Bill would limit municipal bankruptcies in California

The almost unfettered power that unions possess in California takes one's breath away. One place that is not the case is in Chapter 9, a.k.a., municipal bankruptcy. In Chapter 9, a city can renegotiate union contracts in a fair and open forum. But the California Senate is trying to limit the right of municipalities, including hospitals and water districts, to file Chapter 9.

The Senate Local Government Committee on Monday approved legislation that would require cities to first secure permission from an obscure appointed state agency before they could file for bankruptcy.

That panel would have the authority to force cities and local districts, including those providing water service and hospital care, to slash budgets elsewhere before seeking bankruptcy protection.

“It’s a bad idea,” Jay Goldstone, the city of San Diego’s chief operating officer, said in an interview. “The state should not be dictating whether a local government does or does not qualify for bankruptcy. … That’s what the courts should be for.”

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Coincidentally, Goldstone is one of the appointees to the California Debt and Investment Advisory Commission, which would be granted the new oversight power. The commission now provides local governments with advice and technical assistance on debts and investments.

Bankruptcy is not a job for the commission, Goldstone said.

“This just adds another bureaucratic layer at a time when we probably need less bureaucracy, not more,” he said.

Senate Considers Allowing Small Businesses to File Chapter 12

The Senate Judiciary Committee held a hearing entitled Could Bankruptcy Reform Help Preserve Small Business Jobs on March 17, 2010. The ideas presented at the hearing included a proposal to add a new category of entity that could file Chapter 12 (formerly reserved for family farmers and fisherman)--"small business enterprises."

A small business enterprise would be defined as a small business with $10 million or less of debt where at least 50% of the debt had been incurred for business purposes. An exhaustive analysis of the proposal and proposed bill langauge can be found at http://judiciary.senate.gov/pdf/3-17-10%20Small%20Report.pdf.

This kind of proposal makes a great deal of sense for many reasons. First, it is rare indeed to find a Chapter 11 case that can be completed for less than $30,000 in attorney fees. A Chapter 12 case, on the other hand, might be able to be done for half of that on a fairly regular basis. Second, Chapter 13 would also be an inexpensive route, but the debt limits for Chapter 13 are so low that many small businesses do not qualify and Chapter 13 only applies to individuals, not LLC's or corporations. Consequently, many small businesses that are incorporated (even those under the debt limits) do not qualify to file Chapter 13.

Opening up Chapter 12 like this makes a great deal of sense and the Senate should be encouraged to take up such a bill and to pass it.

Mr. Fear Quoted in Article on Debt Consolidation/Negotiation

I was recently quoted in an article in The Business Journal entitled: Local attorney cautions against debt consolidation. The reporter in this story was trying to do a story setting out the pros and cons of debt negotiation/consolidation. I highly encouraged him to try to contact a debt negotation company for an interview. I even gave him quite a few questions to ask. Apparently, he was unable to get anyone to give him an interview, because they are not quoted here.