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The Watercooler ~ Will CalPERS Be Immune in Stockton’s Bankruptcy Reorganization?

I thought I would lay out what the key legal battle will be as Stockton moves forward with their reorganization plan in bankruptcy proceedings.

Once again, it looks like federalism and the Tenth Amendment will be at the core of the battle as CalPERS — California’s public pension plan holder and Stockton’s biggest creditor — fights to remain immune from any contract modification in Stockton’s Chapter 9 reorganization.

More detail about key legal arguments is explained here:

As John Seiler pointed out here Tuesday, Monday’s court ruling by U.S. Bankruptcy Judge Christopher Klein isn’t seen as definitive. Yes, the city of Stockton can proceed with its bankruptcy filing. No, Klein doesn’t yet agree with the city’s plan to only short bondholders and not CalPERS, its biggest creditor, as it reorganizes under Chapter 9 of federal bankruptcy law. He explicitly said later that he will decide on its fairness later.

CalPERS maintains that under the Tenth Amendment, California’s Constitution — which protects public pensions from contract modification in bankruptcy reorganization — trumps federal bankruptcy laws:

The issues at stake — whether California state laws protecting public employee pension obligations are pre-empted and superseded by Congress’s Article I, Section 8 authority to establish uniform laws regarding bankruptcy, or are protected under the Tenth Amendment — implicate fundamental issues of federalism, and in all likelihood the Supreme Court will eventually need to resolve the questions being raised regarding the proper balance between state and federal power.

At this point the judge has hinted that he disagrees with CalPERS. With so much at stake, everyone will be watching this case closely.

The Watercooler is always an open thread.

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