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Warning! This is a not the current version of this legislative bill.
Italicized text includes proposed additions to law or the previous version of the bill.
Struck text includes proposed deletions to law or the previous version of the bill.

(pdf version)
AMENDED IN ASSEMBLY MAY 31, 2011
AMENDED IN ASSEMBLY MARCH 31, 2011

INTRODUCED BY Assembly Member Wieckowski

FEBRUARY 15, 2011

An act to amend Section 53760 of, and to add Sections 8860,
53760.3,
53760.5, 53761, 53761.5, 53762, 53762.5, and 53763 to,
the Government Code, relating to local government.


LEGISLATIVE COUNSEL'S DIGEST


AB 506, as amended, Wieckowski. Local government: bankruptcy:
mediation. neutral evaluation.
Under existing law, any taxing agency or instrumentality of the
state may file a petition and prosecute to completion bankruptcy
proceedings permitted under the laws of the United States.
This bill would provide that a local public entity shall not file
under federal bankruptcy law unless the local public entity has
participated in mediation a neutral
evaluation process
with interested parties, as defined, has
received a certificate of good faith participation, and if the
mediation neutral evaluation results in
either an agreement for debt readjustment, or if the
mediator
neutral evaluator certifies in writing
that continued mediation neutral evaluation
will not contribute to a resolution of the parties' dispute,
under certain circumstances. The bill would also require the
California Debt and Investment Advisory Commission to adopt
mediation guidelines
provide technical assistance as a
neutral third party as necessary in any neutral evaluation process
, as specified.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. The Legislature hereby finds and declares all of the
following:
(a) The California Constitution and current statutory law provide
for a continuity and interdependence between state and local
government entities. Seeking financial relief through the provisions
of Chapter 9 of federal Bankruptcy Code imposes substantial
administrative costs and expenses on a municipality, potentially
exceeding several million dollars. Filing In
order for a municipality to be a debtor under Chapter 9, the
municipality shall make certain showings
required by
subdivision (c) of Section 109 of Title 11 of the United State Code,
that include, but are not limited to, establishing that the
municipality is insolvent, the municipally desires to effect a plan
to adjust its debts, and that the municipality has negotiated in good
faith or attempted to negotiate in good faith with its creditors, as
specified in that section.

(b) Filing for Chapter 9 can
reduce service levels to the taxpayers and residents of a
municipality. In some circumstances, it can have major short-term and
long-term fiscal consequences for the municipality, the surrounding
municipalities, and the state. Filing for bankruptcy protection under
Chapter 9 should be considered a last resort, to be instituted only
after other reasonable efforts have been made, to avoid a bankruptcy
filing or otherwise appropriately plan for it. It is in the interest
of the state, local governments, and the public that local government
entities have sufficiently sound financial capacity to provide
required services to the public and meet their contractual and other
obligations during any restructuring or financial reorganization
process. Furthermore, it is in the best interest of the public, the
state, and local government entities, the employees, investors,
bondholders, and other interest holders be included in an appropriate
restructuring process and have an adequate understanding of the
financial capacity of local government entities and their
obligations, as a clear understanding of both is necessary for any
restructuring or reorganization process.
(b)

(c) The Legislature has an interest in monitoring the
conditions under which local entities may seek Chapter 9 protection.
The relief provided through the bankruptcy process can affect state
and municipal government service levels, debt, and contracts. The
Legislature has a strong interest in ensuring adequate disclosure of
the conditions under which a municipality may seek Chapter 9
protection and providing a process to make any Chapter 9 filing as
efficient as possible.
(c)

(d) To the extent financial relief granted through
Chapter 9 can affect debt service payments, the state's investors and
bondholders have a direct interest in the Chapter 9 process,
particularly prior to filing. So it is important for those parties to
be able to participate in a prefiling confidential
mediation
neutral evaluation process that could
assist parties in reaching a settlement and avoiding a bankruptcy
filing or otherwise lead to a prenegotiated consensual plan of
readjustment as clearly contemplated by subdivision (c) of
Section 109 of Title 11 of the United States Code
.
(d)

(e) To the extent financial relief granted through
Chapter 9 could affect public employee compensation, employees have a
direct interest in the Chapter 9 process, particularly prior to
filing. Therefore, it is important for those parties to be able to
participate in a prefiling confidential mediation
neutral evaluation process that could assist parties in
reaching a settlement or otherwise lead to a prenegotiated agreement
and avoid a Chapter 9 filing.
(e)

(f) The state has established a statewide system of
public employee collective bargaining for state and local government
employers and employees intended to protect the state's interest in
promoting peaceful and harmonious labor relations and preventing work
stoppages. Contracts reached through collective bargaining are
essential to maintaining labor peace and the uninterrupted delivery
of vital public services, and these agreements may be subject to
review, amendment or rejection in the event of a Chapter 9 bankruptcy
proceeding. However, it is the intent of the Legislature that the
rights of workers to collectively bargain shall be fully enforced and
respected in the mediation neutral
evaluation
process.
(f)

(g) Currently, 23 states do not permit municipalities
to file for bankruptcy. Twenty-seven states permit municipalities to
file for bankruptcy, but most states impose standards and guidelines
for access to bankruptcy proceedings. California is one of only 10
states that does not restrict or otherwise limit authority of its
municipalities to file for bankruptcy. At present, California offers
no opportunity for those municipalities that are insolvent to receive
state-level, prebankruptcy guidance, oversight, mediation
neutral evaluation , or assistance. Nor does the
state provide a mechanism for exchange of current and projected
financial information with public employee representatives, debt and
bondholders, and other interested parties in a prebankruptcy setting
even if these municipalities are not currently insolvent but
concerned about becoming insolvent and unable to pay obligations as
these obligations come due. As a result, there is no process in
this state requiring potential Chapter 9 debtors to qualify as
Chapter 9 debtors, leaving these cases subject to motions to dismiss
on any number of grounds, thus delaying earlier resolution and
increasing administrative fees and costs.

(g)

(h) State intervention in local affairs should only
occur in exceptional circumstances and not without a compelling
interest of statewide concern.
(h)

(i) Given the connection between state allocations and
local budgets, the state has a role in assisting municipalities to
address potential insolvency with the goal of averting municipality
bankruptcy filings where possible and providing a process designed to
make the debt restructuring process in or outside of a Chapter 9
bankruptcy as cost effective and efficient as possible for all
participants.
(i)

(j) It is the duty of all state and local elected
officials to ensure that governments provide essential services to
the communities they are elected to serve, and to respect collective
bargaining agreements reached with their employees.
(j)

(k) California's taxpayers who rely on public safety,
senior, recreational, municipal health, library, and other public
services as well as those who own and operate businesses in our
communities, deserve every reasonable and appropriate effort that
state and local government can make to avoid adverse consequences of
Chapter 9 bankruptcy filings, particularly where mediation
a neutral evaluation may lead to out-of-court
resolution of outstanding obligations and disputes or to a preagreed,
prenegotiated plan of readjustment.
(k)

(l) Resolving municipal and state business and
financial issues in a timely, fair and cost-effective manner is an
integral part of a successful government and is in the public
interest. It has long been recognized that alternative dispute
resolution proceedings, like mediation a
neutral evaluation
, offer an economical, discreet, and
expeditious way to resolve potentially devastating situations.

(l)

(m) Through the mediation
neutral evaluation
process, the mediator
neutral evaluator
, a specially trained, neutral third party
can assist the municipality and its creditors and stakeholders to
fully explore alternatives, while allowing the interested parties to
exchange information in a confidential environment with the
assistance and supervision of a mediator
neutral evaluator
to determine whether the municipality's
contractual and financial obligations can be renegotiated on a
consensual basis.
(m)

(n) The California Debt and Investment Advisory
Commission is the appropriate body to administer the
mediation process in conjunction with an appropriate alternative
dispute resolution program within the state. As a result of the
commission's
Commission's current statutory
duties to collect municipal finance data, conduct research,
administer educational seminars, and provide information and
technical assistance on behalf of municipalities, and given the
commission's membership, it is appropriate that the commission be
able to convene mediations, with the assistance of a neutral
third-party nongovernmental entity that will administer the
mediation and train the mediators,
provide technical
assistance as a neutral party
at the request of a municipality
contemplating restructuring or a Chapter 9 filing or by a stakeholder
concerned about the financial condition of the municipality.
It is the intent of the Legislature that the commission may
consult with the Judicial Arbitration and Mediation Services, the
Executive Office for U.S. Trustees, retired bankruptcy judges, or
other appropriate entities in establishing and administering the
program.

SEC. 2. Section 8860 is added to the Government Code, to read:

8860. The commission shall adopt mediation guidelines for
mediation relating to local public entity bankruptcy conducted
pursuant to Article 5 (commencing with Section 53760) of Chapter 4 of
Part 1 of Division 2 of Title 5. The commission may consult with the
Judicial Arbitration and Mediation Services, the Executive Office
for U.S. Trustees, the retired bankruptcy judges, or other
appropriate entities in adopting these guidelines.

8860. The commission shall, when requested by a local
public agency or a neutral evaluator, serve as a neutral third party
to provide technical assistance in any neutral evaluation process
conducted pursuant to Article 5 (commencing with Section 53760) of
Chapter 4 of Part 1 of Division 2 of Title 5.
SEC. 3. Section 53760 of the Government Code is amended to read:
53760. (a) Except as otherwise provided by statute, a local
public entity in this state shall not file a petition and exercise
powers pursuant to applicable federal bankruptcy law unless the local
public entity has participated in mediation
the neutral evaluation process
as provided in Section 8860 and
received a good faith certification from the mediator
neutral evaluator , and if one of the following
applies:
(1) The local public entity has reached an out-of-court agreement
with all interested parties regarding a plan of adjustment pursuant
to subdivision (b) of Section 53762.5.
(2) The local public entity and the interested parties were unable
to reach an out-of-court agreement and the mediator
neutral evaluator has certified in writing that
the parties have participated in mediation
the neutral evaluation process
in good faith, pursuant to
subdivision (d) of Section 53762.5.
(3) The local public entity initiated the mediation
proceeding
neutral evaluation process and
interested parties did not participate in the mediation
neutral evaluation process , pursuant to
subdivision (e) of Section 53762.5 and has disclosed documents
arising from the process required by Section 8860
.
(b) A local public entity shall not file a petition and exercise
powers pursuant to subdivision (a) if either of the
following occur:

(1) The mediator determines that solvency or effective debt
restructuring can be achieved through settlement with all interested
parties and that a settlement can be reached through further
mediation.

(2) The mediator
the neutral evaluator determines that a local
entity has failed to participate in the neutral evaluation
process in
good faith mediation . Failure to
participate in good faith includes, but is not limited to, the
failure to provide accurate and essential financial information, the
failure to attempt to reach settlement with all interested parties to
avert bankruptcy, or evidence of manipulation to delay and obstruct
a timely agreement.
(c) As used in this section article
, "local public entity" means any county, city, district, public
authority, public agency, or other entity, without limitation, that
is a "municipality," as defined in paragraph (40) of Section 101 of
Title 11 of the United States Code (bankruptcy), or that qualifies as
a debtor under any other federal bankruptcy law applicable to local
public entities.
SEC. 4. Section 53760.3 is added to the
Government Code
, to read:
53760.3. (a) A local public entity may initiate the neutral
evaluation process pursuant to this article. A neutral evaluator
shall oversee the neutral evaluation process, and shall facilitate
all of the requirements set forth in subdivision (b).
(b) (1) The local public entity shall make complete disclosure of
all documentation necessary to clearly demonstrate whether the local
public entity is solvent, including, but not limited to, financial
reports, expenditures, assets, and any other relevant documentation.
(2) The local public entity and any interested party shall make
present information to each other, which shall include, but is not
limited to, the status of funds of the local public agency that
clearly distinguishes between general funds and special funds.
(3) The local public entity and any interested party shall present
its proposed plan of readjustment.
(4) The local public entity and any interested party shall
negotiate in good faith.
(c) The neutral evaluation process shall be confidential, and is
subject to Section 703.5 and Chapter 2 (commencing with Section 1115)
of Division 9 of the Evidence Code.

SEC. 4. SEC. 5. Section 53760.5 is
added to the Government Code, to read:
53760.5. (a) A local public entity may initiate a
mediation
the neutral evaluation process when
the local public entity is or likely will become unable to meet its
financial obligations when those obligations are due or become due
and owing.
(b) Mediation A neutral evaluation
shall be conducted through an alternative dispute resolution program
within the state and in accordance with mediation guidelines
adopted by the commission
Section 8860 .
(c) The role of the mediator neutral
evaluator
shall be to assist all interested parties in reaching
an equitable settlement to avert a Chapter 9 filing. The
mediator
neutral evaluator shall also assist the
parties in identifying the anticipated legal costs associated with a
Chapter 9 filing relative to the local public entity's budget
shortfall. The mediator neutral evaluator
may consult with the Judicial Arbitration and
Mediation Services
alternate dispute resolution
service providers, the California Debt and Investment Advisory
Commission
, the Executive Office for U.S. Trustees, retired
bankruptcy judges, or other appropriate entities in establishing and
administering the mediation neutral
evaluation regarding issues
that are not confidential
.
SEC. 5. SEC. 6. Section 53761 is
added to the Government Code, to read:
53761. (a) A mediator neutral evaluator
shall meet all of the following qualifications:
(1) At least 10 years of high level business or legal practice
involving bankruptcy.
(2) Experience and training in conflict resolution
and alternative dispute resolution
.
(3) Completion of a mandatory training program in municipal
organization, municipal debt restructuring, Chapter 9 bankruptcy,
public finance, taxation, California constitutional law, California
labor law, federal labor law, and municipal finance dispute
resolution, provided through an alternative dispute resolution
program within the state.
(b) The mediator neutral evaluator
shall be impartial, objective, independent, and free from prejudice.
The mediator neutral evaluator shall
not act with partiality or prejudice based on any participant's
personal characteristics, background, values or beliefs, or
performance during mediation the neutral
evaluation process
.
(c) The mediator neutral evaluator
shall avoid a conflict of interest or the appearance of a conflict of
interest during and after a mediation the
neutral evaluation process
. The mediator
neutral evaluator shall make a reasonable inquiry to
determine whether there are any facts that a reasonable individual
would consider likely to create a potential or actual conflict of
interest. Prior to mediation, the mediator
the neutral evaluation process, the neutral evaluator
shall not
establish another relationship with any of the parties in a manner
that would raise questions about the integrity of the
mediation
neutral evaluation , except that the
mediator neutral evaluator may conduct
further mediations neutral evaluations
regarding other potential local public entities that may involve some
of the same or similar constituents to a prior mediation.
(d) The mediator neutral evaluator
shall conduct the mediation neutral
evaluation process
in a manner that promotes voluntary,
uncoerced decisionmaking in which each party makes free and informed
choices regarding the process and outcome.
(e) The mediator neutral evaluator
shall not impose a settlement on the parties. The mediator
neutral evaluator shall use his or her best
efforts to assist the parties to reach a satisfactory resolution of
their disputes. Subject to the discretion of the mediator,
the mediator
neutral evaluator, the neutral
evaluator
may make oral or written recommendations for
settlement or plan of readjustment to a party privately or ,
if the parties agree,
to all parties jointly.
(f) The mediator neutral evaluator
has a duty to instruct and inform the local public entity and all
parties of the limitations of Chapter 9 relative to other chapters of
the bankruptcy codes. This instruction shall highlight the limited
authority of United States bankruptcy judges in Chapter 9 such as the
lack of flexibility available to judges to reduce or cram down debt
repayments and similar efforts not available to reorganize the
operations of the city, that may be available to a corporate entity.
(g) The mediator shall neutral evaluator
may
request from the parties documentation and other
information that the mediator neutral
evaluator
believes may be helpful in assisting the parties to
address the obligations between them.
(h) In the event a complete settlement of all or some issues in
dispute is not achieved within the scheduled mediation
neutral evaluation session or sessions, the
mediator neutral evaluator may, at the
mediator's neutral evaluator's
discretion, continue to communicate with the parties in an ongoing
effort to facilitate a complete settlement in order to avoid a
Chapter 9 filing.
(i) The mediator neutral evaluator
shall provide council counsel and
guidance to all parties and shall not be a legal representative of
any party and shall not have a fiduciary duty to any party.
(j) In the event of a settlement with all interested parties, the
mediator neutral evaluator may assist
the parties in negotiating a prepetition, preagreed plan of
readjustment in connection with a potential Chapter 9 filing.
(k) The mediator neutral evaluator
shall maintain the confidentiality of all the information obtained by
the mediator neutral evaluator in
mediation the neutral evaluation process
, unless otherwise agreed to by the parties. The neutral
evaluation shall be subject to Chapter 2 (commencing with Section
1115)
of Division 9 of the Evidence Code.
SEC. 6. SEC. 7. Section 53761.5 is
added to the Government Code, to read:
53761.5. The parties shall exchange all documents including
current financial information and projections addressing future
financial obligations affecting the local public entity or that may
hinder a resolution of the issues before the mediator. The
mediator
neutral evaluator. The neutral evaluator
may request the submission or exchange of memoranda on issues,
including the underlying interests, and the history of the parties'
prior negotiations. Information that a party wishes to keep
confidential may be sent to the mediator
neutral evaluator
in a separate communication clearly marked
"CONFIDENTIAL."
SEC. 7. SEC. 8. Section 53762 is
added to the Government Code, to read:
53762. (a) Each interested party shall provide at least one
representative of each party to attend all mediation
neutral evaluation conferences. Each party's
representative shall have authority to settle and resolve disputes or
shall be in a position to present any proposed settlement or plan of
readjustment to the governing body or membership for approval and
implementation.
(b) The local public entity shall provide a local public entity
representative who shall represent the local public entity's interest
in the mediation neutral evaluation and
who shall be in a position to propose any settlement or
plan of readjustment to the governing body of the local public
entity.
(c) An interested party may be represented by legal counsel, but
must inform all parties of the representation.
(d) The parties shall participate in the mediation in good faith.
If the mediator determines that a representative of one or more of
the parties is not participating in good faith, the mediator may
request that a substitute representative or representatives be
appointed.

(e)

(d) The parties shall maintain the confidentiality of
the mediation neutral evaluation process
and shall not disclose statements made, information disclosed,
or documents prepared or produced, during the mediation
neutral evaluation process process, as specified
in Sections 1119, 1120, 1121, and 1122 of the Evidence Code, unless
all parties consent in writing to the disclosure. This
subdivision does not apply to documents that were not
confidential prior to t
he start of the neutral evaluation
process.

SEC. 8. SEC. 9. Section 53762.5 is
added to the Government Code, to read:
53762.5. Mediation The neutral
evaluation process
shall end if any of the following occur:
(a) The parties execute an agreement of settlement.
(b) The parties reach an agreement or proposed plan of
readjustment that requires the approval of a bankruptcy judge.
(c) The mediator neutral evaluator
certifies in writing that one or more of the parties has not
participated in good faith, that no resolution has been reached, and
that further efforts at mediation the neutral
evaluation process
would not contribute to a resolution of the
parties' dispute.
(d) The mediator neutral evaluator
certifies in writing that the parties have participated in good faith
but the parties have reached an impasse and further efforts at
mediation the neutral evaluation process
would not contribute to a resolution of disputes.
(e) The mediator neutral evaluator
certifies in writing that a mediation neutral
evaluation
was initiated by the local public entity but that
no interested parties participated.
SEC. 9. SEC. 10. Section 53763 is
added to the Government Code, to read:
53763. As used in this article the following terms have the
following meanings:
(a) "Chapter 9" means Chapter 9 (commencing with Section 901) of
Title 11 of the United States Code.
(b) "Claim" means either of the following:
(1) A right to payment, whether or not the right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured.
(2) A right to an equitable remedy for breach of performance if
the breach gives rise to a right to payment, whether or not the right
to an equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured, or unsecured.
(c) "Collective bargaining" means the process by which workers
exercise their right to negotiate with an entity's or organization's
management in a good-faith process to establish employee
compensation, working conditions, and other matters of mutual
interest.
(d) "Collective bargaining agreement" means a written, legally
enforceable contract for a specified period, between the management
of an entity or organization and its employees represented by a
recognized union. It sets down and defines conditions of employment,
including, but not limited to, wages, working hours and conditions,
overtime payments, holidays, vacations, health benefits, retirement
benefits, and procedures for dispute resolution.
(e) "Commission" means the California Debt and Investment Advisory
Commission.

(f)

(e) "Creditor" means either of the following:
(1) An entity that has a claim against a municipality that arose
at the time of or before the commencement of the mediation
neutral evaluation process and whose claim
represents at least 5 percent of the municipality's general fund
obligations.
(2) An entity that may have a claim against the municipality
arising out of rejection of an executory contract or unexpired lease
in a Chapter 9 case and whose claim represents at least 5 percent the
municipality's general fund obligations.
(g)

(f) "Debtor" means a local public entity that may file
for bankruptcy under Chapter 9.
(h)

(g) "Good faith" means participation by a party in the
mediation neutral evaluation process
with the intent to negotiate toward a resolution of the issues that
are the subject of the mediation neutral
evaluation process
, including, but not limited to, the timely
provision of complete and accurate information to provide the
relevant parties through mediation the
neutral evaluation process
with sufficient information, in a
confidential manner, to
negotiate the readjustment of the municipality's debt.
(i)

(h) "Indenture trustee" means a trustee under a
mortgage, deed of trust, or indenture, under which there is an
outstanding security other than a voting-trust certificate,
constituting a claim against the municipality.
(j)

(i) "Interested party" means a trustee, a committee of
creditors, a creditor, an indenture trustee, a pension fund, a
bondholder, or a union who under its collective bargaining agreements
has standing to initiate contract or debt restructuring negotiations
with the municipality.
(k)

(j) "Local public entity" means any county, city,
district, public authority, public agency, or other entity, without
limitation, that is a municipality as defined in paragraph (4) of
Section 101 of Title 11 of the United States Code (bankruptcy), or
that qualifies as a debtor under any other federal bankruptcy law
applicable to local public entities.
(l)

(k) "Local public entity representative" means the
person or persons designated by the local public agency with
authority to make recommendations and to attend the
mediation
neutral evaluation on behalf of the
governing body of the municipality.
SEC. 10. SEC. 11. The Legislature
finds and declares that Sections 6 and 7 of this act, which add
Sections 53761.5 and 53762.5 to the Government Code, impose a
limitation on the public's right of access to the meetings of public
bodies or the writings of public officials and agencies within the
meaning of Section 3 of Article I of the California Constitution.
Pursuant to that constitutional provision, the Legislature makes the
following findings to demonstrate the interest protected by this
limitation and the need for protecting that interest:
To facilitate the process to avoid municipal bankruptcy, it is
necessary to provide for secure documents.