San Bernardino City Bankruptcy Challenged by Bondholders and Insurers

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On Wednesday, the Bond insurer National Public Finance Guarantee Corporation, a unit of MBIA, alleged in a filing that San Bernardino did not provide financial information to its creditors and did not prove that it was eligible to declare a fiscal emergency or to seek municipal bankruptcy protection under Chapter 9. The attorneys for NPFG wrote, “To date, the city has not provided its creditors with any information which would enable them to determine whether the city is eligible to be a Chapter 9 debtor.”

However, the city seems to have planned its moves well ahead to go under bankruptcy protection. Unlike other cities, San Bernardino declared a fiscal emergency on 18 July and then filed for bankruptcy on August 1. In the interim period, stakeholders did not have a chance to protest as under California bankruptcy law, it is not necessary for a city under a state of fiscal emergency to negotiate with creditors. The city followed up quick steps to bankruptcy with a similarly short schedule for proceedings. It asked the court to set a deadline of 21 September for creditors to file objections.

The filing made by the National Public Finance Guarantee Corporation observed the short deadline set by the city for its creditors was “patently unfair and unreasonable.” The Bond insurer asked for documents and witnesses so that creditors could have the chance to analyze the finances of the city.

  

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Again on Wednesday, in a separate filing, Ambac Assurance Company, which insured $ 50 million of pension bonds issued by the city in 2005, as well as the bondholder Erste Europaische Pfandbrief-und Kommunalkreditbank AG, challenged the bankruptcy filing of the city and the short deadline set for creditors. Ambac Assurance’s filing said, “The city has not provided its creditors with the information necessary to evaluate its chapter 9 liability.”

Ambac’s filing also observed, “If it is shown that the City precipitated a fiscal emergency by unreasonably delaying taking necessary action and then relied on a declaration of that emergency to avoid the negotiation requirement, its petition should be dismissed.”

The judge in charge of the proceedings, Judge Meredith Jury, ruled on Friday that the city must file documentation to support its bankruptcy by August 31. The judge also extended the time for creditors to file objections up to October 24.