Cobb v. City of Stockton (In re City of Stockton)

909 F.3d 1256

IN RE CITY OF STOCKTON, CALIFORNIA, Debtor,

Michael A. Cobb, Objector-Appellant,

v.City of Stockton, Debtor-Appellee.

No. 14-17269

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 14, 2016

Resubmitted December 10, 2018 San Francisco, California

Filed December 10, 2018

Bradford J. Dozier (argued), Atherton & Dozier, Stockton, California, for Objector-Appellant.

Robert Loeb (argued), Orrick Herrington & Sutcliffe LLP, Washington, D.C.; Christopher J. Cariello, Orrick Herrington & Sutcliffe LLP, New York, New York; Lesley M. Durmann, Patrick B. Bocash, and Marc A. Levinson, Orrick Herrington & Sutcliffe LLP, Sacramento, California; for Debtor-Appellee.

Before: Sidney R. Thomas, Chief Judge, and Ronald M. Gould and Michelle T. Friedland, Circuit Judges.^*

Dissent by Judge Friedland

OPINION

THOMAS, Chief Judge:

Michael Cobb appeals the bankruptcy court’s order denying his objection to confirmation of a Chapter 9. However, he did not seek a stay of confirmation at any stage; the plan has been substantially consummated; the relief of undoing plan confirmation would bear unduly on innocent third parties; and the bankruptcy court could not fashion relief without undoing the confirmed plan. Therefore, we dismiss his appeal as equitably moot. His claims also fail on the merits.

I

A

When it filed its Chapter 9 petition, Stockton became the largest city in history to seek municipal bankruptcy protection. The recession had reduced property values by half, and 22% of Stockton’s residents were unemployed. Franklin High Yield Tax-Free Income Fund v. City of Stockton ( In re City of Stockton ), 542 B.R. 261, 265 (B.A.P. 9th Cir. 2015). The City was unable to pay bondholders, it had over-committed to public pensions, and its accounting system was in disarray. Id. Budget cuts left police able to respond only to emergency calls. Id. at 266, 274. Stockton ranked 10th in the nation in its violent crime rate, with homicides at an all-time record. In re City of Stockton , 493 B.R. 772, 780 (Bankr. E.D. Cal. 2013). In a cost-cutting initiative commenced in 2008, the City workforce decreased by 25%. Id. The police force was reduced by 20%; the fire department’s workforce by 30%; and the public works employee workforce by 38%. Id.

Despite these cost-cutting measures, the City projected a general fund deficit of almost $9 million as of June 2012 and a deficit of $20 to $30 million in the next fiscal year. Id. ; Franklin , 542 B.R. at 266. The City Council authorized diversion of money from earmarked funds and intentionally defaulted on payments for over $2 million of bonds. In re City of Stockton , 493 B.R. at 781, 789. It also authorized a neutral evaluation process under California Government Code § 53760, a prerequisite to a Chapter 9 bankruptcy filing. Franklin , 542 B.R. at 266.

Unlike other voluntary bankruptcy petitioners, a Chapter 9 debtor must prove that it is eligible for bankruptcy relief. 11 U.S.C. §§ 109(c), 921(c). One of the statutory requirements is that the debtor must prove that it is insolvent. 11 U.S.C. § 109(c)(3). Here, the City filed a petition for an Order for Relief alleging that it was eligible for bankruptcy and, in fact, was insolvent. After a three-day bench trial, the bankruptcy court issued an extensive order making factual findings and determining that the City was eligible for Chapter 9 relief. As to insolvency, the court examined the City’s ability to: (1) pay its debts as they matured (commonly referred to as "cash insolvency"); (2) pay for the costs of providing services required for the health, safety, and welfare of the community (commonly called "service delivery insolvency"); and (3) create a balanced budget (termed "budget insolvency"). After considering the evidence, the court found that:

The sum of the evidence establishes that the City was insolvent by all available measures when it filed its chapter 9 case. It was cash insolvent, unable to pay its debts as they came due as required by § 101(32)(C) and § 109(c)(3). That it was service delivery insolvent confirms that the cash insolvency was not a mere technical insolvency. That it was budget insolvent for the long term confirms that the insolvency would persist without realignment of revenues and expenses. Hence, the City satisfied the insolvency requirement of § 109(c)(3).

In re City of Stockton , 493 B.R. at 790–91.

The ensuing Chapter 9 proceedings were complex, costly, and contentious. Franklin , 542 B.R. at 266. Pre-petition settlements were reached with a number of creditors, and collective bargaining agreements were renegotiated. Id. Under the guidance of a court-appointed mediator, post-petition settlements were reached with the California Public Employees’ Retirement System; the Stockton Police Officers’ Association; the Official Committee of Retirees; Assured Guaranty Corporation (which insured the City’s pension bonds); the National Public Finance Guarantee Corporation (an insurer of almost $100 million in city bonds); Ambac Assurance Corporation (an insurer of $13.3 million in City certificates of participation); and Wells Fargo Bank (indenture trustee for a number of the City’s bond issues). Id. at 266–67. Eventually, over the objections of some creditors, including Cobb, Stockton’s plan of reorganization was confirmed. Id. at 268.

The plan was funded by "a sales tax increase in the greatest amount and for the longest period permitted by California law." Id. at 271 (citation omitted). Under the plan, City employees and retirees "shared the pain" with the capital market and bond creditors, losing the pension and lifetime health benefits around which they had planned their futures. Id. (citation omitted). The plan provided for payment of $1.5 billion in claims distributed among 20 classes of creditors.

The plan became effective in February 2015. Id. at 276. Pursuant to the plan, the City made wire transfers totaling $13.1 million, including a settlement of health care benefits to retirees and payments to institutional creditors. The City implemented the provisions of the plan, restructuring its obligations to two other major institutional creditors by conveying title to 17 parking lots and garages, assigning leasehold interests, and assigning an option for the purchase of a city office building. The City has continued to make its payments pursuant to the plan, with secured creditors receiving lower payments on the secured debt and unsecured creditors receiving lesser amounts.

B

So, what was Objector-Appellant Michael Cobb’s part in all of this? The background is somewhat procedurally complex. Cobb’s father, Andrew Cobb, owned a parcel of land in Stockton. In 1998, the Stockton City Council resolved that the public necessity required the condemnation of a strip of land across the parcel for the purpose of building a road.

In California, the power of eminent domain can be exercised through traditional condemnation proceedings, where possession is taken at the time of judgment, or through "quick-take" condemnation where a locality can take possession upon depositing a probable compensation amount determined by a qualified expert appraiser. Cal. Const. art. I, § 19 ; Cal. Civ. Proc. Code § 1255.010 ; see also Mt. San Jacinto Cmty. Coll. Dist. v. Superior Court of Riverside Cty. , 40 Cal.4th 648, 54 Cal.Rptr.3d 752, 151 P.3d 1166, 1168 (2007). Following the deposit of funds under the "quick-take" procedure, the government may move the court for an immediate possession order. Cal. Civ. Proc. Code § 1255.410. If the defendant elects to withdraw the proposed compensation amount, he waives all claims and defenses to the condemnation, except a claim for greater compensation. Cal. Civ. Proc. Code § 1255.260.

Stockton elected to use the "quick-take" process. Thus, pursuant to California Civil Procedure Code § 1255.010, the City had an expert appraise the parcel to determine the amount of just compensation owed to Andrew Cobb. The appraiser valued the parcel at $90,200.00. As required by the "quick-take" provisions, the City deposited that sum with the California State Treasurer Condemnation Deposits Fund. That same day, the City initiated eminent domain proceedings in the Superior Court of California, County of San Joaquin, to acquire a permanent easement over the parcel (the "eminent domain action").

Later that year, the Superior Court determined the City had met the requirements of § 1255.010, concluded it had met the requirements of probable compensation, and issued an Order for Prejudgment Possession in favor of the City. A road was then built on the parcel, and the Stockton City Council passed a resolution in 2000 accepting the improvements.

In the meantime, Andrew Cobb passed away and his son, Michael Cobb, inherited the parcel. After Andrew Cobb’s death, Cobb was substituted in the condemnation action. He entered into a stipulation with the City allowing him to withdraw the deposited amount and, in 2000, he withdrew the entire amount of the deposit. At that point, by operation of law, he waived all of his defenses and claims to the property, except a claim for greater compensation. Cal. Civ. Proc. Code § 1255.260. In other words, Cobb gave up all rights to the property. He did not assert a counterclaim for greater compensation in the condemnation proceeding.

Seven years later, Cobb attempted to return the $90,200.00 to the City—apparently in an attempt to revoke his earlier waiver—but the City would not accept the funds, explaining that the withdrawal of probable compensation was final under California law. Cobb deposited the funds into an interest-bearing trust account.

In 2007, the Superior Court dismissed the City’s eminent domain action because it had not been brought to trial within five years of its commencement, as is required by California Civil Procedure Code § 583.310. A year later, Cobb filed a complaint in San Joaquin County Superior Court, seeking relief for inverse condemnation (the "inverse condemnation...