Receiver wants bankruptcy case resolved quickly | Fincance ...

01:00 AM EDT on Sunday, August 14, 2011 By JOHN HILLJournal Staff Writer

The receiver who filed bankruptcy for the City of Central Falls hopes for a quick resolution, but a thicket of legal issues may slow the process.

The Providence Journal / Frieda Squires

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CENTRAL FALLS ? beyond potentially breaking new legal ground on how pensions are handled in a municipal bankruptcy, state-appointed receiver Robert G. Flanders Jr. is trying for another sort of bankruptcy precedent ? he wants the reorganization plan done in a month.

By setting an end-of-summer goal, Flanders is seeking to buck the general trend in bankruptcies, where cases can linger for years and cost millions of dollars.

Financially struggling Landmark Medical Center in Woonsocket has been under state bankruptcy supervision for three years; the Twin River gambling complex in Lincoln has been in the process since 2009. Vallejo, Calif., one of the few other municipal bankruptcy cases nationally, has been under court supervision for more than three years. The cost of the process so far is $11.6 million, according to the city?s finance department. Legal bills and related costs account for most of that.

Special bankruptcy Judge Frank J. Bailey, sitting in Providence, has said he too wants the Central Falls case resolved as swiftly as practicable and is willing to assist in any settlement talks.

Flanders is seeking court approval to make $5.6 million in spending cuts by reducing the city?s $22-million operating budget and cutting by as much as 50 percent the pensions being paid to some of the city?s 140 former public safety employees or their survivors. The pension cuts are driven by a local pension fund that projections warn could be out of money shortly, at current payment rates. The operating budget reductions are to bring spending in line with income now and in the future.

As Flanders assembles a spending reduction plan to submit to the court, he is continuing to negotiate with three municipal unions and with retirees in an effort to reach settlements on compensation reductions, rather than have them imposed by the bankruptcy court. Flanders has told the court that making these spending cuts is at the heart of the bankruptcy filing.

Swift settlements would speed the city reorganization process and reduce legal and related costs for the state and unions. but it is unclear if that will happen.

Lawyers for the unions representing police, firefighters and municipal employees, and the public safety retirees, argue Flanders may not have the authority to void existing union contracts, as he did in filing his bankruptcy petition with the court Aug. 1. Briefs on that issue are to be filed by Sept. 16.

a lawyer for the retirees has challenged Flanders? position that he can cut pension payments even before the bankruptcy court acts on the reorganization plan he is developing. Arguing those points before Bailey, and the potential for an appeal on any ruling, could delay a final resolution of the bankruptcy petition for months or longer.

Flanders has petitioned for the court?s approval to place the city into Chapter 9 bankruptcy so he can undertake the financial reorganization. though Chapter 9, the bankruptcy law for municipalities, was patterned after Chapter 11, the one for businesses, there are differences. a major one is that in a Chapter 11 case, a bankruptcy judge can order the liquidation of assets to pay creditors. but that isn?t an option under Chapter 9. The process must end with a financially functioning municipality.

?you can dissolve the company,? said John Knox, one of the lawyers for the City of Vallejo who has written on Chapter 9, ?but a city can?t disappear from the face of the earth.?

And, as Vallejo shows, the process can be expensive. Figures compiled this week by Governor Chafee?s office showed that, as of Monday, over the past 13 months, the state had paid $1.1 million in legal fees and payments to the receivers since assuming control of the city.

That came after the City Council and Mayor Charles D. Moreau tried to file for state bankruptcy in may 2010, claiming the city was insolvent.

The $1.1 million includes $197,289 for work done from July 2010 to February 2011 by the first receiver, retired Superior Court judge mark a. Pfeiffer and, through last week, $150,207 in pay to Flanders, who served on the state Supreme Court and was appointed receiver by Chafee at the end of Pfeiffer?s term. Most of the remainder, $716,011, went to the two law firms that have been handling the legal work on the case, Orson and Brusini and Edwards, Angell, Palmer and Dodge.

It didn?t include the salaries of state employees from agencies that include the Governor?s Office of Economic Recovery and Investment, the Department of Administration and the Department of Revenue who have been assigned to work in various positions in Central Falls government at various times over the past year.

Even in conventional bankruptcies, the process of untangling a bankrupt business? troubled finances can be difficult. Municipalities can be worse.

?a municipal government is a complex animal,? said Knox. Governments don?t just have money they can spend for any purpose they wish he said. they can get revenue from certain operations that are meant to cover a certain department?s budget or grants from agencies or organizations that are sometimes legally committed to specific purposes. One major disagreement between Vallejo and its unions was gas tax revenue the city received. The money was on the books as income, he said, but by law the revenue could only be used for roads.

But it wasn?t just complex bookkeeping that made the Vallejo case linger for three years. so rare are municipal government Chapter 9 cases, the court has designated the Central Falls case as historic, meaning the file is exempt from federal document disposal rules. that rarity means there?s relatively little case law to guide judges, and that can string out court hearings and appeals.

The biggest issue that had to be resolved in Vallejo was whether Chapter 9 gave the city the power to void union contracts. One of Vallejo?s unions saw ambiguities in the case previous to Vallejo, 1994?s Orange County, Calif., filing, and contested the city?s position that bankruptcy gave it the power to cancel union contacts. an appeal by the International Brotherhood of Electrical Workers created, in effect, a two-year time-out until June 2010 when an appeals court upheld the city?s position.

Besides taking time, appeals can be costly. In the Central Falls case, for example, $295,030 of the state legal expenses through last week ? 41 percent of total ? resulted from a defense of the receivership law passed by the General Assembly in June 2010. Moreau and the City Council, who were stripped of their governing authority by the new law, challenged it in Superior Court, and lost. an appeal to the state Supreme Court also failed. both courts ruled the receivership law constitutional.

The Central Falls receivership, the state?s first, has left the mayor and council without any power to govern.

With precedent set in the Vallejo bankruptcy, at least in California courts, for municipal labor contracts to be voided in a bankruptcy process, the unsettled legal issue that could take more time in the matter of Central Falls is Flanders? power to cut current pensions. No municipality that has filed a Chapter 9 petition has used it to try to change current pensions. At a meeting of retirees earlier this month, Jack Parlon, a lawyer for the national Fraternal Order of Police, told the group that ?someone should go to jail? over Flanders? plan to cut pension payments and impose a 20 percent health insurance premium co-pay on retirees. He urged an all-out legal fight.

?a lot of people think they are on very thin ice with these retirees,? said Marc B. Gursky, one of the lawyers representing the firefighters union in current contract concessions talks with Flanders.

He said Flanders has made a point that he would prefer to reach agreements on concessions rather than impose cuts. The bankruptcy filing could be a way of presenting the unions with a worse alternative than making concessions, he said. Flanders has disputed that as his reason, but did say, when asked in June about the effect of the General Assembly?s failure to include $5 million in aid for the city for 2011-12 to avert bankruptcy, ?there?s nothing like a hanging in the morning to concentrate the mind.?

Gursky said Flanders? and Bailey?s hopes for a quick resolution will hinge on how much both sides are willing, and able, to give.

?It?s in everybody?s interest if there?s a negotiated settlement, based on the realities,? he said.

?but whether that?s going to be feasible ??

Receiver wants bankruptcy case resolved quickly

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