 jurisdiction as a "unit" of the district court of which this bankruptcy judge is a "judicial officer of the district court." 28 U.S.C. § 151.
The allocation of authority as between district judges and bankruptcy judges is governed by 28 U.S.C. § 157. A bankruptcy judge may "hear and determine" and may "enter appropriate orders and judgments" in core proceedings. 28 U.S.C. § 157(b)(1).
In non-core proceedings that are otherwise "related to" a case under title 11, a bankruptcy judge may "hear" but not "determine" the matter, leaving the latter function to a district judge after considering the bankruptcy judge's proposed findings and conclusions and reviewing de novo matters to which a party has timely and specifically objected. 28 U.S.C. § 157(c) (1).11 The parties, however, may consent to have a bankruptcy judge "hear and determine" such a proceeding.
FOOTNOTES
11 That provision is:
(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. § 157(c)(1).
11 That provision is:
(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. § 157(c)(1).
The court has an independent duty to determine the core/non-core status of a proceeding and is not bound by allegations of the parties. 28 U.S.C. § 157(b)(3).12
FOOTNOTES
12 That duty is:
(3) The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.
28 U.S.C. § 157(b)(3).
12 That duty is:
(3) The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.
28 U.S.C. § 157(b)(3).
C
Starting with subject-matter jurisdiction, the problem is which category of § 1334(b): "arising under" title 11; "arising in" a case under title 11; or "related to" cases under title 11.
The plaintiffs' allegation that this -action is "related to" a case under title 11 is presented as a naked conclusion with no facts in support. The syntax of § 1334(b) appears to make the "related to" category a residual catchall to include matters that are not necessarily part of the bankruptcy case. But the fringes of this category have led to considerable litigation. 1 Collier ¶ 3.01 . The tendency to overuse this category has been criticized. See Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory, 41 Wm. & Mary L. Rev. 743, 862-920 (2000) (arguing "related to" category is narrower than commonly assumed). Now that waters are roiling in the wake of Stern v. Marshall, 131 S.Ct. 2594, 180 L. Ed. 2d 475 (2011), interests of efficient judicial administration make it important to focus carefully on the § 1334(b) categories.
In this adversary proceeding, the counts in the complaint assert rights against the City under nonbankruptcy law that might be considered in a court of general jurisdiction, but the reality is that this action would not exist in the absence of this chapter 9 case. Without the federal bankruptcy power to impair contracts, the City's unilateral reduction of retiree health benefits would not be attempted in the first place. In other words, but for the existence of this chapter 9 case, there would be no justiciable dispute. It follows that this dispute is too close to the heart of the bankruptcy case to be regarded as merely "related to" a case under title 11. The jurisdictional allegation in the complaint is rejected as incorrect.
The question then becomes whether this dispute "arises under title 11" or "arises in a case under title 11."
The "arising under" § 1334(b) category has heretofore been understood to mean causes of action that are created by the Bankruptcy Code. 1 Collier ¶ 3.01 . The difficulty here is that under the conventional view, the complaint does not invoke bankruptcy law; the Bankruptcy Code involvement occurs when § 904 swoops in from nowhere-mentioned-in-the-complaint to bar the injunction. While the City's unilateral interim action is permitted to occur during a bankruptcy case, title 11 does not specifically authorize the interim action. Nor are any of the plaintiffs' causes of action created by title 11. In these circumstances, the fit with the "arising under" category is uncomfortable; the "arising in" category may be the better fit. 1 Collier ¶ 3 . 01 .
The third § 1334(b) category is the proceeding "arising in" a case under title 11. The parameters of this intermediate category have been poorly outlined in the case law and deserve more careful attention. It is argued in the academic literature that, based on historical jurisprudence, more cases qualify as "arising in" a case under title 11 than commonly assumed. Brubaker, 41 Wm. & Mary L. Rev. at. 755, 859-62, 914 n.599.
Regardless, of whether the outer dimensions of § 1334(b) "arising in" jurisdiction may be uncertain, existing case law discerns such jurisdiction as including proceedings that, while not based on a right created by title 11, would not exist outside of bankruptcy. Harris v. Wittman (In re Harris), 590 F.3d 730, 737 (9th Cir. 2009); Maitland v. Mitchell (In re Harris Pine Mills, Inc.), 44 F.3d 1431, 1434 (9th Cir. 1995) ; Eastport Assoc. v. City of Los Angeles (In re Eastport Assoc.), 935 F.2d 1071, 1076 (9th Cir. 1991); Wood v. Wood (In re Wood). 825 F.2d 90, 97 (5th Cir. 1987); Menk v. LaPaglia (In re Menk), 241 B.R. 896, 909 (9th Cir. BAP 1999). It is sometimes said that "arising in" relates to the "administration" of the case. E.g. Wood, 825 F.2d at 97; 1 Collier ¶ 3.01 .
Here, the plaintiff creditors allege nonbankruptcy theories to attack interim measures regarding their claims taken under the authority of bankruptcy law in the course of administration of the case. The basis of the injunction complaint involves the debtor-creditor relationship between the parties and calls into question the enforceability of bankruptcy doctrines. Such a dispute comfortably fits within the established judicial construction of the § 1334(b) "arises in" category. 28 U.S.C. § 1334(b); Harris. 590 F.3d at 737-38; Menk, 241 B.R. at, 909. It is also sufficient (but not necessary) that the outcome is affected by a section of the Bankruptcy Code — § 904.
Accordingly, this proceeding "arises in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b).
D
The next task is to determine whether the proceeding qualifies as a core proceeding. Sixteen examples of core proceedings are listed at 28 U.S.C. § 157(b)(2)(A)-(P). The list is not limiting. 11 U.S.C. § 102(3); 1 Collier ¶ 3.02. As the definitions overlap and are nonexclusive, the sixteen categories are not mutually exclusive and fall into five general categories: (1) matters of administration; (2) avoidance actions; (3) matters concerning property of the estate; (4) omnibus categories; and (5) chapter 15 cases. 1 Collier ¶ 3.02 . The first and fourth categories are implicated in this instance.
This lawsuit is a core proceeding on three adequate, independent grounds: §§ 157(b)(2)(A), (B), and (O).
Since the gravamen of the complaint challenges interim actions being taken by the City in the course of administering the case, it qualifies as a core proceeding on that basis. 28 U.S.C. § 157(b) (2) (A) ; 1 Collier ¶ 3 . 02 .
The determination that the plaintiffs are "creditors" who have "claims" against the debtor implicates core proceeding status regarding "allowance or disallowance of claims" of creditors. 28 U.S.C. § 157(b)(2)(B). Thus, the demand for a declaratory judgment that plaintiffs have a vested property interest is merely a premature request that this court determine that their claims are allowed; this is the essential routine of the claims administration process.
Finally, this chapter 9 involves the adjustment of financial relations between the City and all of its creditors, including the plaintiffs, in a process that will culminate in a chapter 9 plan of adjustment. As such, this proceeding that focuses on the relationship between debtor City and creditor plaintiffs is a core proceeding as an "other proceeding" affecting the "adjustment of the debtor-creditor or the equity security holder relationship." 28 U.S.C. § 157(b)(2)(O); Harris, 590 F.3d at 738-40; 1 Collier ¶ 3.02 .
Therefore, this entire dispute is a "core proceeding" that "arises in" this chapter 9 case that a bankruptcy judge may "hear and determine" and "enter appropriate orders and judgments" pursuant to 28 U.S.C. § 157(b)(1).
The appropriate order in this instance is an order dismissing this adversary proceeding. The dismissal will be without prejudice to further prosecution of the plaintiffs' claims in the routine course of the reorganization and claims administration process, which process does not ordinarily require an adversary proceeding.
Conclusion
For the reasons stated, Bankruptcy Code § 904 forbids the injunction requested. Settled bankruptcy law permits the City to implement interim contractual modifications before the confirmation of a chapter 9 plan of adjustment but such revisions do not, as a matter of law, become permanent unless and Until made part of a confirmed plan of adjustment or otherwise voluntarily agreed. The plaintiffs' substantive claims will be more expeditiously fixed and determined in accordance with principles of due process without the need for this adversary proceeding. Stay relief is inappropriate because the nature of the dispute is integral to the adjustment of the debtor-creditor relationship that policy dictates occur in a single forum.
The remedy for the plaintiffs is to participate in the process of negotiating their treatment under a chapter 9 plan.
This is a core proceeding that "arises in" the chapter 9 case and would not exist "but for" the chapter 9 case.
Accordingly, orders will be entered DENYING the motion for TRO and preliminary injunction and declining to afford relief from the automatic stay.
This adversary proceeding will be DISMISSED, without prejudice to the prosecution by the plaintiffs of their various claims through conventional bankruptcy procedure.
Dated: August 6, 2012.
/s/ Christopher M. Klein Click for Enhanced Coverage Linking Searches
UNITED STATES BANKRUPTCY JUDGE
