BB&K In The News

BB&K attorney Isabel Safie explores in the Daily Journal how the Detroit bankruptcy case may impact CalPERS in bankruptcies of California municipalities.

On May 1, the California Public Employees' Retirement System, or CalPERS, filed an amicus brief in the 6th U.S. Circuit Court of Appeals urging reversal of U.S. Bankruptcy Judge Steven Rhodes' determination that vested pension rights could be impaired in a bankruptcy proceeding. If CalPERS' actions are any indication, it is concerned with the impact that the decision reached by Rhodes in hire City of Detroit will have on municipal (a term that includes any political subdivision or public agency or instrumentality of a state) bankruptcies in California. Over 3,000 California public entities contract with Ca1PERS for pension benefits. Municipal bankruptcies are governed by Chapter 9 of the U.S. Bankruptcy Code, and while rising pension costs have contributed to multiple municipal bankruptcies - Vallejo, Stockton and San Bernardino - in California in recent years, the ability to reduce amounts owed to CalPERS has never directly been addressed.

On its face, the ruling in Detroit represents a seismic shift in the way courts have traditionally viewed the pensions of public employees. In essence, the Detroit case holds that state laws, including state constitutions, protecting the pensions of public employees will not apply in bankruptcy such that those pensions may be impaired as part of the debt restructuring plan of a Chapter 9 debtor. This ruling is in stark contrast with the position that CalPERS has taken in Chapter 9 bankruptcies - that public pensions are untouchable in bankruptcy court or elsewhere.

On its face, the ruling in Detroit represents a seismic shift in the way courts have traditionally viewed the pensions of public employees. In essence, the Detroit case holds that state laws, including state constitutions, protecting the pensions of public employees will not apply in bankruptcy such that those pensions may be impaired as part of the debt restructuring plan of a Chapter 9 debtor. This ruling is in stark contrast with the position that CalPERS has taken in Chapter 9 bankruptcies - that public pensions are untouchable in bankruptcy court or elsewhere.

Click here to read the entire article published on May 22, 2014 in the Dail Journal (subscription required).