CA Municipalities Must Mediate Before Filing Bankruptcy

Karol Denniston of Schiff Hardin has brought our attention to recently enacted legislation in California requiring mediation, in most instances, before a municipality may seek protection under Chapter 9 of the federal bankruptcy laws.

The new law (Assembly Bill 506) requires a municipality to either participate in a 60-day “neutral evaluation process” or declare a fiscal emergency that jeopardizes the “health, safety or well-being” of its residents.

Ms. Denniston, an ADR veteran and former Chair of the ABA Business Law’s Dispute Resolution Committee, played a central role in framing this legislation.  It effects all municipalities, including cities, counties, boards, districts, and authorities.

In the context of municipalities’ declining tax revenues and increasing financial responsibilities resulting from withdrawal of state and federal funding, municipal bankruptcies are increasing.  The new California law provides a confidential, neutral forum in which municipalities and their creditors can exchange current and projected financial information, negotiate restructuring of municipal obligations, and educate each other on the risks and benefits of a Chapter 9 filing — all within the confines of confidentiality assured by California’s mediation laws.

More information on this interesting development is available here and in articles linked to Karol’s biography (linked above). 

The early days of mediation — initiated and controlled by private parties — seem increasingly an innocent thing of the past, as the process has become compulsory in many instances.  Public policy seems to dictate that the potential benefits of mediation be investigated, whether the parties wish it or not.  As the current election debate illustrates, sometimes it is about “me” and sometimes it is about “us.”

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