Judge Dismisses Richmond, Calif., School District's Bankruptcy Filing

WASHINGTON -- A federal bankruptcy court yesterday dismissed the bankruptcy petition of California's Richmond Unified School District, sweeping aside questions about whether the district is now able to pay off its defaulted certificates of participation or other debts.

Bankruptcy Judge Edward Jellen said he had little choice but to grant the district's dismissal motion, since municipal bankruptcy is a voluntary procedure. He added that the district has been unwilling to come forward with a financial reorganization plan since it filed for bankruptcy on April 19.

The only sanction the court could impose for not reorganizing, he said, is dismissal of the petition. Thus, the judge determined that it would be "pointless" for him not to dismiss the case at this time, said attorneys who attended yesterday's court session.

It was not immediately clear what steps holders of the district's $9.8 million certificates would take next. The certificates went into default in August, when the district missed a $1.1 million lease payment.

The bankruptcy petition was filed under the direction of the district's school board, which said at the time that it did not have enough money to keep the schools open or pay its certificates and other longterm debts.

A state court shortly after the bankruptcy filing ordered the state superintendent of public schools to take control of the district and keep the schools open. The state-appointed administrator, Fred Stewart, never developed a financial reorganization plan, and instead filed for the bankruptcy dismissal on Aug. 26, saying the district could now better manage its finances.

His action came over objections from parent and teachers groups, as well as a majority of school board members who had voted on Aug. 21 to continue reorganizing the district's finances through bankruptcy.

Attorneys for the administrator, Lempres & Wulfsberg, in an argument apparently picked up by the bankruptcy court, said the bankruptcy laws grant municipalities an almost automatic right to dismissal if the bankruptcy case has not wound on too long and made it impossible for creditors to pursue other remedies.

Under the code's Chapter 9 provisions, jurisdictions can enter bankruptcy only by their own choice, and cannot be forced by creditors or the court either to remain in bankruptcy or to liquidate their property, the attorneys said in their brief before the court.

Opposition briefs had cast aspersions on the district's argument that it can move to dismiss a petition, regardless of its financial condition.

"To allow the debtor to enjoy the bankruptcy court's protection while complying with only those bankruptcy code provisions to which it ~consents,' would render the Chapter 9 process a sham," they said.

The opposition pointed out that, remarkably, the district did not even demonstrate that its financial problems have been solved. The only reasons it gave for the dismissal motion were that it had "determined that relief under Chapter 9 is no longer necessary for financial recovery or continued operations," and dismissal would be "in the best interests" of the district and its creditors.

But the district's lawyers pointed out that certificate holders and other creditors actually have better remedies available to them through the state courts outside of bankruptcy.

The certificates indenture and California law permit investors and the certificates' trustee, Security Pacific National Bank, to a seek a court order requiring the district to cure the deficiency. They can also attempt to repossess school buildings and other property securing the lease issue.

David Garcia, spokesman for Security Pacific, said it would be "premature" to say whether the bank's attorneys will pursue any of those remedies until they have consulted with the certificate holders. The trustee also is in the midst of what appears to be negotiations with the state to restructure the debt issue.

Some California bond lawyers have questioned whether the state courts would uphold the contractual rights of investors -- inside or outside of bankruptcy -- to foreclose on school property and evict school personnel.

A parent-teachers group headed up by the 1,800-member United Teachers of Richmond union had objected strenuously to the dismissal move, with support from the president and one other member of the Richmond school board.

They contended that the state -- which is by far the district's largest creditor with $28.5 million of loans outstanding -- could not negotiate equitable settlements with the district's other creditors outside of bankruptcy.

The state has not offered to reduce or reschedule the district's loan repayments. But as administrator of the district, state attorneys extracted a 9% pay cut from teachers while they have initiated repayment negotiations with the certificates' trustee and International Business Machines Corp., which also holds a defaulted equipment lease worth over $9 million.

Attorneys for the state, Security Pacific, and IBM have refused to comment on their discussions, but Ernie Ciarrochi, executive director of the teachers union, said the state is trying to strike deals with the lease holders giving them "something less than 100 cents on the dollar."

Besides raising conflict of interest questions about the state's role in the bankruptcy dismissal, the parent-teachers group had argued that the district has not demonstrated that its financial condition has improved enough since April to permit it to escape bankruptcy.

The district's brief pointed to its fiscal 1992 budget, issued in July and showing a positive end-of-year balance, as evidence it was financially under control once again. But the opposition groups noted that the budget is balanced "only because it makes no payments to the COP holders or to IBM."

The July budget, under which the district is still operating, actually "admits that the district cannot pay its existing debts as they come due," said Murphy, Weir & Butler, attorneys for the opposition, in their brief.

"Dismissal of this case will only exacerbate the insolvent debtor's existing financial crisis," they contended. "Without adjustment of these debts, the debtor must inevitably refile for Chapter 9 protection or cut services so drastically that it ceases to provide adequate educational services," the opposition warned the court.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.