Aggravating Municipal Bankruptcy Recovery & Federalism in Chapter 9. U.S. Bankruptcy Judge Meredith Jury has denied a request by San Bernardino officials to block state efforts to collect $15.2 million in disputed redevelopment funds from the city, although Judge Jury held out the possibility that the city could seek future relief during a hearing in U.S. District Court in Riverside. Last March, the California Department of Finance warned San Bernardino officials that it might withhold the city’s future sales and property tax proceeds if the city did not turn over $15.2 million that department officials contend was not a proper use of redevelopment dollars, but state officials had agreed not to act on the threat pending a ruling by the bankruptcy court. San Bernardino, in turn, had sought protection from the bankruptcy court, claiming the automatic stay with its Chapter 9 petition sheltered it against the state’s actions and warning that any state attempts to garnish the city’s tax proceeds could have dire consequences for a city that already has made deep cuts to services. In her denial, Judge Jury held that the state’s order was against the successor to the city’s redevelopment agency, which is legally a separate entity from the city, even though it is controlled by the mayor and council. In addition, Judge Jury wrote that the city had failed to show that it would suffer irreparable harm if the state action were to withhold taxes from the successor agency: in order to prevail, Judge Jury wrote, the city must make the case that the state’s action would harm its pendency plan – a budget plan to get through bankruptcy. Judge Jury agreed to give the city until Sept. 23rd to file an amended complaint. Subsequent to the hearing, San Bernardino officials said they were confident that the state would not take action until the city has another chance to challenge it, and Mayor Pat Morris said the city’s successor agency does not have the $15.2 million, so that paying that obligation would negatively impact its budget. The effort to go after San Bernardino is not targeted, but rather part of a broader effort by the California state Department of Finance to warn a number of local governments in recent months as it deals with last year’s dissolution of redevelopment agencies. Several cities and counties have challenged the agency’s rejection of post-redevelopment expenses.

 Jeffco: Who’s in Charge of personnel policy in a Municipal Bankruptcy?  U.S. District Court Judge Lynwood Smith, in a 147-page opinion, last week appointed a receiver to select, hire, promote, demote, discipline, or fire Jefferson County employees as part of an order finding the county in contempt for failing to comply over the past three decades with the requirements of the consent decree on its hiring practices. This receiver is different than and not connected to the Jefferson County’s bankruptcy receiver, but rather to the hiring practices and the Jefferson County Commission’s Department of Human Resources. Under the judicial order, the receiver to be named by the end of next month will be responsible for the county’s HR department and report only to the court. Judge Smith wrote that the imposition of a receiver under normal circumstances is a “remedy of last resort,” but fully justified in the present circumstances. The consent decree case has been ongoing since December 29, 1982, so that, as Judge Smith wrote, it has become the American equivalent of a long running legal case depicted in a Charles Dickens novel; however, in contrast, the judge noted: “[T]his litigation is not fictional and its longevity no joking matter…This court finds that no other remedy would be adequate to correct the effects of three decades of blatantly contumacious conduct.” The extraordinary remedy of appointing a receiver over the County’s Department of Human Resources—“who will be answerable to no one but this court—is warranted in light of all of the factors addressed in this opinion.” Judge Smith had restarted this contempt hearing last December to decide whether the county has failed to comply with the decree to improve the county’s employment practices. The hearing was held based on a newly filed 2007 motion by attorneys representing groups of people who had sued—known as the Martin-Bryant plaintiffs—to hold the county in civil contempt of court. The plaintiffs’ attorney alleged that after signing the 1982 consent decree, Jefferson County had “utterly ignored” it. In his opinion, Judge Smith ordered the parties to confer regarding prospective candidates for the position of receiver; the extent of the receiver’s duties; the receiver’s compensation; the receiver’s support staff and personnel and other duties. Noting, in his opinion, that the county established a 30-year pattern of “intentional, willful disobedience of this court’s orders,” without even taking into account the “numerous, additional violations” detailed in the Martin-Bryant parties’ proposed findings of fact and conclusions of law. While increasing the number of blacks and females was constructive, Judge Smith opined: “The decree prohibits discrimination of any kind on the basis of race or gender, and it requires that blacks and females be considered for employment with the county on the same basis as whites and males.” Smith said the parties are further directed to file a joint report of any prospective candidates for the position of receiver on or before Sept. 20 and send a proposed order to be entered when a receiver is formally appointed on or before Sept. 25.

Jefferson County Manager Tony Petelos said he was reviewing the order and looking forward to complying with the judge’s opinion. Jefferson County Commissioner Jimmie Stephens said he had hoped a monitor would be appointed to work along with Petelos, instead of a receiver who would have broad powers:  “My only regret is that the judge didn’t give the commission a chance to move forward…with a monitor and allow Mr. Petelos to make some long range decisions for the county…He only has a little over a year under his belt and he now has the institutional knowledge to make those decisions.” Jefferson County Commission President David Carrington said the ruling “now gives the county a definitive pathway to resolving a consent decree that was entered more than 30 years ago.”


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