WASHINGTON -- California's Richmond School District has notified the trustee of its $8.35 million certificates of participation issue that it does not have enough money to make a scheduled $1 million lease payment on July 15, leaving the fate of the issue in the hands of a federal bankruptcy court.
David Garcia, a spokesman for the trustee, Security Pacific National Bank, said the band is consulting with bankruptcy lawyers and bond counsel and has not yet determined whether it can use reserve and other available funds to make the scheduled Aug. 1 payment to investors.
Security Pacific officials say they have enough reserve funds on hand to make the next payment. But some attorneys contend the reserves cannot be used because they fell under the control of the bankruptcy court when the school district filed for Chapter 9 protection in April.
The district's attorneys are not disputing the bank's right to use the reserves, however. "The reserve fund is something we don't have any control over," said Robert Hughes of Lempres & Wulfsberg, the district's bankruptcy lawyer.
Other officials familiar with the Richmond proceeding said they expect the bank to be able to make the next payment, but future annual payments on the certificates issue, which matures in 1998, are in doubt because of the bankruptcy filing.
"Because of the reserve account, the COP holders will get their money this year. But it's up in the air as to what will happen in the future," said Ernie Ciarrochi, executive director of the United Teachers of Richmond. The union, representing about 1,800 teachers, has been negotiating with the district over a new contract.
Union officials' position in the bargaining talks is that the district -- or the bankruptcy court -- should cancel the school property lease underlying the certificates and suspend further payments, rather than impose layoffs and deep salary reductions on the teachers.
"We have certainly encouraged the district ot do what it can to restructure its debt to get out of long-term obligations, but even that will not keep layoffs or salary cuts from occuring," Mr. Ciarrochi said. "Even without making the debt payment this year, we've got over 350 people on layoff, and 9% salary cuts, plus additional health benefits cuts," he said.
The school district, while it expects to default on this month's lease payment, has not yet proposed to cancel or restructure the certificates, however, Mr. Hughes said.
"It's possible" that the district could propose to stretch out its debt payments, he said, noting that municipal reorganization under Chapter 9, like corporate reorganization under Chapter 11, "permits the debtor to propose a plan for approval by its creditors to restructure its debts."
But so far, the only action taken by the district has been to "advise the trustee that the district does not have any provision in its fiscal 1992 budget," which began July 1, to make the July 15 lease payment, he said.
Andrea Porter of Murphy, Weir & Butler, the union's bankruptcy lawyer, said she "suspects the district will make a motion" before the bankruptcy court to restructure the debt, and attempt to work out an agreement with the CIP holders. But if the district does not, she said, "other parties and interests" may file such a motion later in the proceedings.
"Municipal bondholders are not entitled to any different treatment than corporate bondholders" under the bankruptcy laws, she said. "There's a tremendous amount of flexibility as to what can be done," she said.
Mr. Hughes says he expects the trustee, on behalf of individual investors, "at some point" to file a claim in the bankruptcy proceeding. Mr. Garcia and other bank officials declined to comment on the bank's plans.
The certificates indenture and lease contract provide the trustee and investors with the right of foreclosure and repossession in case of default, attorneys said, but those remedies have been at least temporarily stayed by the bankruptcy petition.
"Can they repossess the school property? That probably has to be answered by the court," Mr. Hughes said. "It is possible, but not certain, that they can."