Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 1 of 354

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1 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 1 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX David M. Goodrich (CA Bar No ) dgoodrich@sulmeyerlaw.com SulmeyerKupetz A Professional Corporation 333 South Hope Street, Thirty-Fifth Floor Los Angeles, California Telephone: Facsimile: Corey W. Glave, (CA Bar No ) SBCPFattorney@gmail.com Attorney at Law nd Street Hermosa Beach, California Telephone: (323) Facsimile: (310) Attorneys for San Bernardino City Professional Firefighters, Local 891 In re CITY OF SAN BERNARDINO, CALIFORNIA, Debtor. UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION Case No. 6:12-bk MJ Chapter 9 REQUEST FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM (11 U.S.C. 503); DECLARATION OF DAVID M. GOODRICH IN SUPPORT THEREOF No Hearing Requested at this Time DMG\ /9/2015 (6:08 PM)

2 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 2 of TABLE OF CONTENTS Page SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX I. BACKGROUND...1 II. LEGAL AUTHORITY...3 A. Standard For Allowance Of Administrative Expenses....3 B. Actual and Necessary Expenses Were Incurred by the City Unpaid Regular and Overtime Wages The Statutorily Set Rate for Salary is Reasonable....4 a. The History of Salary Rates under Section b. The Statutory Rates for Salary are Per Se Reasonable Unpaid Vacation Pay Severance Pay Unpaid Pension Benefits...6 C. The Services Rendered Preserved the City, Its Property and Its Interests Section 503 Was Incorporated Into Chapter 9 In Its Entirety While 541 Is Not Incorporated into Chapter 9, the Term "Estate" Should Be Read as "Debtor" in Statutory Provisions Made Applicable by Congress in Chapter 9 Cases This Court and the City Have Already Substituted "Estate" with "Debtor." Section 902 Further Demonstrates the Interchangeability of "Debtor" and "Estate" in Chapter The Erroneous Conclusion Reached in Off-Track Betting D. Any 904 Constraints on Court Authority to Allow Administrative Expenses Are Allayed Because The City Has Consented to this Court's Determination of Post-Petition Liability E. The Court May Allow Administrative Expenses Under the Reading Doctrine F. Section 502(g) Does Not Eliminate 503(b)(1)(A) Rights DMG\ /9/2015 (6:08 PM)

3 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 3 of G. The District Court Has Found the Firefighters are Entitled to a "Different Priority of Payment" on Their Post-Petition Claims H. The City Has Admitted Administrative Expenses are Allowable in Chapter 9 And Should Be Judicially Estopped From Taking a Contrary Position I. The Results of Finding Certain Administrative Claims Are Not Allowable In Chapter 9 Would be Absurd and Inequitable III. CONCLUSION...19 DECLARATION OF DAVID M. GOODRICH SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX DMG\ /9/2015 (6:08 PM)

4 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 4 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX CASES TABLE OF AUTHORITIES Page Assoc. of Retired Emples. v. City of Stockton (In re City of Stockton), 478 B.R. 8 (Bankr. E.D. Cal. 2012)... 8 Glendale City Employees' Ass'n, Inc. v. City of Glendale, 15 Cal.3d 328 (1975) Gottlieb v. Kest, 141 Cal. App. 4th at 137 ( Harris v. Wittman (In re Harris), 590 F.3d 730 (9th Cir. 2009) IBEW, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262 (E.D. Cal. 2010)... 8, 9 In re Al Copeland Enters., Inc., 9 91 F.2d 233 (5th Cir. 1993) In re Charlesbank Laundry, Inc., 755 F.2d 200 (1st Cir. 1985) In re City of San Bernardino, 2015 U.S. Dist. LEXIS 60881, 17 (C.D. Cal. May 7, 2015) In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. Mar. 13, 2009)... 8 In re Cott Corp., 47 B.R. 487 (Bankr. D. Conn. 1984)... 6 In re Great Ne. Lumber & Millwork Corp., 64 B.R. 426 (Bankr. E.D. Pa. 1986)... 6 In re Health Maintenance Foundation, 680 F.2d 619 (9th Cir. 1982)... 6 In re Marcal Paper Mills, Inc., 650 F.3d 311 (3d Cir. N.J. 2011)... 6 In re N.P. Mining Co., Inc., 963 F.2d 1449 (11th Cir. 1992) DMG\ /9/2015 (6:08 PM)

5 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 5 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX In re New York City Off-Track Betting Corp., 434 B.R. 131 (Bankr. S.D.N.Y. 2010)... 8, 11, 12, 13 In re Public Ledger, 161 F.2d 762 (CA3 1947)... 5 In re Roth American, Inc., 975 F.2d 949 (3d Cir. Pa. 1992) In re Sanford Fork & Tool Co., 160 U.S. 247 (1895) In re Tucson Yellow Cab Co., 789 F.2d 701 (9th Cir. Ariz. 1986)... 6 International Engine Parts, Inc. v. Feddersen and Company, 64 Cal. App. 4th 345 (1998) Jackson v. County of Los Angeles, 60 Cal. App. 4th 171 (1997)... 17, 18 Loehr v. Ventura County Community College Dist., 147 Cal.App.3d 1071 (1983) Longshore v. County of Ventura, 25 Cal.3d 14 (Cal. 1979) Mercy-Peninsula Ambulance v. County of San Mateo, 592 F.Supp. 956 (N.D. Cal. 1984) confirmed 791 F.2d 755 (9th Cir. 1986) NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1983)... passim Orange County Employees Ass'n v. County of Orange (In re County of Orange), 179 B.R. 177 (Bankr. C.D. Cal. 1995)... 8 Philadelphia Co. v. Dipple, 312 U.S. 168 (1941)... 5, 15 Rapp, 2009 Bankr. LEXIS Reading Co. v. Brown, 391 U.S. 471 (1968), Snow-Erlin v. United States, 470 F.3d 804 (9th Cir. 2006) Straus-Duparquet, Inc. v. Local Union No. 3, IBEW, 386 F.2d 649 (2d Cir. N.Y. 1967)... 5, 6 DMG\ /9/2015 (6:08 PM)

6 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 6 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX STATUTES 11 U.S.C. 89(1) U.S.C. 104(a)(1) U.S.C. 330(a) U.S.C , U.S.C. 409(1) U.S.C. 502(g) U.S.C , 11, U.S.C. 503(b)... passim 11 U.S.C. 503(b)(1)(A)... passim 11 U.S.C. 503(b)(2) U.S.C U.S.C. 507(a)(2)... 12, U.S.C. 507(a)(4) U.S.C. 507(a)(4)(B) U.S.C. 507(a)(5) U.S.C , 8, 10, U.S.C. 541(a)... 7, U.S.C. 726(a)(1) U.S.C , 8, U.S.C. 901(a)... passim 11 U.S.C , U.S.C. 902(1) U.S.C. 902(5) U.S.C , 12, U.S.C. 943(b)(5)... 12, 14 DMG\ /9/2015 (6:08 PM)

7 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 7 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX U.S.C. 944(c)(1) U.S.C. 943(b)(3) U.S.C. 1129(a)(9) U.S.C. 1222(a)(2) U.S.C. 1322(a)(2) Govt. Code a(8)... 1 Govt. Code 3500, et seq Govt. Code Govt. Code 54980(c)... 1 Govt. Code Health and Safety Code , 4 OTHER AUTHORITIES Collier on Bankruptcy Collier on Bankruptcy San Bernardino City Charter Section , 4, 5, 15 San Bernardino City Charter Section San Bernardino City Resolution No DMG\ /9/2015 (6:08 PM)

8 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 8 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX San Bernardino City Professional Firefighters Local 891 ("SBCPF") hereby request entry of an order allowing an administrative claim (the Administrative Claim") in an amount to be determined by this Court. This request is brought pursuant to 11 U.S.C. 503(b) as incorporated into Chapter 9 by 901(a). 1 In support hereof, SBCPF respectfully submits as follows: I. BACKGROUND The San Bernardino City Professional Firefighters Local 891 ( SBCPF ) is a recognized employee organization under the Meyers-Milias-Brown Act, Cal. Govt. Code 3500, et seq. The SBCPF represents approximately 100 employees of the Fire Department holding the ranks of firefighter, firefighter/paramedic engineer and fire captain. While in a Chapter 9 case, a municipality still functions as a municipality. Depending upon the statutory mission of the municipality, there are certain necessary and basic municipal services which must be provided, such as police, fire, sewer, water and electrical services. To function, labor is a necessary cost for a municipality in bankruptcy. The Legislature of the State of California has determined that the local provision of fire protection services, rescue services, emergency medical services, hazardous material emergency response services and other services relating to the protection of lives and property is critical to the public peace, health and safety of the state." Health and Safety Code The City's Charter provides for establishing and maintaining of a Fire Department. Under California law, municipal services or functions include, but are not limited to, firefighting, police, ambulance, utility services, and the improvement, maintenance, repair, and operation of streets and highways. California Government Code 54980(c). Similarly, California law establishes that the regulation and provision of emergency medical care services which the city has engaged in is a traditional municipal function. See Government Code 54980(c); a(8); 38794, 54981; Mercy-Peninsula Ambulance v. County of San Mateo, 592 F.Supp. 956 (N.D. Cal. 1984), confirmed 791 F.2d 755 (9th Cir. 1986). Consequently, under California 1 All capitalized terms shall have the meaning as set forth in this Pleading. DMG\ /9/2015 (6:08 PM) 1

9 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 9 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX law and the City's own Charter, the providing of fire and emergency services is an essential, actual and necessary cost and expense of the City in maintaining and preserving the debtor municipality and the functioning of the City, including the public peace, health and safety of the City. The City is a charter city. Section 186 of the City Charter provides a mandatory salary formula establishing the amount of pay and overtime for safety employees. Section 234 of the Charter further mandates that the contract with the state employment retirement system (to wit, CalPERS) and to do all things necessary to provide for the participation by the City of San Bernardino and the employees thereof, in the Retirement System, with full credit being given to the employees of said City for prior service rendered. 2 The City has opted into the CalPERS retirement plan and, as a result, retirement benefits for employees of the City are subject to the California Government Code and Public Employees Retirement Law ( PERL ). The City has elected to continue on with its obligations under the CalPERS retirement plan. The last Memorandum of Understanding ( MOU ) executed by and between the firefighters and the City expired in 2009; however, it was extended by a Side Letter Agreement through In 2011, the parties could not reach an agreement and the City imposed certain changes in working conditions, including an involuntary taking of earned wages (approximately $1,400 per month for four months). The SBCPF successfully sued the City obtaining a Judgment/Writ for all money taken from the Firefighters (approximately $1.4 million), plus 7% interest from the date each taking. This judgment is why the SBCPF is one of the top 20 unsecured creditors of the City. On January 30, 2013, post-petition, the City formally adopted City Resolution No (the Postpetition Resolution ). The Postpetition Resolution unilaterally reduced salary, payments for sick leave and sick leave accruals for each firefighter. The Post-Petition Resolution also required "cost-sharing" whereby each firefighter's earned but unpaid wages were taken to be used to pay the City's own general fund obligations, including the City s liability to the CalPERS' plan. 2 The Charter further mandates that any contract so entered into with the retirement system shall only be terminated by an ordinance adopted by a majority vote of the electorate of the City of San Bernardino. DMG\ /9/2015 (6:08 PM) 2

10 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 10 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Since February 1, 2013, the City has continued to use the services of the firefighters and the City has received a material benefit from such services. Despite the use of these services to its own benefit and the protection of its assets, the City has not paid for such services in the amount set by statute, charter or contract. The City has failed to pay, inter alia, the full amount of postpetition wages mandated by Section 186 of the City's Charter, as well as post-petition, accrued vacation and pension amounts due to the firefighters. All of these unpaid amounts directly relate to necessary and beneficial services provided by the firefighters during the City's Chapter 9 case. These unpaid amounts constitute administrative expenses of the City and the Court should allow these amounts as administrative expenses in an amount as determined by the Court. II. LEGAL AUTHORITY A. Standard For Allowance Of Administrative Expenses. Section 503(b)(1)(A)(i) provides: "after notice and a hearing, there shall be allowed administrative expenses including-- actual, necessary costs and expenses of preserving the estate, including (i) wages, salaries, and commissions for services rendered after the commencement of the case... See 11 U.S.C. 503(b)(1)(A)(i). As discussed below, the City has incurred employee wage and benefit costs and expenses, on a post-petition basis, which were actual, necessary and benefitted the City and not all of those wages and benefits have been paid by the City. B. Actual and Necessary Expenses Were Incurred by the City. 1. Unpaid Regular and Overtime Wages There can be no dispute the City incurred actual and necessary expenses for fire protective services which benefitted the City post-petition. In fact, these services are mandatory. See City Charter 183, 184 and 186, California Health and Safety Code and California Government Code Even if the City could operate without fire protection services, the firefighters provided the City with invaluable protection against loss of public and private property and DMG\ /9/2015 (6:08 PM) 3

11 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 11 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX safeguarded the City's residents and transients. These expenses incurred were unequivocally actual and necessary. These expenses include regular wages and overtime pay which accrued post-petition. Some of this pay, however, has not been tendered even though the City received the benefit of such services. The cost and expenses for the firefighters were actual and necessary. 2. The Statutorily Set Rate for Salary is Reasonable. a. The History of Salary Rates under Section 186. In April 1955, the electorate for the City of San Bernardino amended the San Bernardino City Charter and added 186. Section 186 establishes a formulaic method for setting the salaries of safety members of the Police and Fire Departments. The amount set by the formula is the amount that must be paid. Section 186 was subsequently approved by the legislature of the State of California. In June 1976, Charter 186 was amended to change the method of establishing the salaries of safety members of the Police and Fire Department (increase the number of cities in the salary survey from five (5) to ten (10)) and make other salary changes for specified positions. The measure passed with a vote of nearly 3 to 1 in favor of the measure. In March 1985, the electorate amended the City Charter to provide overtime pay, under specific language for firefighters. In June 1980, there was a measure placed on the ballot to repeal Charter 186. The measure was defeated by a vote of almost 3 to 1. Between 1985 and 2004, on at least two occasions, there were ballot measures placed on the ballot to repeal Charter 186. Finally, in 2012, the City attempted to repeal Charter 186. That measure failed as well. While the City may feel the salary amounts set by Charter 186 are too high, the electorate disagrees. The formulaic approach to setting salaries has existed without interruption for more than 60 years. If the electorate felt the salary amounts set by Charter 186 were excessive, it could have voted to repeal or amend Charter 186 sometime during the last 60 years, yet it has not. b. The Statutory Rates for Salary are Per Se Reasonable. Where a debtor " elects to continue to receive benefits from the other party to an executory contract pending a decision to reject or assume the contract, the debtor-in-possession is obligated to pay for the reasonable value of those services (citation omitted) which, depending on DMG\ /9/2015 (6:08 PM) 4

12 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 12 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX the circumstances of a particular contract, may be what is specified in the contract." NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531, (1983), citing to Philadelphia Co. v. Dipple, 312 U.S. 168, 174 (1941), and In re Public Ledger, 161 F.2d 762, (CA3 1947). The full amount of the "reasonable value" of the services rendered post-petition has not been paid by the City. Bildisco holds the "reasonable value" of services provided can be established by the terms of a pre-petition contract. Here, the amount to be paid for services provided by the firefighters to the City is set by something more than a rejected contract; it is set by statute. See Charter 186. These statutory salary amounts have been adopted and consistently reaffirmed by the electorate (most recently in November 2014). By adopting and repeatedly reaffirming the formulaic salary approach set by Charter 186, the electorate of the City has decided the amount to be paid to the firefighters under Charter 186 is reasonable. The wage amounts set by Charter 186 are the "reasonable value" for the services provided. Further, the amount to be paid under Charter 186 is per se reasonable. The amount to be paid under Charter 186 is based upon the salaries of firefighters in 10 different cities that are similar in size to San Bernardino. This methodology ensures the City's firefighters are paid a salary that is commensurate with firefighters that are similarly situated. If the services of the firefighters were replaced by services of firefighters located in 1 of the 10 other cities, the City would be required to pay a similar amount for those services. Through its application, Charter 186 renders the salaries of the firefighters reasonable. 3. Unpaid Vacation Pay Vacation pay accruing post-petition is an administrative expense. See Straus-Duparquet, Inc. v. Local Union No. 3, IBEW, 386 F.2d 649, 651 (2d Cir. N.Y. 1967); In re Roth American, Inc., 975 F.2d 949, 958 (3d Cir. Pa. 1992). This is true even if the right to vacation pay is derived from a pre-petition collective bargaining agreement. Id. at 651. The City has failed to pay accrued, post-petition vacation pay of the firefighters. These expenses were actual and necessary in order to induce the firefighters' continued employment post-petition. Consistent with Straus-Duparquest, the Court should allow the amount of unpaid vacation pay that has accrued post-petition as an administrative expense. DMG\ /9/2015 (6:08 PM) 5

13 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 13 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Severance Pay Certain types of severance pay for termination of employees constitutes an administrative expense. In re Tucson Yellow Cab Co., 789 F.2d 701, 704 (9th Cir. Ariz. 1986), citing In re Health Maintenance Foundation, 680 F.2d 619, 621 (9th Cir. 1982). The City has announced it will enter into a contract with a third-party fire and EMS service provider. This, in turn, will result in the City's termination of employment of the firefighters and the method of termination could lead to an allowable administrative expense. If so, severance pay for such termination should be allowed as an administrative expense. 5. Unpaid Pension Benefits Unpaid pension obligations accruing post-petition are administrative expenses under 503(b)(1)(A). See In re Marcal Paper Mills, Inc., 650 F.3d 311, (3d Cir. N.J. 2011), In re Great Ne. Lumber & Millwork Corp., 64 B.R. 426, 428 (Bankr. E.D. Pa. 1986), In re Cott Corp., 47 B.R. 487, 495 (Bankr. D. Conn. 1984). Again, the City plans to terminate the firefighters. Upon termination, the firefighters' pension benefits are "portable" and may be transferred to another entity that participates in the CalPERS pension fund. The City has also disclosed that it is repaying CalPERS for past due pension payments. Based upon the timing for the City's plan to terminate the firefighters (sometime this summer) and the length of time the City needs to bring the CalPERs' delinquent payments current (the fall of 2016), there will be unpaid, past due pension obligations of the firefighters at the time of termination. This unpaid pension obligation must be paid in full upon termination or allowed as an administrative expense. C. The Services Rendered Preserved the City, Its Property and Its Interests. 1. Section 503 Was Incorporated Into Chapter 9 In Its Entirety. Section incorporates all of 503, including 503(b)(1)(A), into chapter 9. When incorporating 503, Congress did not exclude 503(b)(1)(A) from chapter 9. See 901(a). Congress did not indicate any express or intended limitation for the allowance of administrative 3 Sections referred to herein are to sections of the Bankruptcy Code. DMG\ /9/2015 (6:08 PM) 6

14 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 14 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX expenses for employee wages, other forms of compensation or benefits in Chapter 9. Instead, the Congressional history demonstrates an intent to require all administrative expenses be paid in Chapter 9. See House Report No ("Section 901 makes applicable appropriate provisions of other chapters of proposed title 11 They are as follows: 503. Administrative expenses. Administrative expenses as defined in section 503 will be paid in a chapter 9 case, as provided under section 89(1) of current law [section 409(1) of former title 11]."). If Congress intended to exclude authority for bankruptcy courts to allow administrative expenses for wages for services rendered after the commencement of the case, it could have simply excluded 503(b)(1) from Chapter 9 or limited its application in Chapter 9, but it did neither. 2. While 541 Is Not Incorporated into Chapter 9, the Term "Estate" Should Be Read as "Debtor" in Statutory Provisions Made Applicable by Congress in Chapter 9 Cases. There is no general definition of the term "estate" in the Bankruptcy Code. See 101, generally. Section 541(a) explains that an "estate" is created upon the filing of a voluntary or involuntary petition. See 541(a). The "estate" is comprised of a variety of property and interests held by the debtor on the petition date. See 541(a). Section 541 is not, however, incorporated into Chapter 9. See 901(a). The exclusion of 541 from Chapter 9 is not fatal to the allowance of administrative expenses in Chapter 9. By excluding 541, the concept of an estate was omitted from chapter 9 and with it the definitions of estate and property of estate. It appears that Congress intentionally omitted 541 from Chapter 9 and enacted 903 and 904 in order to respect the sovereignty of the States by providing some constraint on a bankruptcy court's powers when dealing with a municipality in bankruptcy. See In re New York City Off-Track Betting Corp., 434 B.R. 131, (Bankr. S.D.N.Y. 2010). Congress remedied the lack of the concept of property of the estate by defining property of the estate within Chapter 9 as property of the debtor in 902. See 902. In contrast, Congress failed to explicitly define the term estate when used in provisions applicable to Chapter 9 or when used in sections of Chapter 9. As discussed below, it is implicit that the term "estate" in Chapter 9 cases, when appearing in statutory provisions specifically incorporated into DMG\ /9/2015 (6:08 PM) 7

15 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 15 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Chapter 9, should be read as "debtor." A variety of provisions which are incorporated into chapter 9 by 901 as well as seminal legal precedent cannot be applied to Chapter 9 cases unless bankruptcy courts recognize that the use of the term "estate" in such provisions and case law should be read as "debtor." For example, the term "estate" appears in six places in 365, five of which are without the phrase "property of the" preceded before the term "estate." Nevertheless, Section 365 has been incorporated, in its entirety, into Chapter 9. See 901(a). If an "estate" is not read as "debtor" in such provisions in Chapter 9, then 5 of the 6 provisions in 365 have no application in Chapter 9. Such an interpretation is inconsistent with Congress' full incorporation of 365 into Chapter 9. In connection with a motion seeking authority to reject a collective bargaining agreement in Chapter 9, bankruptcy courts have adopted the holding of NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1983) in Chapter 9. See Orange County Employees Ass'n v. County of Orange (In re County of Orange), 179 B.R. 177, 180 (Bankr. C.D. Cal. 1995); In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. Mar. 13, 2009), affirmed by IBEW, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262 (E.D. Cal. 2010); Assoc. of Retired Emples. v. City of Stockton (In re City of Stockton), 478 B.R. 8, 23 (Bankr. E.D. Cal. 2012). Under the Bildisco standard, one of the elements a debtor must demonstrates is that a collective bargaining agreement burdens the "estate" (and not "property of the estate"). Bildisco at 526. There has yet to be a reported decision where a bankruptcy court has declined to apply the Bildisco standard in Chapter 9 even though it requires a showing of a burden on the "estate." In fact, one bankruptcy court has noted the lack of an "estate" in Chapter 9 as it relates to the Bildisco standard and applied a slightly modified version of the Bildisco standard nonetheless. In re City of Vallejo, 403 B.R. 72, 78 at footnote 2, (Bankr. E.D. Cal. Mar. 2, 2009), affirmed by IBEW, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262 (E.D. Cal. 2010). Clearly the concepts of "estate" and "debtor" are interchangeable in Chapter 9. Bankruptcy courts will be unable to apply certain provisions of the Bankruptcy Code as well as seminal case law to Chapter 9 cases unless the term "estate," when appearing in statutory provisions specifically incorporated into Chapter 9 is read as "debtor." While there may not be an DMG\ /9/2015 (6:08 PM) 8

16 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 16 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX "estate" in Chapter 9, it is clear there can be "a burden on the debtor," which means the same thing for purposes of Chapter 9 that burden on the estate means in Chapter 11. The same goes for reading the term "preservation of the estate" in Chapter 11 as "preservation of the debtor" in Chapter 9. To hold otherwise will result in an arbitrary distinction which cannot be reconciled. 3. This Court and the City Have Already Substituted "Estate" with "Debtor." This Court has substituted "estate" with "debtor" in this case. In authorizing the City's rejection of the SBCPF's collective bargaining agreement, this Court had to and did find the SBCPF's MOU was a burden on the City instead of finding it was a burden on the "estate." See Exhibit A to the Declaration of David M. Goodrich ("Goodrich Dec."), (page 15), line 14, page 19, line 20, page 30, lines 8-16 [substituting the "burden on the estate" standard of Bildisco with the standard of "burden on the debtor."]). This Court's decision was upheld on appeal. See Exhibit B to the Goodrich Dec. The City has also replaced "estate" with "debtor." In support of its Motion to Reject the Collective Bargaining Agreement with the SBCPF ("Rejected Motion"), the City cites to Bildisco and argues that the Supreme Court established, in pertinent part, the following standard: " a debtor may reject a collective bargaining agreement under the Bankruptcy Code Section 365 if the agreement is a burden on the debtor " [Emphasis added]. See Exhibit C to the Goodrich Dec. (docket number 438), at page 5, lines The City filed a supplement to the Rejection Motion a year and a half later and again argued that the Bildisco standard includes a demonstration by a municipal debtor that a collective bargaining agreement is a "burden on the debtor." See Exhibit D to the Goodrich Dec. (docket number 1116) page 32, lines It is evident that the City has no objection to substituting "estate" with "debtor" when it supports relief sought by the City. Both the Court and the City have substituted the term "estate" with the term "debtor" in this case in order to apply the Bildisco standard to the rejection of the SBCPF's MOU. The use of the term "debtor" in place of the term/concept of "estate" should not be applied in a vacuum. It DMG\ /9/2015 (6:08 PM) 9

17 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 17 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX would be inherently inconsistent application of statutory interpretation to deny a request for the allowance of an administrative expense based upon the use of the word "estate" in 503(b)(1) after this Court, at the request of the City, has already authorized the rejection of the SBCPF's MOU under the Bildisco standard even though there is no "estate" which was burdened by the MOU. The lack of an "estate" was not a bar to the City's requested relief and it should not be a bar to the SBCPF's requested relief. 4. Section 902 Further Demonstrates the Interchangeability of "Debtor" and "Estate" in Chapter 9. Section 902 demonstrates that the concepts of "estate" and "debtor" were meant to be interchangeable in Chapter 9. As noted above, 902(1) was included to deal with the exclusion of 541 from Chapter 9. See Collier on Bankruptcy P An "estate" is a collection of all property and rights of a debtor on the petition date. See 541(a). On the petition date, those rights are placed into an "estate" for the benefit of creditors of the debtor. See 541(a). Section 503(b)(1) refers to the preservation of the "estate." See 503(b)(1). Where an "estate" is being preserved, it is the property and rights of the debtor that are being preserved and not the "estate" itself. Preservation of the "estate," or more accurately preservation of "property of the estate," means preservation of "property of the debtor" in Chapter 9. Moreover, the estate representative in Chapter 11, the trustee, is defined as "debtor" in Chapter 8. See 902(5). This application is consistent with definition 902(1) and Congress' inclusion of 503(b)(1) into Chapter 9. The 503(b)(1) standard in Chapter 9 is a showing of a preservation of the debtor or property of the debtor and the lack of an "estate" is of no consequence. 5. The Erroneous Conclusion Reached in Off-Track Betting. In In re Off-Track Betting Corporation, the bankruptcy court for the Southern District of New York held that post-petition operating expenses of a Chapter 9 debtor are not administrative expenses under 503(b) of the Bankruptcy Code. In re New York City Off-Track Betting Corp., 434 B.R. 131, 142 (Bankr. S.D.N.Y. 2010). Specifically, the Court declined to order payment of the statutory commissions as administrative expenses under 503(b) concluding that that Chapter 9 does not incorporate 541. Id. at 142. Because 541 is not incorporated into Chapter 9, Off- DMG\ /9/2015 (6:08 PM) 10

18 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 18 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Track Betting concludes an estate does not exist and there's nothing to preserve. Id. at 142. Referring to theories found in Collier and Norton, Off-Track Betting opines that 503 administrative expenses must be limited to "expenses incurred in connection with the chapter 9 case itself" and not operating expenses of a municipal debtor. Id. at 142. Citing to 904's limitations on a bankruptcy court's power over a municipality in bankruptcy, the Off-Track Betting court opines that a bankruptcy court may not order a municipality to make specific payments in violation of the Tenth Amendment unless a municipality consents. Id. at 140. The analysis in Off- Track Betting is faulty on three fronts and, in any event, does not govern the relief sought in this motion. First, Off-Track Betting only addresses whether or not a bankruptcy court may order an allowed administrative expense be paid. Id. at 140. Section 503(b) authorizes a bankruptcy court to allow an administrative expense upon a request and after notice and a hearing. See 503(b). There is no specific requirement in 503(b) that a bankruptcy court order a debtor pay an allowed administrative expense as part of a 503(b) request. Instead, the requirement for payment of, or distribution on, an administrative expense is dependent upon the chapter in which a case is pending. See 726(a)(1), 943(b)(5), 1129(a)(9), 1222(a)(2) and 1322(a)(2). Off-Track Betting does not discuss whether or not an administrative claim can be allowed; it simply concludes that a bankruptcy court cannot, absent consent (discussed below), order a municipal debtor pay administrative claims for operational costs. Id. at 140. This distinction becomes important when analyzing the interplay of 503(b), 507 and 943(b)(5). Section 943(b)(5) requires payment of 507(a)(2) claims (which includes administrative expenses allowed under 503(b)) in full and in cash on the effective date of a plan as a condition precedent to confirmation. See 943(b)(5). While 904 may limit a bankruptcy court's authority to order payment of allowed administrative expenses before a plan of adjustment is confirmed, Section 943(b)(5) provides unfettered authority to require payment as a condition to plan confirmation. Section 943(b)(5) provides the authority requiring a debtor pay allowed administrative expenses in Chapter 9 that Off-Track Betting found to be barred by 904 under the facts of that case. DMG\ /9/2015 (6:08 PM) 11

19 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 19 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Also missing from Off-Track Betting's analysis is the fact that Congress has authorized bankruptcy courts to allow administrative expenses without any express limitation. See 901(a) (incorporating 503 in its entirety). If Congress truly intended to restrict a bankruptcy court's power to allow and/or order paid only those administrative expenses incurred the chapter 9 case or incident to the plan (the language used in 943(b)(3)), it could have easily done so by only incorporating 503(b)(2) and 330(a) into Chapter 9 or providing express language in Chapter 9 limiting administrative expenses to expenses incurred in connection with the chapter 9 case itself. Instead, Congress incorporated all of 503, did not incorporate 330(a) and did not provide an express limitation on the types of expenses which can be allowed as administrative expenses in Chapter 9. Off-Track Betting reads limitations into Chapter 9 where no such limitations exists. Finally, there is no discussion in Off-Track Betting of the litany of problems that arise if the term "estate" is not substituted with the term "debtor" in Chapter 9. As discussed above, several other provisions of the Bankruptcy Code which contain the term "estate" are fully incorporated into Chapter 9. By not substituting the term "estate" with the term "debtor," those incorporated sections have no functional application in Chapter 9. As is also discussed above, several key Chapter 9 decisions hinge on the replacement of the term "estate" with the term "debtor." Off-Track Betting fails to distinguish its decision from those Chapter 9 cases that use the term "debtor" in place of "estate." It also fails to address the problems created by removing the word "estate" from incorporated sections of the Bankruptcy Code. In fact, Off-Track Betting does even attempt to remedy the paradox created by its finding. The Off-Track Betting decision is of dubious value because it has redrafted 901 to exclude 503(b)(1)(A) from Chapter 9 even though 901 incorporates all of 503. D. Any 904 Constraints on Court Authority to Allow Administrative Expenses Are Allayed Because The City Has Consented to this Court's Determination of Post-Petition Liability. As discussed in the last section, the bankruptcy court in Off-Track Betting expressed concern over its ability to order the debtor to pay administrative expenses because of the restriction placed on it under 904. In re New York City Off-Track Betting Corp., 434 B.R. 131, DMG\ /9/2015 (6:08 PM) 12

20 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 20 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX (Bankr. S.D.N.Y. 2010). Consent, however, is an exception to the limitations placed on a bankruptcy court under 904. See 904. Here, the City has unequivocally and repeatedly consented to this Court's adjudication of claims related the post-petition liabilities it has incurred with respect to the firefighters. See Exhibits E and F to the Declaration of David M. Goodrich, attached hereto. Any determination of post-petition liability of the City, including an order or judgment adverse to the City, may be entered by the Court notwithstanding 904 as a result of the City's consent. Furthermore, the firefighters are not asking the Court order the City use its revenue or property to pay any allowed administrative expense at this time. As discussed above, Section 503(b) authorizes a bankruptcy court to allow an administrative expense upon a request and after notice and a hearing. See 503(b). A bankruptcy court need not order a debtor pay an allowed administrative expense as part of a 503(b) allowance request and the requirement for payment of, or distribution on, an administrative expense is dependent upon the chapter in which a case is pending. See 726(a)(1), 943(b)(5), 1129(a)(9), 1222(a)(2) and 1322(a)(2). Similar to the process established by 501 and 502, 4 the process under 503(b) results in the allowance of the administrative expense and not an order that the debtor pay the administrative expense. E. The Court May Allow Administrative Expenses Under the Reading Doctrine. In Reading Co. v. Brown, 391 U.S. 471 (1968), the Supreme Court held damages arising from a post-petition tort committed by a debtor operating a business are entitled to administrative expense status as a matter of "fairness" for those that deal with the debtor. Id. at 477 and 482. Applying the fairness principle, Reading found an administrative expense may be allowed even if there is no benefit to the estate. Id. While Reading was decided under the former Bankruptcy Act, its holding and reasoning have been applied to cases arising under the Bankruptcy Code. See Collier on Bankruptcy P , citing In re Al Copeland Enters., Inc., 991 F.2d 233, 239 (5th Cir. 1993) (stating that the Supreme Court's opinion in Reading survived Congress's revisions to the Bankruptcy Code); In re N.P. Mining Co., Inc., 963 F.2d 1449, 1456 (11th Cir. 1992) (holding 4 Section 901(a) incorporates all of 501 and 502. DMG\ /9/2015 (6:08 PM) 13

21 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 21 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX that the reasoning in Reading is valid in analyzing section 503(b)(1)(A) since the administrative expense provision in section 104(a)(1) of the Bankruptcy Act refers to "actual and necessary costs and expenses of preserving estate" which is nearly identical to the language in section 503(b)(1)(A)). Earned but unpaid salary or wages are the vested property of the employees. See Longshore v. County of Ventura, 25 Cal.3d 14, 22 (Cal. 1979); Glendale City Employees' Ass'n, Inc. v. City of Glendale, 15 Cal.3d 328, 343 (1975); Loehr v. Ventura County Community College Dist., 147 Cal.App.3d 1071, 1080 (1983) ("Earned but unpaid salary or wages are vested property ). The City's seizure of wages constitutes conversion. Damages flowing from the City's conversion of property of the firefighters entitles the firefighters to administrative expenses even if there is no benefit to the estate. Reading Co. v. Brown, 391 U.S. 471, 477 (1968). Furthermore, the First Circuit has found post-petition, deliberate violations of law by a debtor which damage third parties entitles those damaged to an administrative expense. In re Charlesbank Laundry, Inc., 755 F.2d 200 (1st Cir. 1985). The amount of damages arising from violations of law may be allowed as an administrative expenses even if no benefit was conferred upon the estate. Id. at 202. Here, the City has seized earned, but unpaid wages from the firefighters on a post-petition basis. Entitlement to payment of a specific wage amount is established under Section 186 of the City Charter and not any iteration of the rejected collective bargaining agreement. See Section 186 of the City Charter. Despite this statutory mandate, the City has violated Section 186 and taken wages earned by the firefighters. Pursuant to In re Charlesbank Laundry, Inc., 755 F.2d 200 (1st Cir. 1985), the firefighters are entitled to an administrative claim for the amount of unpaid wages due post-petition. F. Section 502(g) Does Not Eliminate 503(b)(1)(A) Rights. While 502(g) renders pre and post-petition contractual obligations unsecured claims where a contract is rejected pursuant to 365, where a debtor " elects to continue to receive benefits from the other party to an executory contract pending a decision to reject or assume the contract, the debtor-in-possession is obligated to pay for the reasonable value of those services DMG\ /9/2015 (6:08 PM) 14

22 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 22 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX (citation omitted) which, depending on the circumstances of a particular contract, may be what is specified in the contract." Bildisco at 531, citing to Philadelphia Co. v. Dipple, 312 U.S. 168, 174 (1941), and In re Public Ledger, 161 F.2d 762, (CA3 1947). Even though the City rejected the MOU with the firefighters, a benefit was conferred upon the City which cannot be classified as an unsecured claim under 502(g). The City elected to continue to receive the benefits of the post-petition services performed by the firefighters. The City has not, however, paid the reasonable value for such services. As is discussed above, the value of the benefit conferred upon the City by the firefighters is measured by the amount to be paid under Section 186 of the City Charter. That amount, however, has not been paid and the unpaid amount should be allowed as an administrative expense. G. The District Court Has Found the Firefighters are Entitled to a "Different Priority of Payment" on Their Post-Petition Claims. In its decision affirming this Court's denial of a motion for an order confirming that the automatic stay does not apply, or in the alternative, for relief from the automatic stay, the District Court held: "Claims arising post-petition can receive a different priority of payment under a chapter 9 reorganization, but the adjudication of those claims remains part of the core jurisdiction of the bankruptcy court." In re City of San Bernardino, 2015 U.S. Dist. LEXIS 60881, 17 (C.D. Cal. May 7, 2015), citing Bildisco, 465 U.S. at ; Harris v. Wittman (In re Harris), 590 F.3d 730, (9th Cir. 2009). The District Court s decision affirming this Court's order and finding "claims arising post-petition can receive a different priority of payment under a chapter 9 reorganization" is now the law of the case that this Court must follow. See, e.g., In re Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895); Snow-Erlin v. United States, 470 F.3d 804, (9th Cir. 2006). "Claims" for wages, commissions, vacation pay and sick leave" are ordinarily entitled to priority under 507(a)(4)(B). "Claims" for contributions to an employee benefit plan are entitled to priority under 507(a)(5). Sections 507(a)(4) and (a)(5), however, are not incorporated into Chapter 9. See 901(a). Instead, the only types of "claims" which are entitled to priority in Chapter 9 are administrative expenses allowed under 503(b). See 901(1), 507(a)(2) and DMG\ /9/2015 (6:08 PM) 15

23 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 23 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX (b). Because only administrative expenses are entitled to priority in Chapter 9, the District Court in the City of San Bernardino could only be referring to one type of "priority" claim an administrative expense; any other interpretation of this statement is at odds with the District Court's finding. This Court must follow the law of the case established by the District Court which holds the firefighters' claims arising post-petition are entitled to administrative expense status. / / / / / / / / / H. The City Has Admitted Administrative Expenses are Allowable in Chapter 9 And Should Be Judicially Estopped From Taking a Contrary Position. In the event the City opposes this Request on the basis that administrative expenses are not allowable in a Chapter 9 case, the Court should estop the City from taking such a position. Judicial estoppel is designed to protect the integrity of the judicial system and prevent a litigant from playing fast and loose with the courts: "The concept of judicial estoppel prevents a party from asserting a position in a judicial proceeding that is contrary or inconsistent with a position previously asserted in a prior proceeding. The purpose is to protect the integrity of the judicial process and not the parties of the lawsuit. Jackson v. County of Los Angeles, 60 Cal. App. 4th 171, 181 [70 Cal. Rptr. 2d 96] (1997). The doctrine of judicial estoppel, sometimes referred to as the doctrine of preclusion of inconsistent positions, is invoked to prevent a party from changing its position over the course of judicial proceedings when such positional changes have an adverse impact on the judicial process. [Citation omitted]. The policies underlying preclusion of inconsistent positions are general consideration[s] of the orderly administration of justice and regard for the dignity of judicial proceedings. [Citations omitted]. Judicial estoppel is intended to protect DMG\ /9/2015 (6:08 PM) 16

24 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 24 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX against a litigant playing fast and loose with the courts. [Citation omitted].... Judicial estoppel is most commonly applied to bar a party from making a factual assertion in a legal proceeding which directly contradicts an earlier assertion made in the same proceeding or a prior one. [Citation omitted]." International Engine Parts, Inc. v. Feddersen and Company, 64 Cal. App. 4th 345, 350 (1998) (emphasis in original) (multiple citations omitted). It seems patently wrong to allow a person to abuse the judicial process by first [advocating] one position, and later, if it becomes beneficial, to assert the opposite. Jackson v. County of Los Angeles, 60 Cal. App. 4th 171, 181 (1997) (emphasis added) (citations and internal quotations omitted). In California, judicial estoppel applies when: "(1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake." Id. citing Jackson v. County of Los Angeles, 60 Cal. App. 4th 171, 183 (1997)). Courts regularly apply this doctrine to bar a plaintiff from prosecuting causes of action that were not disclosed in the plaintiff s prior bankruptcy case. See id. at 354 (dismissing action on grounds of judicial estoppel in light of plaintiff s failure to disclose claims in bankruptcy case); Kest, 141 Cal. App. 4th at (citing multiple cases dismissing action on grounds of judicial estoppel for plaintiff s fail[ure] to disclose a legal claim in a prior bankruptcy case and recognizing applicability of judicial estoppel on such grounds, but declining to dismiss action given absence of one element of doctrine under particular circumstances); Rapp, 2009 Bankr. LEXIS 4287 at *20-21 (finding plaintiff judicially estopped from pursuing claims given failure to disclose claims in chapter 7 bankruptcy case). In its arguments on to the appellate court, the City admitted, on two separate occasions, that: (1) "Claims arising post-petition (often referred to as administrative expenses) can receive a different priority of payment under a chapter 9 plan " and (2) "[i]ndeed, Section 503(a), entitled DMG\ /9/2015 (6:08 PM) 17

25 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 25 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Allowance of Administrative Expenses, expressly provides that the bankruptcy court may, after notice and a hearing, allow or disallow administrative expenses " See Exhibits G (page 22, first full paragraph) and H (page 22, first paragraph) to the Goodrich Dec. The City's argument relating to "claims arising post-petition" pertain to, inter alia, the City's taking of post-petition wages to pay the City's own pension obligations. In order to convince the District Court that this Court held core jurisdiction over the firefighters' post-petition claims, the City admitted that administrative claims are allowable in Chapter 9. See Exhibits G and H. When making these admissions, the City did not qualify administrative expenses in Chapter 9 as only those claims for "expenses incurred in connection with the chapter 9 case itself." See Exhibits G and H. In fact, it could not have; if it did, the argument would have no merit or meaning. The City has prevailed on the appeals in which it has taken this position and the District Court expressly adopted this position in one of the appeals. See Exhibit B ("Claims arising postpetition can receive a different priority of payment under a chapter 9 reorganization, but the adjudication of those claims remains part of the core jurisdiction of the bankruptcy court." (citations omitted)). If the City now argues that the firefighters claims cannot be allowed as administrative claims because there is no estate in Chapter 9, then this position will be totally inconsistent with the position taken by the City on appeal. The City knowingly and intentional took this position in order to prevail on appeal. Should the City now argue that the firefighters do cannot hold administrative claims because of a lack of an estate in Chapter 9, the Court should apply the doctrine of judicial estoppel and bar any such argument. I. The Results of Finding Certain Administrative Claims Are Not Allowable In Chapter 9 Would be Absurd and Inequitable. Setting aside the issues discussed above, the practical effect of denying a request for payment of administrative expenses for wages incurred, but not paid, on a post-petition basis would lead to absurd and inequitable results. For example, a municipal debtor could lure an unsuspecting employee into continued employment post-petition. If a municipal debtor decided to not pay post-petition wages and those wages are not allowable as administrative claims, then accrued post-petition wages could be paid at pennies on the dollar or not at all. The remainder of DMG\ /9/2015 (6:08 PM) 18

26 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 26 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX any wages not paid could be discharged in a plan of adjustment unless the debtor specifically excluded the claim for payment. See 944(c)(1). Clearly Congress did not incorporate a set of Bankruptcy Code provisions that would result in little or no payment to employees working for the benefit of a bankrupt municipality. If it did, then an inability to recover post-petition wages as administrative priority expenses would result in employees refusing to work for municipal debtors. The omission of the concept of an "estate" from Chapter 9, as that terms relates to administrative expenses, could not have been intended to dissuade continued employment of those a municipal debtor depends upon most. III. CONCLUSION WHEREFORE, for all of the foregoing reasons, SBCPF respectfully requests the Court enter an order allowing its Request For Allowance of Administrative Claim in the amount to be determined by the Court. DATED: July 9, 2015 Respectfully submitted, SulmeyerKupetz A Professional Corporation By: /s/ David M. Goodrich David M. Goodrich Attorneys for San Bernardino City Professional Firefighters, Local 891 DMG\ /9/2015 (6:08 PM) 19

27 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 27 of 354 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX DECLARATION OF DAVID M. GOODRICH I, David M. Goodrich, declare as follows: 1. I am an attorney duly admitted to practice before this Court. I am Senior Counsel with SulmeyerKupetz, A Professional Corporation, attorneys of record for San Bernardino City Professional Firefighters Local 891 ("SBCPF"). If called as a witness, I could and would competently testify to all facts within my personal knowledge except where stated upon information and belief. 2. Attached hereto as Exhibit A is a true and correct copy of the Court's Findings of Fact and Conclusions of Law in support of order approving the City of San Bernardino's ("City") Motion for an Order Approving the Rejection of Collective Bargaining Agreements that I downloaded directly from the Court's webpacer document filing/storage system. 3. Attached hereto as Exhibit B is a true and correct copy of the District Court's memorandum of decision affirming the Court's order approving the City's Motion for an Order Approving the Rejection of Collective Bargaining Agreements that I downloaded directly from the Court's webpacer document filing/storage system. 4. Attached hereto as Exhibit C is a true and correct copy of the City's Motion for an Order Approving the Rejection of Collective Bargaining Agreements that I downloaded directly from the Court's webpacer document filing/storage system. 5. Attached hereto as Exhibit D is a true and correct copy of the City's Supplement to its Motion for an Order Approving the Rejection of Collective Bargaining Agreements that I downloaded directly from the Court's webpacer document filing/storage system. 6. Attached hereto as Exhibit E is a true and correct copy of an excerpt from a transcription of the Court's hearing held on July 31, 2014, which I received from Escribers, a court recording transcription service. 7. Attached hereto as Exhibit F is a true and correct copy of an excerpt from a transcription of the Court's hearing held on December 3, 2014, which I received from Escribers, a court recording transcription service. 8. Attached hereto as Exhibit G is a true and correct copy of the City's Opening Brief DMG\ /9/2015 (6:08 PM) 20

28 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 28 of for appeal number 5: that I downloaded directly from the Court's webpacer document filing/storage system. 9. Attached hereto as Exhibit H is a true and correct copy of the City's Opening Brief for appeal number 5: that I downloaded directly from the Court's webpacer document filing/storage system. I declare under penalty of perjury under the laws of the United States of America and the State of California that the foregoing is true and correct. Executed on July 9, 2015, at Los Angeles, California. SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX /s/ David M. Goodrich David M. Goodrich DMG\ /9/2015 (6:08 PM) 21

29 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 29 of 354 EXHIBIT A

30 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 30 1 of FILED & ENTERED NOV CLERK U.S. BANKRUPTCY COURT Central District of California BY moser DEPUTY CLERK In re UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION Case No. 6:12-bk MJ CITY OF SAN BERNARDINO, CALIFORNIA, Debtor. Chapter 9 FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING ORDER GRANTING IN PART AND DENYING IN PART CITY OF SAN BERNARDINO'S MOTION AUTHORIZING REJECTION OF COLLECTIVE BARGAINING AGREEMENT WITH SAN BERNARDINO CITY PROFESSIONAL FIREFIGHTERS Hearing: Date: September 11, 2014 Time: 1:30 p.m. Place: United States Bankruptcy Court 3420 Twelfth Street Courtroom 301 Riverside, CA

31 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 31 2 of I. INTRODUCTION 1. On April 4, 2013 and September 11, 2014, the motion entitled "Debtor City of San Bernardino s Motion Pursuant to 11 U.S.C. 365, 901 and 904 for Order Approving: (A) Rejection of Collective Bargaining Agreements With San Bernardino Public Employees Assoc., San Bernardino Police Officers Assoc. and San Bernardino City Professional Firefighters; and (B) February 1, 2013 Interim Modifications to Such Collective Bargaining Agreements" ("the Rejection Motion") came on regularly for hearing in Courtroom 301 of the United States Bankruptcy Court for the Central District of California, the Honorable Meredith Jury presiding. Prior to the September 11, 2014 hearing: (a) the City and the San Bernardino Public Employees Association (SBPEA ) reached an agreement pursuant to which, among other things, the City withdrew the Rejection Motion as it applied to the SBPEA; and (b) the Court bifurcated the proceedings such that the September 11, 2014 hearing, the Court s subsequent order on the Rejection Motion and these Findings of Fact and Conclusions of Law do not apply to the San Bernardino Police Officers Association ( SBPOA ) and the City s Memorandum of Understanding with the SBPOA. 2. Movant City of San Bernardino ("City") appeared through its counsel, Paul R. Glassman and Fred Neufeld of Stradling Yocca Carlson & Rauth, a Professional Corporation. The San Bernardino City Professional Firefighters Local 891 ("SBCPF") appeared through its counsel, Corey W. Glave, Attorney At Law, and David M. Goodrich of Sulmeyer Kuptez, a Professional Corporation. 3. The Court reviewed numerous briefs filed in support of and in opposition to the Rejection Motion, the declarations of Michael Busch, Georgeann Hanna, Linda Daube, Diana Leibrich, Kathleen DeVaney and Richard Luczak filed by the City in support of the Rejection Motion, the declarations of Corey Glave, David Goodrich and Richard Scott Moss filed by the SBCPF in opposition to the Rejection Motion, and the numerous documents attached to the declarations. The City s evidence on the financial burden of the contract was entirely unrebutted by any admissible evidence presented by SBCPF, who chose to not present any expert testimony to counter the testimony of Michael Busch. SBCPF explicitly waived the opportunity for an evidentiary hearing during which it could have cross examined Mr. Busch and any of the other City 2

32 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 32 3 of declarants. Based upon the evidence presented, the Court hereby makes the following findings of fact ( FOF ) and conclusions of law. Based upon these findings of fact and conclusions of law, on September 19, 2014, the Court entered its "Order Granting In Part and Denying In Part City of San Bernardino's Motion Authorizing Rejection of Collective Bargaining Agreement With San Bernardino City Professional Firefighters" ("the Rejection Order"). 4. The findings and conclusions set forth herein constitute the Court's findings of fact and conclusions of law. To the extent any of the following findings of fact are determined to be conclusions of law, they are adopted, and shall be construed and deemed, conclusions of law. To the extent any of the following conclusions of law are determined to be findings of fact, they are adopted, and shall be construed and deemed, as findings of fact. 5. The Court has jurisdiction to hear and determine the Rejection Motion and the requests for relief contained in the Rejection Motion pursuant to 28 U.S.C. 157(b)(1) and 1334(b). Venue of the adversary proceeding in this district is proper under 28 U.S.C and The Court, having read and considered all of the pleadings and heard oral argument, and having ruled on certain of the evidentiary objections and upon consideration of the admissible evidence, and good cause appearing therefor, the Court hereby makes the following findings of fact and conclusions of law II. FINDINGS OF FACT The Parties and the Memorandum of Understanding 7. The City of San Bernardino ("City") is a municipal corporation and a political subdivision of the State of California The City filed a voluntary petition for relief under Chapter 9 of the Bankruptcy Code on August 1, 2012 ("Petition Date") On September 17, 2013, this Court entered its Order for Relief Under Chapter 9 of the Bankruptcy Code. 3 1 City of San Bernardino Eligibility Opinion, [Docket No.830], at p. 18, lines 1-3. References to the "Docket" are to the pleadings filed in the above-captioned Chapter 9 case. 2 Docket No. 1. 3

33 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 33 4 of The City and the SBCPF are parties to a collective bargaining agreement entitled Fire Safety Employees Memorandum of Understanding - January 1, 2003 to June 30, 2009 (Resolution No ), as amended by Resolution No dated June 1, 2009 (approving a Side Letter to Resolution No ) and Resolution No adopting the Terms and 5 Conditions of Employment for the Fire Safety Employees (collectively, the "MOU"). 4 The MOU provides in Section 5 of Article VII that "[u]pon expiration of the MOU and until a new MOU has been negotiated between the Union and the City, all articles in this MOU shall remain in full effect, unless otherwise stated in this MOU." 5 The City's Financial Condition 11. Prior to the Petition Date, the City s Finance Department with the assistance of Andrea Travis-Miller, the City's former Acting City Manager, and Michael Busch, the president and CEO of Urban Futures, Inc., the City's financial consultant, prepared the San Bernardino Budgetary Analysis and Recommendations for Budget Stabilization dated July 9, 2012 (the July 2012 Budget Report ), a Staff Report dated July 18, 2012, a Fiscal Emergency Operating Plan July 2012 to September 2012 (the Fiscal Emergency Plan ), and a report entitled City of San Bernardino 16 Selected Monthly Cash Flow Analysis( Cash Flow Analysis ). 6 The City's Finance Department and Mr. Busch, with the assistance of Ms. Travis-Miller, also prepared the Pre-Pendency Plan and Pendency Plan. 7 3 Docket No Declaration Of Diana Leibrich In Support Of Debtor City Of San Bernardino s Motion Pursuant To 11 U.S.C. 365, 901 And 904 For Order Approving: (A) Rejection Of Collective Bargaining Agreements With San Bernardino Public Employees Assoc., San Bernardino Police Officers Assoc. And San Bernardino City Professional Firefighters; And (B) February 1, 2013 Interim Modifications To Such Collective Bargaining Agreements and the exhibits thereto [Docket Nos. 446 through ] filed March 4, 2013 ("Leibrich Decl. 3/4/13") at 7 and Exhibits 2, 3 and 4 thereto. 5 6 Leibrich Decl. 3/4/13 at Exhibit 2, p. 36. Exhibits B, C, I, L and M to Declaration of Georgeann Hanna In Support of City of San Bernardino's Memorandum of Facts and Law In Support Of The Statement of Qualifications Under Section 109(c) Of The Bankruptcy Code [Docket No. 129] filed on August 31, 2012 ("Hanna Decl. 8/31/12"). 7 Declaration Of Michael Busch In Support Of Debtor City Of San Bernardino s Motion Pursuant To 11 U.S.C. 365, 901 And 904 For Order Approving: (A) Rejection Of Collective Bargaining Agreements With San Bernardino Public Employees Assoc., San Bernardino Police Officers Assoc. And San Bernardino City Professional Firefighters; And (B) February 1, 2013 Interim Modifications To Such Collective Bargaining Agreements and the exhibits thereto [Docket Nos. 445 through 445-2] filed March 4, 2013 ("Busch Decl. 3/4/13") at 6; Exhibits 1 through 3 to Declaration of Michael Busch Re City of San Bernardino's Pendency Plan [Docket No. 234] filed on November 30,

34 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 34 5 of The Great Recession and housing bubble burst adversely affected the City of San Bernardino just like other cities in California and across the nation. Since 2007, housing prices plummeted and the foreclosure rate increased resulting in significantly lower property tax revenues. The housing construction boom of the early 2000 s led to speculation in the housing market and an influx of people moving to San Bernardino to seek more affordable housing than that available in Los Angeles, Orange and San Diego Counties. Speculation in San Bernardino s housing market made it particularly vulnerable when the housing bubble burst, and the Riverside-San Bernardino- Ontario metro area had one of the nation s highest foreclosure rates. San Bernardino s foreclosure rate was 3.5 times greater than the national average. The median single family home price peaked in 2007, and was over 40% below that peak in June of In addition to declines in residential real estate prices, commercial properties dropped in value. Given continued housing market weakness and the constraints imposed by Proposition 13 on property tax increases, the July 2012 Budget Report concluded that property tax revenues likely will remain flat for years to come. The Great Recession also caused job losses for many of San Bernardino s residents. Since June of 2008, the City has suffered from double digit unemployment. The City s unemployment rate was 16.9% as of June 2012, which was notably higher than the State of California s and more than double the June 2012 national rate of 8.2%. By 2010, roughly 34.6% of the City s population was classified as poor. In 2011, the U.S. Census Bureau ranked the City as the second poorest in the nation behind only Detroit. While sales tax revenues have increased modestly since the low, the July 2012 Budget Report predicted that sales tax revenues were not projected to return to peak levels in the near term The July 2012 Budget Report presented to the Mayor and Common Council at the July 10, 2012 Common Council meeting determined that: (1) the City faced a budget deficit preliminarily estimated to be over $45.8 million in fiscal year which began on July 1, 2012; (2) the City had depleted all its General Fund reserves and reserves in other internal service accounts to cover substantial budget deficits in the last four consecutive fiscal years; (3) immediate and substantial action had to be taken to reduce spending and preserve cash for the 28 8 Busch Decl. 3/4/13 at 7; Exhibits B and C to Hanna Decl. 8/31/12. 5

35 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 35 6 of City to continue providing essential services to the City s residents; (4) reviews of the City s General Fund revealed that the balances at the start of the and fiscal years had been erroneously reported by City staff and actually totaled over $4.5 million less than reported, and the beginning General Fund balance for the current fiscal year was estimated to be a cash deficit of over $18.2 million; and (5) the City did not have enough unrestricted cash available to pay its financial obligations as and when those obligations were due or to become due and owing in July of 2012 and continuing throughout the fiscal year and beyond As of June 30, 2012, the City s General Fund had no cash. The General Fund had spent more than it had available and the estimate of the cash deficit in the General Fund was revised 10 from $18.2 million to $15.2 million in March As the City worked to complete a backlog of accounting work, the estimated General Fund negative cash balance was revised to $15.3 million as of the end of fiscal year on June 30, The City's Comprehensive Annual Financial Report for fiscal year dated June 16, 2014 ("FY CAFR") confirmed that the City ended fiscal year with a negative cash position in the General Fund in the amount of $15,345, In June of 2012, as part of Mr. Busch's early analysis of the causes and depth of the City's financial crisis, it was discovered that the City had a history of either not funding or substantially under-funding its operational obligations, its internal service funds (such as workers compensation, general liability claims), and the retirement benefits the City provided to its retirees in addition to their pensions (commonly referred to as other post employment benefits or "OPEB"). The analysis of the City's unfunded actuarial liabilities and long-term claim liabilities prepared by employees of the City's finance department in June of 2012 showed that the City had an annual net shortfall on funding of $14.4 million dollars. For fiscal year , Mr. Busch's analysis in June of 2012 revealed that the City under budgeted operational expenses by approximately $7.4 million. The City also was not budgeting or setting aside any funds for liabilities such as compensated 9 Busch Decl. 3/4/13 at 8; Exhibits B and C to Hanna Decl. 8/31/ Busch Decl. 3/4/13 at Declaration of Michael Busch In Support of Motion to Reject Collective Bargaining Agreement With San Bernardino City Professional Firefighters Local 891 [Docket No. 1117] filed on August 18, 2014 ("Busch Decl. 8/18/14") at 5; Declaration of Georgeann Hanna In Support of Motion to Reject Collective Bargaining Agreement With San Bernardino City Professional Firefighters Local 891 [Docket No through ] filed on August 18, 2014 ("Hanna Decl. 8/18/14") at Exhibit 20. 6

36 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 36 7 of absences, working capital or reserves for economic uncertainties. Mr. Busch's estimation of the under-budgeting of the City's operational expenses was confirmed in the City's FY CAFR and determined to be $7.6 million (slightly higher than Mr. Busch's estimate). The combined underfunding of municipal operations and other liabilities led to the City s significant negative cash position in the General Fund and other internal service funds, which also was verified by the FY CAFR. For example, the workers compensation and general liability funds had an asset deficit of roughly $20 million combined as of June 30, Mr. Busch explained that it was for these reasons that the City increased its General Fund budget (expenditures for each department) by $26 million and budgeted another $18.3 million for line items that had not been budgeted before by the City for the fiscal year The City funds its operations through roughly 70 individual funds which are comprised of the General Fund, discretionary funds and restricted funds. While the City had total cash and investments as of June 3, 2012 of approximately $27,000,000, all of those monies were held in restricted funds and legally unavailable for General Fund obligations The July 2012 Budget Report stated that in addition to the pensions that the City provides to its employees through the California Public Employees Retirement System ( CalPERS ), the City also provides other post-employment benefits, including retiree health insurance. Because City employees are eligible to retire at either age 50 (for police and fire) or 55 (for other employees), before such employees are eligible for Medicare, the City s costs for this health insurance benefit are significant. Unlike pension benefits which are traditionally funded through the working life of the employee, little money was set aside to fund these benefits even though an actuarial liability arose. As of June 2011, the City s unfunded liability for OPEB was estimated to be $61 million Declaration of Michael Busch In Support of The City of San Bernardino's Reply To The San Bernardino City Professional Firefighters Local 891's Opposition And Response [Docket No. 1157] filed on September 8, 2014 ("Busch Decl. 9/8/14") at 8 and Exhibits 2 and 3 thereto; Exhibit 20 to Hanna Decl. 8/18/14; Current Financial Condition; Declaration of Michael Busch in Support Thereof ( Busch Decl., 4/29/13 ) at 7 and Exhibit 3 thereto. 13 Busch Decl. 9/8/14 at 9 and Exhibit 1 thereto. 14 Busch Decl. 3/4/13 at 19. 7

37 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 37 8 of The preliminary financial projections in the Fiscal Emergency Plan and Cash Flow Analysis presented to the Common Council and Mayor on July 24, 2012 demonstrated that the City had an estimated net cash deficit of over $11.5 million and, as such, could not pay all of its obligations due and owing or becoming due from July through September of The preliminary financial projections showed that City would end each month of its fiscal year in with a negative cash balance of millions of dollars in the General Fund As of August 2014, the City still has no General Fund reserves nor does the City have reserves in any other funds and remains unable to budget funds for vehicle replacement or replacement of other critical equipment, including items such as computers and information technology. Despite an improvement in total cash since the Petition Date, the City s ability to respond to one significant negative event under the City s current cash position would jeopardize the substantial efforts made to date to address liquidity, budget and cash insolvency Most of the City's vehicles that are used to provide public safety and other services (such as police and fire protection, animal control services, maintenance and code enforcement work) are either past their scheduled replacement date or scheduled for replacement over the next three years. It is estimated that, as of fiscal year , the backlog for replacement of City 17 vehicles is at least $17.7 million dollars. 17 A Fleet Liability Listing identified the City vehicles scheduled for replacement in 2014 through 2031 and the estimated cost for replacing those vehicles, and unless and until the City builds up its cash, old fire trucks, police cars and other vehicles used for essential basic services and the equipment necessary to support them cannot be replaced The City also has a significant capital improvement project and public facilities backlog estimated at $200 million and the City must be able to perform this work to repair and maintain streetlights, roadways, traffic signals, sewers, bridges, storm drains, culverts and other infrastructure such as public buildings and parks which are vital to City operations and the safety of its residents. For years, the City deferred capital improvement projects and much needed public 15 Busch Decl. 3/4/13 at 10; Exhibits L and M to Hanna Decl. 8/31/ Busch Decl. 8/18/14 at Busch Decl. 8/18/14, Exhibit 3 attached thereto. 18 Busch Decl. 8/18/14 at 13 and Exhibits 3 and 4 thereto. 8

38 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page 38 9 of facilities improvements because the General Fund relied on non-general Fund monies, including funds for capital improvement projects, in order to pay General Fund expenses. 19 The Pre-Pendency and Pendency Plans 22. The Pre-Pendency Plan presented to the City s Common Council in August of 2012 determined that the General Fund experienced (a) a significant revenue decline from the peak in FY of $89.72 million to $78.21 million in FY and (b) increasing operating costs primarily related to personnel costs and debt service. As set forth in the July 2012 Budget Report, personnel costs represented about 75% of total General Fund expenditures for the City s fiscal year. Public safety (police and fire) accounted for approximately 72% of the personnel costs in the General Fund. For the fiscal year, personnel costs alone were projected to exceed all of the City s annual General Fund revenues The City's Common Council approved a majority of the expenditure reductions recommended in the Pre-Pendency Plan on September 17, 2012 and October 1, 2012, which significantly reduced the City's fiscal year budget deficit and included changes to the 15 operations of the Fire Department. 21 The City s Pendency Plan, which incorporated and amended the Pre-Pendency Plan, was approved by the City's Common Council on November 26, 2012 as set forth in Resolution No The modifications to the City s seven collective bargaining agreements with the City s employee unions which would support the Pendency Plan included: (a) deferral of payment of cash outs of sick, holiday and vacation leave for terminated employees; and (b) increasing the amount of each employee s share of the City s obligation to CalPERS such that the employee would 22 pay 50% of the normal cost of the benefit. 23 As described in the Pendency Plan, all of the City s creditor constituencies were adversely affected. The Pendency Plan contemplated savings from approximately $26 million in employee salary and benefit reductions, and $35 million in continuing 19 Busch Decl. 8/18/14 at Busch Decl. 3/4/13 at 11; Exhibits B and C to Hanna Decl. 8/31/2012; Exhibit 2 to Busch Decl. 11/30/ Busch Decl. 11/30/12 at 7, lines and Exhibits 2 and 3 thereto. 22 Busch Decl. 11/30/12 at 5 and Exhibit 1 thereto; Leibrich Decl. 3/4/13 at 10 and Exhibit 16 thereto. 23 Leibrich Decl. 3/4/13 at 10 and Exhibit 16 thereto. 9

39 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of deferrals of payments to creditors. However, the City s financial crisis was such that, even with these cuts and deferrals, the City remained in dire financial straits In order to implement the Pendency Plan, four of the City's unions (the General Bargaining Unit, the Fire Management Bargaining Unit, the Police Management Bargaining Unit, and the Management/Confidential Bargaining Unit) reached agreements with the City on modifications to their respective collective bargaining agreements, and those modifications took effect on February 1, 2013 as set forth in Resolution No , Resolution No , Resolution No , and Resolution No The City did not reach an agreement with three unions on the modifications of the terms and conditions of employment set forth in the City s Pendency Plan. These unions were the Fire Safety Unit, Middle Management Unit and the Police Safety Unit. On January 28, 2013, the City Council voted to impose modifications to the terms and conditions of employment on those bargaining units as set forth in Resolution No , Resolution No and Resolution No On January 28, 2013, the City also adopted Resolution No entitled Resolution Of The Mayor And Common Council Of The City Of San Bernardino Adopting Modifications To The Retiree Health Insurance Payments For Police Safety And Police Management Employees In Accordance With The City s Pendency Plan, Item #8, Adopted By The Mayor And Common Council On November 26, 2012 By Resolution No which reduced the City's contribution to the retiree medical plans for eligible members of the Police Safety Unit and Police Management Unit to the same percentage the City contributes for other retirees Busch Decl. 3/4/13 at Leibrich Decl. 3/4/13 at 11 and Exhibits 17, 18, 19 and 20 thereto; Declaration Of Linda Daube In Support Of Debtor City Of San Bernardino s Motion Pursuant To 11 U.S.C. 365, 901 And 904 For Order Approving: (A) Rejection Of Collective Bargaining Agreements With San Bernardino Public Employees Assoc., San Bernardino Police Officers Assoc. And San Bernardino City Professional Firefighters; And (B) February 1, 2013 Interim Modifications To Such Collective Bargaining Agreements [Docket No. 444] filed March 4, 2013 ("Daube Decl. 3/4/2013") at Leibrich Decl. 3/4/13 at 16 through 19 and Exhibits 21 through 23 thereto. 27 Leibrich Decl. 3/4/13 at 20 and Exhibit 24 thereto; Daube Decl. 3/4/2013 at

40 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of The City's Budgets for Fiscal Years , and In February 2013, the City's financial consultant prepared the City Manager s Budget Message dated February 19, 2013 ( February Budget Message ) and the Fiscal Year and Fiscal Year Proposed Budget ( Proposed Budget ) with the assistance of the former Acting City Manager, Andrea Travis-Miller, employees of the City s Finance Department and individuals working in the City s Finance Department under contract with UFI. As set forth in the Budget 7 Message, the City s liquidity crisis remained extremely serious. 28 As stated in the February Budget Message, after incorporating various transfers in from other Funds and transfers out, the projected operating deficit for fiscal year was revised to just short of $41 million. 28. The City needed to close the fiscal year with sufficient cash to operate in the next fiscal year during the lean months when revenues would come in below the monthly average, and the timely implementation of the expenditure reduction measures of the Pendency Plan were vital and necessary to meet that objective. The Pendency Plan anticipated the elimination of the 9% Employer Paid Member Contribution (EPMC) for police and fire, and the payment by the employee of 50% of PERS normal costs effective January 1, These changes did not go into effect until February 1, The additional cost to the City from just this one-month delay on these items alone was estimated to be $571,125. The City was not done cutting expenses in the process of balancing its budget, but the modifications to employee benefits were a key element in that budgetary process. As of March 2013, the City still had deficits in its internal service funds, no reserves in any funds and no funds for equipment replacement. Mr. Busch stated that the cost savings were critical to the implementation of the Pendency Plan and the ability of the City to propose a confirmable plan of adjustment and that absent the rejection of the police, fire and middle management MOUs, the City could not successfully implement its Pendency Plan As set forth in the City Manager s February Budget Message, in order to adjust for the City Charter Section 186 ( Section 186 ) salary adjustments and the delayed implementation of the Pendency Plan measures, the City Manager recommended that the Common Council consider Busch Decl. 3/4/13 at 5 and 15 and Exhibit 1 thereto. 29 Busch Decl. 3/4/13 at

41 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of cost reduction strategies such as closing four community centers, terminating the agreement with the Boys and Girls Club, closing two senior centers, closing the cemetery, contracting with a private company or other public agency for library services, engineering, collections and information technology services, and outsourcing refuse collection services As indicated in Table 1 of the February Budget Message, budget reductions that reflect implementation of the Pre-Pendency Plan and Pendency Plan impacted nearly every City department including the Common Council, Mayor, City Clerk, City Treasurer, City Attorney, City Manager, Civil Service, Human Resources, Public Works, Parks & Recreation, and Community Development. The City stopped proposing any additional capital improvement projects. Library hours were reduced, full-time library employees reduced to part-time and a children s bookmobile project cancelled. Reductions in personnel in Public Works, Parks & Recreation and Community Development resulted in reduction of maintenance of the City s infrastructure and parks and recreational facilities In April 2013, with the assistance of Mr. Busch, the City prepared a revised Budget Message dated April 15, 2013 ( April Budget Message ) and a revised Fiscal Year and Fiscal Year Proposed Budget ( FY and Budget ) with the assistance of employees of the City s Finance Department and individuals working in the City s Finance Department under contract with UFI. The Budget was approved and adopted by the Common Council on April 22, Based on the City s FY and Budget, planned continued deferrals, cash flow analysis and reconciled bank statements, the City s total cash position as of January 2013 was $26.8 million and the estimated year-end total cash positions were $33.1 million and $37.8 million for June 30, 2013 and June 30, 2014, respectively. Given the City s total deferred obligations of $ million, anticipated General Fund negative cash balance as of June 30, Declaration of Diana Leibrich in support of Debtor City of San Bernardino s Reply ( Leibrich Decl. 4/1/13 ) at Leibrich Decl. 4/1/13 at City Of San Bernardino s Report Respecting: (1) Approval Of Budgets For Fiscal Years And Further Implementing Pendency Plan; And (2) Supplemental update On City s Current Financial Condition; Declaration Of Michael Busch In Support Thereof [Docket No. 572] filed on April 29, 2013 ("Busch Decl. 4/29/13") at 5. 12

42 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of of $8,358,873 and operating capital needs, there would not be enough cash available if the City was required to pay all of the City s deferred obligations during the FY and Budget period The City s estimated growth in total cash from January 2013 to June 2013 was a reflection of continued deferrals of payments to creditors, service delivery reductions to the City's residents, and savings achieved through compensation/salary negotiations and impositions. Additionally, because the City reduced its General Fund expenses through these measures, as well as continued deferral of infrastructure and equipment replacement, the General Fund became less reliant on the restricted funds for cash flow purposes, thereby increasing cash on hand in these other funds. However, as Mr. Busch explained, improvement in total cash is not a suitable measure of the City s financial health because deferred creditor obligations exceed General Fund cash on hand, and essential services, infrastructure, equipment and working capital and reserves remain unfunded While the estimate made as of April 15, 2013 of a $2.3 million budget surplus for the General Fund for fiscal year may appear as a financial improvement, this was accomplished through, among other things, significant reductions in service delivery to the City's residents, the deferral of obligations due to the City's creditors and the City s continuation of not funding essential services such as infrastructure and equipment replacement As a result of cost-containment measures made since the Petition Date, which included the modifications to seven collective bargaining agreements that the City implemented in February 2013 (including the imposition of modifications to the MOU approved by the Mayor and Common Council in Resolution No effective as of February 1, 2013), the City no longer relied on non-general Fund cash to pay for General Fund expenses. The City would have ended fiscal year on June 30, 2013 with a General Fund ending cash balance of between negative $5-6 million if the City had continued to make the employer contribution payments to CalPERS, but ended the fiscal year with estimated cash of $8.6 million because it deferred payments to CalPERS during that fiscal year. Despite the improvement in cash, the City's General Fund 33 Busch Decl., 4/29/13 at 7, p. 6, lns Busch Decl. 9/8/14 at Busch Decl. 9/8/14 at

43 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of liabilities continue to reflect a fund balance deficit estimated to be negative $13.1 million at the end of fiscal year After holding budget workshops in May and June of 2014, the Mayor and Common Council adopted the City's general budget for fiscal year (which included the Fire 5 Department budget and associated cuts)(the "FY Budget") on June 30, The FY Budget included a memorandum from Paul Drasil, the Interim Fire Chief, entitled "Proposed Fire Department Budget for Fiscal Year 14/15 (the "Drasil Report"). On June 30, 2014, the City also adopted Resolution No , continuing the City's fiscal emergency The proposed FY Budget was a substantially revised budget after the estimated amounts from the managers of the City's departments for necessary expenditures to operate their respective departments exceeded the City's projected revenues by $28.2 million. It is likely that further downward adjustments to the City's Budget will be required to address the anticipated salary increases required under Charter Section 186. In addition, the City continues to defer payments on certain liabilities, which are unbudgeted and are estimated to be approximately $14.4 million. 39 The City still has deficits of over $3 million in certain of its internal service funds. Internal services funds are necessary to provide funds for expenses such as unemployment claims, workers compensation claims, general liability and motor pool expenses (such as parts, equipment and fuel). There are no funds in the City s FY Budget budgeted to address the deficits in the City's internal service funds The General Fund cash balance was $4,675,838 as of the close of business on April 30, The General Fund houses the cash that the City utilizes to pay for salaries for the City's employees and other expenses of operating the City, including the operations of the Fire 23 Department. 41 The City has no choice but to continue to focus on managing its operational costs Busch Decl. 8/18/14 at Declaration of Georgeann Hanna In Support of Debtor City of San Bernardino's Opposition To Motion of San Bernardino City Professional Firefighters Local 891 For Relief From The Automatic Stay [Docket No. 1064] filed on July 24, 2014 (Hanna Decl. 7/24/14") at 4 and Exhibit 1 thereto. 38 Hanna Decl. 7/24/14 at 6 and Exhibit 3 thereto. 39 Busch Decl. 8/18/14 at 12 and Exhibit 2 thereto. 40 Busch Decl. 8/18/14 at Busch Decl. 8/18/14 at 7 and Exhibit 1 thereto. 14

44 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of through the continuation of the implemented cost containment measures, as well as the identification of additional cost containment measures if the City is going to be able to bring back City services to the basic levels expected of a U.S. city with more than 210,000 residents and some of the highest unemployment and poverty rates in the nation. With respect to the Fire Department, the City needs to manage total compensation and implement certain other cost containment measures, which were identified in the Drasil Report and the earlier Cooke Memorandum in order to implement the City s balanced budget, and the Fire Department budget, that the City enacted for the fiscal year Municipalities manage their financial matters through cost recovery (revenues such as taxes and fees) and cost containment (managing expenses through staffing levels, operating efficiencies, contracting for services, and cost sharing). As of September 2014, the City's revenues remain below peak levels and the City's ability to recover costs for services continues to be impaired by a very slow recovery from the Great Recession, as well as a continued decline in the household income of City residents. 43 The Fire Department Budgets and the Burden of the MOU on the City 40. Section 186 of the Charter of the City of San Bernardino contains a provision entitled Salaries that establishes a basic standard for fixing salaries for employees of the Police and Fire 17 Departments. 44 The City has no ability to negotiate over Fire Safety employee salaries at this time due to the requirements of City Charter Section 186. Fire Safety employee salaries have continued to rise during this bankruptcy case. The increases in Fire Safety employee salaries from August 1, 2008 to date are shown in Resolution Nos , , , , and Other costs directly linked to salary compensation, such as overtime and pension costs, have also increased during the bankruptcy case For fiscal year , the average salaries for members of the SBCPF were as follows: (a) Fire Fighter (P-1) - $7, per month or $85,602 annually; (b) Paramedic/Firefighter 42 Busch Decl. 8/18/14 at Busch Decl. 9/8/14 at Hanna Decl. 8/31/12 at 4 and Exhibit A at p. C-30 to C Hanna Decl. 8/18/14 at Exhibits 8, 12, 13, 14 and Busch Decl. 8/18/14 at 9. 15

45 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of (P-2) - $7, per month or $92, annually; (c) Engineer (P-3) - $7, per month or $95, annually; and (d) Captain & Fire Investigator (P-4) $9, or $109, annually. In addition to this basic salary, members of the SBCPF are paid overtime and receive other fringe benefits, including health and life insurance, tuition allowance, paid sick leave, vacation and holiday leave, and pension benefits. The amount of overtime for the Fire Safety Unit budgeted for fiscal year (approximately $4,462,643) divided by the total number of fire safety unit employees (126) equates to approximately $35,400 per employee in overtime compensation per year. The annual amount paid by the City for medical benefits for Fire Safety Unit Employees who elect 9 employee plus dependent coverage is $11, per employee. 47 Based on this information for basic salary, overtime and medical benefits alone (exclusive of other fringe benefits, including pension benefits), the average compensation for the Fire Safety Unit employees ranges from $132, annually for a Fire Fighter to $156, annually for a Captain & Fire Investigator for fiscal year As shown in the chart that is Exhibit 1 to the Busch Decl. of 8/18/14, for the fiscal year, of the approximate 115 full time Fire Safety positions, about 70% of the positions earned roughly $100,000 in salary and $40,000 in benefits. The median full time position in the chart (with half of the positions above and half below) earned approximately $140,000 in salary and $40,000 in benefits. For the 30 highest paid fire safety employees, the total compensation package ranged from $207,000 to $272, Fire safety overtime is a substantial cost to the City, with some Fire Safety employees earning more in overtime than basic salary, others earning nearly as much in overtime as from basic salary and most earning overtime of about half of their basic salary The City s overall costs for operation of the Fire Department were approximately $34.3 million in the fiscal year immediately before the Petition Date. It was about $29.4 million in fiscal year and estimated to be about $30.4 million in fiscal year With the implementation of the Drasil Report and the City s proposed modifications to the terms and 47 Leibrich Decl. 4/1/13 at Leibrich Decl. 4/1/13 at Busch Decl. 8/18/14 at 9 and Exhibit 1 thereto. 50 Id. 16

46 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of conditions of employment upon rejection of the MOU (including continuing employee sharing of the normal cost of the CalPERS pension contribution implemented on February 1, 2013), the City hopes to reduce the annual cost of operating the Fire Dept. to $28.1 million in the fiscal year Despite the City's cost cutting efforts since the Petition Date, the City's Fire Department incurred overtime expenses substantially in excess of the Fire Department's original budgets for the and fiscal years. Specifically, the Fire Department overtime budget for fiscal year was $5 million and the actual overtime costs were $7 million. The Fire Department overtime budget for fiscal year was $4.8 million and the actual overtime was $6.3 million. Thus, the Fire Department has incurred over-budget overtime of $3.5 million during the first two years of the City's bankruptcy The MOU provides at Article II Section 15 entitled Constant Staffing: The Fire Department will maintain its authorized daily constant staffing position vacancies through off duty personnel on an overtime basis. The "constant staffing" provision of the MOU requires the City to provide 24 hour staffing, seven days a week on all fire engines and ladder trucks with a specific number of firefighting personnel and the Chief has no discretion whether to fill a position regardless 16 of the then existing service level demands. 53 The "constant staffing" provision of the MOU restricts the City's ability to match service levels with actual service needs when fire services are at their lowest demand and restricts the City's ability to run the Fire Department efficiently. The "constant staffing" provision in the MOU is a primary cause of approximately $4.2 million of Fire Department 20 costs in calendar year If the MOU is rejected, the City intends to replace the constant staffing model with the minimum staffing model discussed in the Drasil Report and the Cooke Memorandum. 46. Even when the City employed more firefighting personnel in years prior to the Petition Date, the Fire Department still expended between $6 and $7 million annually for overtime costs which is approximately the same amount incurred with substantially fewer firefighting 51 Busch Decl. 8/18/14 at Busch Decl. 8/18/14 at Daube Decl. 9/8/14 at Busch Decl. 9/8/14 at

47 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of personnel after the Petition Date. Therefore, employing additional firefighting personnel does not appear to reduce overall overtime expense. This is due to the "constant staffing" provision which prevents the City from operating the Fire Department efficiently, and generates overtime costs that 4 are difficult to control without removing firefighting equipment from service. 55 According to Mr Busch, the City s proposed modifications to the terms and conditions of employment upon rejection of the MOU is the only way the City can get its Fire Department budget in line with the City s overall budget for fiscal year and the long term The Fire Department initially requested an additional $5 million in its Fire Department budget to address its aging fleet of fire safety vehicles. It is estimated that the backlog to replace aging fire safety vehicles for the Fire Department alone is $8 million. Due to the amount necessary to pay salaries and high overtime costs of Fire Safety employees, it was not possible to include funds in the Fire Department budget for fire safety vehicle replacement The cost savings the City seeks in the operations of the Fire Department are critical to the implementation of the City s FY Budget so that the General Fund can pay its expenses without relying on non-general Fund monies. This is important for many reasons, including that the City has been unable to perform capital improvement projects and maintain vital infrastructure for years due to the reliance on the non-general Fund revenues to support the General Fund. Absent the cost savings expected from rejection of the MOU, the City would have an unbalanced budget and would require the use of operating capital to meet its General Fund obligations. 58 The Burden on the City of Paying the Entire Cost of Employee Pension Benefits 49. The City participates in CalPERS to provide pension benefits to the City s employees. The City s employee retirement costs have more than tripled since for miscellaneous employees and almost tripled for public safety employees. In absolute dollars, San Bernardino s General Fund employee pension costs have risen from $6.2 million in to $19 million by , and were projected to reach $22.6 million by absent reforms. In 55 Busch Decl. 9/8/14 at Busch Decl. 8/18/14 at Busch Decl. 8/18/14 at 14 and Exhibit 5 thereto. 58 Busch Decl. 8/18/14 at

48 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of the Pre-Pendency Plan, the City projected that over the next five years, the City s cumulative retirement contributions will exceed $108 million unless reductions were made The rates paid by the City to CalPERS for providing pension benefits to the City s 4 employees are, pursuant to applicable law, set by CalPERS. 60 The City s total normal cost contribution as a percentage of payroll was % for safety employees and % for miscellaneous employees for fiscal year In fiscal year , the City s total normal cost contribution as a percentage of payroll increased to % for safety employees and % for miscellaneous employees. In addition to the normal cost of the pension benefit, the City also pays an amount based on the unfunded actuarial liability. In fiscal year , the amount was % of payroll. The City believes that, as of June 30, 2011, the City s unfunded actuarial liability for both the safety and miscellaneous plans was more than $255 million The normal cost of the CalPERS pension benefit is divided between the City and its employees. For fiscal year , the employee share of the normal cost for Safety employees was 9% of payroll. However, until the City required sharing of at least the normal cost effective February 1, 2013, the City paid all of the normal cost for the SBCPF members: the employer share, plus the employee share, by the City paying the employee share as EPMC (defined in the collective bargaining agreement as the employer paid member contribution ), plus the unfunded rate, for a total payment to CalPERS by the City each month of % of the base salary for each safety employee. For a Fire Fighter (P-1), whose annual salary is $85,602, the City was obligated to pay % for each such employee to CalPERS, or $33, For a Fire Fighter (P-1), the base salary, overtime, medical benefits and pension benefits total $166, The costs of the CalPERS benefit went up for fiscal year , beginning July 1, 2013, to a total cost of % of base salary for each safety employee, with the normal cost part of that increasing to % of base salary. On February 1, 2013, the City implemented cost sharing of the normal cost. For SBCPF members, the employee share of the normal cost was 50% of 59 Busch Decl. 3/4/13 at 17 and Leibrich Decl. 4/1/13 at 10 and Exhibit 2 thereto. 61 Busch Decl. 3/4/13 at 17 and Leibrich Decl. 4/1/13 at

49 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of %, or % of base salary. 63 The Court explicitly declined to determine whether such cost sharing is allowed by California law. 53. The City has no control over the actuarial changes that determine the annual costs for CalPERS benefits for the SBCPF members. Until the City implemented employee cost sharing in February 2013, the City was paying the full cost of the SBCPF members pension benefit, with no employee cost sharing. In fiscal year , that total cost was 39.15% of base salary. For fiscal year the total cost is now 42.8%, and the total cost is projected to rise to 46.5% of base salary in fiscal year According to the latest projections by the City's actuarial consultant, Bartel & Associates, it is expected that the cost of the CalPERS benefit will increase from 42.8% of base salary in fiscal year to 59.9% of base salary in fiscal year (a 29% increase in costs over just that 5 year time period), and then the rate will flatten out at roughly 59% of payroll According to Mr. Busch, the post-2013 increases could make it very difficult for the City to address its insolvency. The MOU in its current form provides that the City will pay the entire amount of the cost of the CalPERS benefit, with no contributions whatsoever from the SBCPF members for their own pension benefits. For the current fiscal year, : (a) for a Fire Safety employee holding the position of Firefighter/Paramedic (P-2) with an annual base salary of $96,036, the MOU obligates the City to pay CalPERS $41,103 for a Firefighter/Paramedic s pension benefit; and (b) for a Fire Safety employee holding the position of Fire Captain (P-4) with an annual base salary of $109,532, the MOU obligates the City to pay CalPERS $46,879 for the Fire Captain s pension benefit. Mr. Busch estimated that the cost to a Firefighter/Paramedic of sharing in the normal cost of the CalPERS benefit would be approximately $560 per pay period and for a Fire Captain it would be $638 per pay period The City estimates that by SBCPF members contributing 50% of the normal cost of the CalPERS benefit, the City will save approximately $1.6 million in fiscal year with the savings increasing each year thereafter to $2.25 million in fiscal year , for a total savings of approximately $34.3 million during this time period. The City estimates it will save approximately 63 Leibrich Decl. 4/1/13 at Busch Decl. 8/18/14 at Id. 20

50 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of $2.1 million in fiscal year from implementation of the Drasil Report to reduce the City's overtime costs for the Fire Department, and this amount will increase each year to about $3 million savings in fiscal year , for a total savings of $45.3 million. Taken together, the savings from SBCPF members contributing to their own CalPERS pension benefit and operational efficiencies to reduce Fire Department overtime, the City estimates that it will save $3.7 million in fiscal year and more each year thereafter for a total cumulative savings of about $79.6 million by fiscal year The City s Efforts To Negotiate Voluntary Modifications to the MOU With The SBCPF 56. Soon after the Petition Date, the City made efforts to meet with the SBCPF to negotiate voluntary modifications to the MOU. As reflected in correspondence between Corey Glave, counsel for the SBCPF, and City representatives, the City made efforts to meet and negotiate with the SBCPF regarding, among other things, the MOU and Resolution No that the Mayor and Common Council adopted on August 6, 2012 authorizing the City Manager to suspend, and/or negotiate with employees, payouts for all employees' accrual leave bank payoffs, cash-outs, or sell-outs ("Resolution "), which later became part of the City s Pendency Plan, and the change to Civil Service Rule 511 regarding layoffs. 67 In an communication dated September 10, 2012, Corey Glave, counsel for the SBCPF, advised the City that unless the City was willing to reverse or modify the Common Council's August 2012 action, a meeting between the City's representatives and the SBCPF was "really just a waste of time, money and resources for both the City and the Union." The City's representatives, Diana Leibrich and Linda Daube, met with representatives of the SBCPF on September 26, 2012 to discuss the implementation of the Common Council s 66 Busch Decl. 9/8/14 at 16 and Exhibit 5 thereto. 67 Leibrich Decl. 3/4/13 at 22 and Exhibit 25 thereto; Exhibit O to Hanna Decl. 8/31/12; Exhibits 10, 11 and 12 to the Opposition Filed By Creditor San Bernardino City Professional Firefighters Local 891 To Debtor s Motion Pursuant To 11 U.S.C. 365, 901 And 904 For Order Approving: (A) Rejection Of Collective Bargaining Agreements With San Bernardino Public Employees Assoc.; San Bernardino Police Officers Assoc.; And San Bernardino City Professional Firefighters; And (B) February 1, 2013 Interim Modifications To Such Collective Bargaining Agreements; And Declarations Of Corey Glave and David Goodrich In Support Thereof [Docket Nos. 507 and 507-1] filed on March 21, 2013 ("Glave Decl. 3/21/13"). 68 Exhibit 25 to Leibrich Decl. 3/4/13 (part 2 of 5, at p. 5 of the 12 pages). 21

51 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of imposition of changes to certain Civil Service Rules regarding layoffs and Resolution No At the conclusion of the meeting, the City provided six possible dates to schedule negotiations. After two follow-up s from the City to Mr. Glave, on October 2, 2012, Mr. Glave responded by that he had been in contact with the City's bankruptcy attorneys and would get back to the negotiating team at a later date On October 5, 2012, Mr. Glave sent an to Ms. Leibrich stating that the SBCPF and the City would be entering into mediation and that the commencement of negotiations would be held in abeyance until after the mediation process was completed and requested that the City confirm that negotiations would be held in abeyance until after the mediation process was completed. 70 October 5, 2012, Ms. Daube sent an to Mr. Glave stating that she was unable to confirm negotiations would be held in abeyance until after the mediation process was completed. 71 On In October and November of 2012, City representatives and Mr. Glave communicated by with respect to cost-saving measures for the Fire Department and modifications to the MOU set forth in the City's Pre-Pendency Plan. In an communication sent on October 25, 2012 from Richard Luczak, a Deputy City Attorney for the City, to Mr. Glave, Mr. Luczak requested that Mr. Glave "generally advise when you are available to discuss any of the issues identified in the cost saving measures adopted by the Council on October 1, 2012." On November 15, 2012, in response to the Mr. Luczak's October 25, , Mr. Glave did not provide any dates on which he was available to meet, stated that the SBCPF had filed a PERB charge regarding this matter and stated that "if the City is serious about resolving these issues, we would ask that all the prior changes be set aside and held in abeyance until the parties can formally meet and/or address the issues in the bankruptcy mediation process." In an sent on November 27, 2012 from Mr. Luczak to Mr. Glave, Mr. Luczak responded that Mr. Glave's request "to rescind the pre-pendency cost-savings would only serve to make the City more insolvent and make it that much harder to reach solvency which is many months away (assuming the Pendency Plan is approved)" and was untenable, but that Daube Decl. 3/4/2013 at 5, lines. 9-21; Exhibit 25 to Leibrich Decl. 3/4/13(part 3 of 5 at p. 2 of 2) [Docket No ]. 70 Exhibit 12, page 123 to Glave Decl. 3/21/ Id. 22

52 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of the "City remains willing to meet and discuss these issues should you and the SBCPF change your position." On November 21, 2012, this Court entered its Order approving the "Stipulation to Submit to Nonbinding Mediation Between City of San Bernardino and SBCPF." On January 11, 17 and 23, 2013, the City and the SBCPF participated in mediation 6 before the Honorable Scott Clarkson. 74 The mediation did not result in any agreement between the 7 City and the SBCPF. 75 During the time period between the Petition Date and the mediation with the Honorable Scott Clarkson, the SBCPF filed three post-petition unfair labor practice complaints against the City with the California Public Employment Relations Board On January 28, 2013, Mr. Glave and Ms. Daube exchanged s regarding proposals made by the City to the SBCPF during the mediation before the Honorable Scott Clarkson and whether City representatives were authorized to present any of those proposals to the Common Council In April of 2013 after the initial hearing on the Rejection Motion, the SBCPF propounded formal discovery by serving notices of depositions and demands for the production of documents for Ms. Daube and Ms. Leibrich whose depositions were taken in April, 2013, and noticed the deposition of Mr. Busch which was taken on May 10, This Court facilitated the resolution of various discovery disputes regarding document production and the depositions Declaration of Richard Luczak In Support Of City Of San Bernardino's Reply [Docket No. 537] filed on April 1, 2013 ("Luczak Decl. 4/1/12") at 4 and Exhibit 1 thereto. 73 Docket Nos. 220 and 221; Exhibit 13 to Glave Decl. 3/21/ Daube Decl. 3/4/2013 at 5; Glave Decl. 3/21/13 at 19, lns Daube Decl. 3/4/2013 at 5; Leibrich Decl. 3/4/13 at 22, lns Declaration of Jolena Grider In Support of City of San Bernardino' Opposition To Motion of SBCPF For Relief From The Automatic Stay [Docket No. 502] ( Grider Decl. 3/21/13 ) filed on March 21, 2013 at 6-8 and Exhibits 2, 3 and 4 thereto. 77 Exhibit 1 to Declaration of Linda Daube In Support of City of San Bernardino's Opposition to Motion of SBCPF For Relief From The Automatic Stay [Docket No. 501] filed on 3/21/ Exhibits 1 and 2 to Declaration Of Kathleen D. DeVaney In Support Of City Of San Bernardino s Opposition To The San Bernardino City Professional Firefighters Local 891 s Motion To Strike Evidence [Docket No. 696]; Exhibit A to Declaration of Paul R. Glassman In Support of City of San Bernardino's Reply Brief In Support of Its Motion For Summary Judgment on Eligibility For Chapter 9 Relief [Docket No. 752]. 23

53 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of On September 5, 2013, the Court entered an order appointing the Honorable Gregg W. Zive as the Case Mediator on broad terms, including negotiation of a plan of adjustment and other matters submitted jointly by parties to the mediator Prior to the commencement of negotiations with the SBCPF through mediation with Judge Zive, on or about October 24, 2013, City representatives participated in a meeting with representatives of the SBCPF and the SBPOA. In November 2013, the City provided an economic proposal to the SBCPF setting forth the financial parameters for public fire safety services consistent with the City s draft term sheet for a plan of adjustment. In December of 2013, the City s negotiating team and the SBCPF met and discussed the City s proposal. On February 21, 2014, the City and the SBCPF met again and the SBCPF provided a verbal response to the City s proposal. On April 7, 2014, the City sent a written Response to SBCPF Proposals and Proposed Agenda for an April 10, 2014 Meeting to the SBCPF. Despite the scheduled meeting, the SBCPF failed to appear On May 23, 2014, the City's negotiating team met with representatives of the SBCPF outside of the confidential mediation. At the May 23 meeting, the City provided documents such as a memorandum from Fire Department Battalion Chief Nathan Cooke to City Manager Allen Parker describing the proposed budget cuts and potential impacts to the Fire Department, the City s proposed Budget and the Fire Department Budget On May 27, 2014, the City and the SBCPF attended mediation with Judge Zive in Los Angeles. In connection with that meeting, the City prepared and submitted a revised comprehensive proposal to the SBCPF In June 2014, Mr. Glave submitted requests for documents under the California Public Records Act via the City s website and the City responded to those requests. 83 In addition, Docket No Declaration of Linda Daube In Support of Motion to Reject Collective Bargaining Agreement With San Bernardino City Professional Firefighters Local 891 [Docket No. 1118] filed on August 18, 2014 ("Daube Decl. 8/18/14") at Daube Decl. 8/18/14 at Daube Decl. 8/18/14 at Hanna Decl. 8/18/14 at 4-7 and Exhibits 1 through 6 thereto. 24

54 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of Kathleen DeVaney, one of the City s outside counsel, sent documents by to Mr. Glave on March 24, 2014 responsive to informal document requests made by Mr. Glave. On July 8, 2014, Ms. DeVaney sent documents by to Mr. Glave and Mr. Goodrich responsive to requests for documents made by Mr. Glave at and in connection with the May 23, 2014 meeting between representatives of the City and the SBCPF As part of the negotiation process with the SBCPF regarding modifications to the MOU, the City prepared a proposal regarding the implementation of the Fire Department budget adopted by the Mayor and Common Council on June 30, This proposal was delivered to the SBCPF on July 28, The City requested that the SBCPF provide available times and dates when its counsel and other representatives of the SBCPF were available to meet in the hope of reaching an agreement as to the implementation of the Fire Department budget through modifications to the existing MOU. A revised proposal was delivered to the SBCPF on July 30, The City's negotiating team met with representatives of the SBCPF on August 13, August 25 and September 3, 2014, to continue discussions and negotiations respecting modifications to the MOU and the changes necessary to implement the City's Budget and the Fire Department budget. The City also requested additional and longer meetings with the SBCPF. Mr. Glave responded that the September 11 deadline was not meaningful to the SBCPF, and that the SBCPF was not amenable to the additional dates and longer meetings. At the August 13, 2014 session, Mr. Glave stated: If it happens by September 11th, great. If not, it s no big deal.... So Mr. Glassman s dates are not my concern. The City and the SBCPF did not reach an agreement with respect to modifications to the MOU Declaration of Kathleen DeVaney In Support of Motion to Reject Collective Bargaining Agreement With San Bernardino City Professional Firefighters Local 891 [Docket No. 1119] filed on August 18, 2014 at 3 and Daube Decl. 8/18/14 at and Exhibits 1 and 2 thereto. 86 Declaration of Linda Daube In Support of The City of San Bernardino's Reply To The San Bernardino City Professional Firefighters Local 891's Opposition And Response [Docket No. 1158] filed on September 8, 2014 ("Daube Decl. 9/8/14") at 8, 9 and 10 and Exhibits 1, 2 and 3 thereto; Exhibit 1 to Daube Decl. 9/8/14 at p. 20, line 12 to p. 21, line 8; p. 33, lines 8-14; p. 34, lines

55 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of Since the delivery of the revised MOU on July 28, 2014, representatives of the City and representatives of the SBCPF met three times for a total of approximately 9 hours as part of the City's continuing efforts to negotiate modifications to the MOU necessary to implement the City's Budget and the Fire Department budget and the City's financial rehabilitation On September 7, 2014, Ms. Daube sent an to Mr. Glave, advising that the City intended to proceed with the Rejection Motion on September 11, 2014 and that as previously discussed it was imperative for financial reasons that the City implement its Fire Department budget reductions as well as the other proposed terms and conditions modifying the MOU and the City desired to focus on implementation at the meeting scheduled for September 10, The SBCPF canceled the September 10 meeting Throughout the entire time that the City tried to procure concessions from the SBCPF regarding voluntary modifications to the MOU, the City provided the SBCPF with financial information and documents regarding the City's dire financial condition and the need to reduce the costs of operating the City, including reducing overall employee compensation. 90 The Negotiations With Six Other Unions and the Agreements Reached 74. Besides the Fire Safety Unit represented by the SBCPF, the City s other employee bargaining units are as follows: (1) Police Safety Employees represented by the San Bernardino Police Officers Association ( SBPOA ); (2); Middle Management Unit represented by the San Bernardino Public Employees Association ( SBPEA ); (3) the Management/Confidential Bargaining Unit represented by the San Bernardino Management/Confidential Association ( SBCMA ); (4) the Fire Management Bargaining Unit represented by the San Bernardino Fire Management Association ( SBFMA ); (5) the General Unit represented by the International Union Of Operating Engineers Daube Decl. 9/8/14 at Daube Decl. 9/8/14 at 10 and Exhibit 4 thereto. 89 Id. 90 See the Hanna Decl. 8/31/12 at Exs. B, C, D, I, J, L, M and N; Hanna Decl. 7/24/14 at Exs. 1 and 2; Hanna Decl.8/18/14 at Exs. 1 through 6, 18 and 20; Busch Decl. 8/31/12 at 5 through 20; Busch Decl. 11/30/12 at 5 through 12 and Exs. 1 through 3; Busch Decl. 3/4/13 at 5 through 19 and Ex. 1; Busch Decl. 4/29/13 at 5 through 8 and Exs. 1 through 5; Busch Decl. 8/18/14 at 5 through 18 and Exs. 1 through 5; Glassman Dec. 8/16/13 at Ex. A; Daube Dec. 7/29/14 at 6 and Exs. 1 through 3; Daube Decl. 9/8/14 at Exs. 1 through 3; DeVaney Dec. 8/18/14 at 3 and 5. 26

56 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of ( IUOE ); and (6) the Police Management Bargaining Unit represented by the San Bernardino 2 Police Management Association ( SBPMA ). 91 As of August 1, 2012, the City was a party to collective bargaining agreements with each of those bargaining units documented in various memoranda of understanding and attendant documents, including City Council resolutions, side letters and amendments In January of 2013, four of the City's unions, representing the General Bargaining Unit, the Fire Management Bargaining Unit, the Police Management Bargaining Unit, and the Management/Confidential Bargaining Unit), reached agreements with the City on modifications to their respective collective bargaining agreements, and those modifications took effect on February 1, 2013 as set forth in Resolution No , Resolution No , Resolution No , and Resolution No In addition to the SBCPF, the City did not reach an agreement with two other unions on the modifications of the terms and conditions of employment set forth in the City s Pendency Plan. These unions were the SBPOA and the SBPEA. On January 28, 2013, the City Council voted to impose modifications to the terms and conditions of employment on those three bargaining units 16 as set forth in Resolution No and Resolution No On January 28, 2013, the City also adopted Resolution No entitled Resolution Of The Mayor And Common Council Of The City Of San Bernardino Adopting Modifications To The Retiree Health Insurance Payments For Police Safety And Police Management Employees In Accordance With The City s Pendency Plan, Item #8, Adopted By The Mayor And Common Council On November 26, 2012 By Resolution No which reduced the City's contribution to the retiree medical plans for eligible members of the Police Safety Unit and Police Management Unit to the same amount the City contributes for other retirees Leibrich Decl. 3/4/13 at Leibrich Decl. 3/4/13 at Leibrich Decl. 3/4/13 at 11 through 15 and Exhibits 17, 18, 19 and 20 thereto; Daube Decl. 3/4/2013 at Leibrich Decl. 3/4/13 at 16 through 19 and Exhibits 21 and 22 thereto. 95 Leibrich Decl. 3/4/13 at 20 and Exhibit 24 thereto; Daube Decl. 3/4/2013 at

57 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of The City's representatives have met and negotiated with representatives of the City's six other bargaining units with respect to amendments to their respective memoranda of understanding to implement the City's FY Budget. The City's negotiating team met, negotiated and exchanged documents and information with representatives of the General Unit, Management/Confidential Unit and Middle Management Unit on three separate occasions which resulted in side letter agreements approved by the Common Council on July 7, 2014 as Resolution 7 No The City's negotiating team also met, negotiated with and exchanged documents 8 with representatives of the Police Management and Fire Management bargaining units on multiple 9 10 occasions and negotiations are ongoing. 97 SBPOA MOU. The City continues to meet with the SBPOA regarding the All of the modifications to the collective bargaining agreements with the General Employees, Middle Management Unit and Management Confidential Unit (which groups are classified as Miscellaneous Employees) in place as of May 2013 are set forth in resolutions of the City's Common Council. As a result of those modifications, the General Unit employees and Mid- Management employees were obligated to work 10% more hours than during the period when a 10% salary concession was in place, and an agreement was reached on a third tier retirement plan of 2% at age 62 for new employees. In addition, there had been no upward salary adjustments for these employees in over 8 years and members of the General Employees unit receive the lowest monthly allocation towards health care costs ($609 for a family and $459 for single). In comparison, SBCPF members received a monthly allocation of $992 for a family and $572 for single. With respect to the implementation of cost sharing of the CalPERS benefits, the negotiated concession of 50% of the normal cost of the CalPERS benefit for the Miscellaneous Employees was the same as the imposed benefit of 50% of the normal costs for the Safety Employees (including the fire safety unit). Because most members of the SBCPF enjoy a generous 3% at 50 pension benefit, the cost of this Daube Decl. 8/18/14 at 12; Exhibit 16 to Hanna Decl. 8/18/ Daube Decl. 8/18/14 at

58 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of very generous benefit is significantly higher than the lower formula pension benefit provided to the Miscellaneous Employees In 2011, most all of the City's bargaining units agreed to continue a 10% reduction in pay which had been in place since 2009 for almost all bargaining units, but the SBCPF did not agree. In early July 2012, the Middle Management Unit, Management Confidential Unit and General Unit agreed to continue this 10% salary reduction to help the City as it faced bankruptcy. In addition to salary reductions, the City's other bargaining units, also agreed to the following concessions: (a) in 2011, the General Unit agreed to forego step and merit increases in pay through June 30, 2012 and a two-tiered retirement system effective September 1, 2011; (b) in 2010, the Middle Management bargaining unit agreed to a two-tiered retirement system effective January 1, 2011 and other changes to their pension benefits; and (c) in 2010, the police management bargaining unit agreed to a 10% pay reduction and other concessions with respect to pension benefits and other benefits including vacation, holiday and sick leave, and health care. 99 CONCLUSIONS OF LAW 80. Bankruptcy Code Section 365(a) 100 provides that a debtor may assume or reject any executory contract. Section 901 provides that Section 365(a) applies in chapter 9 cases. Prior to the U.S. Supreme Court decision N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984) ( Bildisco ) every federal court of appeal that had considered the question held that collective bargaining agreements are executory contracts subject to assumption and rejection under 365(a) and Section 365(a) s substantially identical predecessor, section 313(1) of the Bankruptcy Act, 11 U.S.C. 713(1). 101 See e.g., Local Joint Executive Bd., etc. v. Hotel Circle, Inc., 613 F.2d 210 (9 th Cir. 1980), a pre-bankruptcy Code pre-bildisco collective bargaining agreement rejection case in which the Ninth Circuit concluded that 98 Busch Decl. 9/8/14 at 13; Exhibits 17 through 20 to Leibrich Decl. 3/4/13; Exhibit 16 to Hanna Decl. 8/18/ Hanna Decl. 8/18/14 at Exhibits 9 through 11 and Leibrich Decl. 3/4/13 at Exhibit Unless otherwise indicated, all Section References are to chapter 11 of title 11 of the U.S. Code, the Bankruptcy Code. 101 Section 313(1) of the Bankruptcy Act provided: Upon the filing of a petition, the court may permit the rejection of executory contracts of the debtor, upon notice to the parties to such contracts and to such other parties in interest as the court may designate. 11 U.S.C. 713(1). 29

59 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of the unique features of labor agreements do not overcome the plain language of the Bankruptcy Act and the policies embodied in Chapter XI proceedings. While we recognize that important employee interests are at stake when rejection of a labor agreement is considered, the policies of the Bankruptcy Act are designed to assist failing businesses, a goal in which employees ultimately have a stake as well. We do not believe that the power to reject labor agreements found to be onerous and burdensome to the debtor's estate is inconsistent with the policies of the labor laws. 613 F.2d at In Bildisco, the debtor made post-petition unilateral modifications to the terms and conditions of employment governed by a collective bargaining agreement ( CBA ), including failing to make required contributions to pension and health plans and failing to implement contractually agreed wage increases and then, several months later, filed a motion to reject the CBA. Over the objection of the employee unions and the National Labor Relations Board, the Supreme Court held that: (a) a debtor may make unilateral changes to the terms and conditions of employment prior to bringing a motion to reject the CBA; (b) a debtor may reject a CBA under Bankruptcy Code Section 365 if the agreement is a burden on the debtor, the balance of the equities weighs in favor of rejection, and the debtor makes reasonable efforts to negotiate voluntary modifications to the CBA and those efforts are not likely to produce a prompt and satisfactory solution; and (c) applicable labor laws that require an employer to bargain to impasse, obtain the consent of the union or comply with similar procedures before rejecting the CBA do not apply when the employer makes unilateral modifications to, or seeks to reject the CBA. See 465 U.S. at , 104 S.Ct. at In 1978, when Congress first enacted the Bankruptcy Code, it considered whether Section 365(a) contemplated the rejection of municipal employee labor contracts in chapter 9 cases. In the legislative history, the Senate Report provides: Within the definition of executory contracts are collective bargaining agreements between the city and its employees. Such contracts may be rejected despite contrary State laws. 102 See also, Brotherhood of Railway Airline and Steamship Clerks v. REA Express, Inc., 523 F.2d 164, 169 (2d Cir. 1975), cert. denied, 423 U.S. 1017, 1073, 96 S. Ct. 451 (1975); Shopmen's Local Union No. 455 v. Kevin Steel Products, Inc., 519 F.2d 698, 706 (2d Cir. 1975); N.L.R.B. v. Bildisco (In re Bildisco), 682 F.2d 72, 78 (3rd Cir. 1982), aff d, N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, (1984); Borman's, Inc. v. Allied Supermarkets, Inc., 706 F.2d 187, 190 (6th Cir. 1983), cert. denied, 464 U.S. 908, 104 S. Ct. 263 (1983); Local Unions 20 et al. v. Brada Miller Freight System, Inc. (In re Brada Miller Freight Systems, Inc.), 702 F.2d 890, 897 (11th Cir. 1983). 30

60 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of Courts should readily allow the rejection of such contracts where they are burdensome, the rejection will aid in the municipality's reorganization and in consideration of the equities of each case. On the last point, "[e]quities in favor of the city in chapter 9 will be far more compelling than the equities in favor of the employer in chapter 11. Onerous employment obligations may prevent a city from balancing its budget for some time. The prospect of an unbalanced budget may preclude judicial confirmation of the plan. Unless a city can reject its labor contracts, lack of funds may force cutbacks in police, fire, sanitation, and welfare services, imposing hardships on many citizens. In addition, because cities in the past have often seemed immune to the constraint of "profitability" faced by private businesses, their wage contracts may be relatively more onerous than those in the private sector. See S. Rep. No , 95th Cong., 2d Sess., at 112, quoted in Collier on Bankruptcy, 16th Edition, Bankruptcy Reform Act of 1978 Legislative History at App. Pt. 4(e)(i). Subsequent to the enactment of Section 365(a) and the Supreme Court decision in Bildisco, every federal court to have considered the question has held that Section 365(a) also authorizes the rejection of municipal employee collective bargaining agreements in chapter 9 cases. See, In re County of Orange, 179 B.R. 177, 183 (Bankr. C.D. Cal. 1995); In re City of Vallejo, 403 B.R. 72, 77 (Bankr. E.D. Cal. 2009), aff d, 432 B.R. 262 (E.D. Cal. 2010) ( Vallejo ); In re City of Stockton, 478 B.R. 8, 23 (Bankr. E.D. Cal. 2012) ( Stockton ) (dictum). The Evergreen Clause of the MOU 83. The SBCPF argued that there is no contract to reject because the MOU expired on its own terms in 2010, two years before the City commenced its chapter 9 bankruptcy case. However, the MOU contained an evergreen clause which provided that all of the terms of the MOU remain in effect until a new MOU is negotiated between the City and the SBCPF. Evergreen provisions are common in collective bargaining agreements, including municipal employee collective bargaining agreements, and are routinely enforced. See e.g., Eastern Enterprises v. Apfel, 524 U.S. 498, 118 S.Ct (1998) (discussing evergreen clauses as legitimate and enforceable contractual provisions); Irwin v. Carpenters Health and Welfare Trust Fund for California, 745 F.2d 553, 556 (9th Cir. 1984) (noting federal policy enforcing evergreen clauses); Appeal of N.H. Department of Safety, 155 N.H. 201, 203, 921 A.2d 924, 927 (2007) (evergreen clause in state troopers collective bargaining agreement that continues agreement in effect until a new agreement is executed means that terms of contract continue in effect indefinitely until the parties negotiate a successor contract); 31

61 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of City of Somerville v. Somerville Police Employees Assoc., 2011 Mass. Super. Lexis 154 (Mass. Sup. 07/21/2011) (Compendium, Ex. 4) ( evergreen clause keeps all of the same terms of the prior CBA in effect; evergreen clause that provided for agreement to continue in full force and effect until successor agreement is executed is enforceable, subject to statutory 3-year cap). The purpose and effect of an evergreen clause is to continue in full force and effect the terms of the collective bargaining agreement. See Carpenters v. Valentine, 131 Cal. App. 3d 534, 542 (Cal. App. 1982); Trustees of the B.A.C. Local 32 Insurance Fund v. Fantin Enterprises, Inc., 163 F.3d 965, (6th Cir. 1998) (evergreen clause continues in effect all contractual obligations); 84. California state and federal courts enforce evergreen clauses. See Mobil Oil Corp. v. Handley, 76 Cal. App. 3d 956, (Cal. App. 1978); Starwood Corp. v. Raytheon Corp., 2006 Cal. App. LEXIS 2821, (Cal. App. Apr. 5, 2006); Operating Engineers Pension Trust v. Cecil 12 Backhoe Service, Inc., 795 F.2d 1501, 1506 (9th Cir. 1986). 103 The Court concludes that the evergreen clause in the MOU is enforceable, and the MOU is subject to rejection under Section 365(a). 85. Even if the MOU expired in June 2010 without the evergreen clause, the SBCPF has argued that applicable state labor law requires that the status quo remain in place until the parties bargain to impasse. That status quo constitutes a contract that can be rejected under Bankruptcy Code Section 365. In re Hoffman Bros. Packing Co., Inc., 173 B.R. 177, (B.A.P. 9th Cir. 1994) (where applicable labor law required that status quo ante remain in place until an impasse has been reached, the contract continues on after termination while parties continue to bargain or the contract is rejected); In re Karykeion, 435 B.R. 666, 675 (Bankr. C.D. Cal. 2010) (Bildisco ruling gives debtor authority to reject residual obligations and effects of expired collective bargaining agreement); Allied Pilots Assoc. v. AMR Corp., et al.(in re AMR Corp.), 471 B.R. 51 (Bankr. S.D.N.Y. 2012) (where applicable labor law required that the parties abide by the terms of the expired collective bargaining agreement until bargaining had been exhausted, that agreement is subject to rejection under the Bankruptcy Code). 103 See also, San Francisco Culinary, Bartenders & Serv. Employees Welfare Fund v. Lucin, 1993 U.S. App. LEXIS (9th Cir. Dec. 7, 1993); Bd. of Trs. of the Sheet Metal Workers Health Care Plan v. Vigil, 2011 U.S. Dist. LEXIS 28219, 3-4 (N.D. Cal. Mar. 8, 2011); Sheet Metal Workers' Int'l Assn., Local 206 v. West Coast Sheet Metal Co., 1991 U.S. Dist. LEXIS 20474, (S.D. Cal. Jan. 18, 1991); California Butchers' Pension Trust Fund v. Frank's Quality Meats, Inc., 1990 U.S. Dist. LEXIS 13693, (N.D. Cal. Sept. 28, 1990). 32

62 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of Therefore, the Court concludes that even if the evergreen clause were not enforceable, the terms of the MOU remained in effect until negotiation to impasse under state law or rejection under the Bankruptcy Code. Effect of Rejection 86. The SBCPF also argued that upon rejection of the MOU, the City is not permitted to impose or implement new terms and conditions of employment until the City and the SBCPF negotiate to impasse under state labor law with respect to any new terms and conditions of employment that modify those in effect prior to rejection. This is the same argument made by the union and the National Labor Relations Board that was rejected by the U.S. Supreme Court in Bildisco. The very purpose of rejection of a collective bargaining agreement under Section 365 is to allow the debtor to implement changes to the terms and conditions of employment if the collective bargaining agreement is a burden on the debtor (and subject to the debtor making reasonable efforts to achieve consensual changes and showing that the balance of the equities tips in favor of rejection). For that reason, where a court approves rejection of a collective bargaining agreement under Section 365(a), the practical effect of rejection is that the debtor is permitted under the Bankruptcy Code to implement new terms and conditions of employment, notwithstanding that there may be applicable labor laws that permit such changes only after the parties have negotiated to impasse. See e.g., In re Rath Packing Co., 36 B.R. 979, 994 (Bankr. N.D. Iowa 1984), aff d, 48 B.R. 315 (N.D. Iowa 1985) (rejection of CBA allowed debtor to reduce wages at the meat packing facility from $10.34 per hour to $7.24 per hour, and revise work rules; changes could not have been made unless the CBA was rejected); In re Allied Technology, Inc., 8 B.R. 366, 368 (Bankr. S.D. Ohio 1980) (rejection of the CBA, allowed financially troubled debtor to avoid CBA requirement to increase the amount of the employer contribution to the employee pension plan); In re Ateco Equipment, Inc., 18 B.R. 915, (Bankr. W.D. Pa. 1982) (rejection of CBA allowed the debtor to (a) reduce benefits below what the CBA required and (b) layoff inefficient employees without regard to the seniority provisions of the CBA); In re Yellow Limousine Service, Inc., 22 B.R. 807, 809 (Bankr. E.D. Pa. 1982) (rejection of the CBA enabled debtor to terminate all employees and offer re-employment only to those employees willing to purchase the taxi vehicles as independent contractors under a franchise 33

63 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of system); In re Southern Electronics Co., Inc., 23 B.R. 348, 359 (Bankr. W.D. Tenn. 1982) (rejection of CBA allowed the debtor to lay off inefficient employees without regard to seniority system mandated by CBA and replace them with new employees); In re Braniff Airways, Inc., 25 B.R. 216, 221 (Bankr. N.D. Tex. 1982) (rejection of CBA allowed debtor to recall laid off employees but pay them at a lower wage scale than CBA required). 87. The cases under Section 313(1) of the Bankruptcy Act, the substantially identical predecessor to Section 365, are of the same effect, permitting implementation of new terms and conditions of employment after rejection of the CBA notwithstanding that there may be applicable labor laws that permit such changes only after the parties have negotiated to impasse. See, Brotherhood of Railway, Airline and Steamship Clerks, et al. v. REA Express, Inc., 523 F.2d 164, 171 (2d Cir. 1975), cert. denied, 423 U.S. 1017, 96 S. Ct. 451, (1975), cert. denied, Int'l Ass'n of Machinists and Aerospace Workers, AFL-CIO v. REA Express, Inc., 423 U.S. 1073, 96 S. Ct. 855 (1976) (debtor is not bound to follow the elaborate and protracted [contract negotiation] procedures of 6 of the RLA [Railway Labor Act] before putting into effect its proposed terms of employment. ); Carpenters Local Union No et al. v. Turney Wood Products Inc. (In re Turney Wood Products Inc.), 289 F.Supp. 143, 149 (W.D. Ark. 1968) (upon rejection of CBA, debtor could lay off employees and reduce wages in disregard of CBA); The Bohack Corp. v. Truck Drivers Local Union No. 807, International Brotherhood Of Teamsters, et al., 431 F.Supp. 646, 648 (E.D.N.Y. 1977) (rejection of CBA allowed debtor, a retail supermarket chain, to lay off warehouse employees and contract out work inconsistent with rejected CBA; the only issue left by the rejection is damages ). 88. The City asked the Court to authorize the new terms and conditions of employment that the City proposed to implement upon rejection of the MOU; however, in the order approving rejection of the MOU, the Court declined to do so. Reasonable Efforts to Negotiate Modifications 89. The City made numerous efforts, over more than a two year period, to get the SBCPF to meet with the City to help the City deal with its financial crisis through modifications to the terms and conditions of employment controlled by the MOU. See FOF 34

64 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of The City also provided the SBCPF with financial information for the SBCPF to determine for itself that the City was in dire financial straits and needed to find ways to reduce the costs of operating the City, including reducing overall employee compensation. See FOF 68 and 73. The City also presented the SBCPF with a comprehensive set of proposals to modify the MOU. by July 28, See FOF In In re Rath Packing Co., 36 B.R. 979, 995 (Bankr. N.D. Iowa 1984), aff d, 48 B.R. 315 (D. Iowa 1985), where the collective bargaining agreement was rejected under Section 365(a), the debtor attempted, during six weeks of negotiation, to procure concessions that would make rejection of the collective bargaining agreement unnecessary, but agreement could not be reached. In comparison, In In re S.A. Mechanical, Inc., 1986 Bankr. Lexis 6051, *4 (B.A.P. 9 th Cir. May 15, 1986), the bankruptcy court denied a debtor s motion to reject a CBA under Section 365 because the debtor made no efforts at all to negotiate voluntary modifications with the union, thereby failing the Bildisco reasonable efforts rule. The B.A.P. affirmed the bankruptcy court s ruling. Here, the aggregate result of (a) the efforts made by the City in the first few months of the bankruptcy case to meet with the SBCPF, (b) the subsequent unsuccessful mediations between the City and the SBCPF involving first Judge Clarkson and then Judge Zive, and (c) the meetings between the City and the SBCPF in the five weeks after the City submitted its comprehensive set of proposals to the SBCPF on or about July 28, 2014, combine to show that the City made reasonable efforts to negotiate consensual modifications to the MOU. 91. The SBCPF had been informed that the City required modifications to the MOU in order to comply with the amount budgeted by the City to the Fire Department for fiscal year , particularly with respect to overtime pay, but the SBCPF made no concessions on that matter, arguing instead that the City s proposed minimum staffing model would not actually reduce 24 overtime. 104 Given the positions of the parties, and the evidence submitted by the City in support of 25 its efforts to implement a minimum staffing model in place of the constant staffing model required See San Bernardino City Professional Firefighters Local 891's Opposition and Response to the City of San Bernardino's Supplement to Motion to Rejection Collective Bargaining Agreement [Docket No. 1142] ( SBCPF 8/29/2014 Opposition ) at p. 11, lines

65 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of by the MOU (see FOF 45 and 46), the Court concludes that further negotiations were not likely to lead to a prompt and satisfactory solution. 92. The SBCPF also argued that there were sufficient meetings between the parties concerning modifications to the MOU, and that the negotiations did not satisfy the state law meet and confer and impasse requirements. The Court will address the applicability of the state law rules below. The dearth of meetings, however, was partly a function of the SBCPF s reluctance to engage with the City regarding modifications to the MOU. SBCPF maintained it could not negotiate any new terms without a comprehensive proposal from the City. Bildisco does not require such comprehensive proposal to negotiate terms necessary for financial stability. Moreover, by July 28, 2014, the City had provided a comprehensive proposal which did not lead to consensual modifications. See e.g., In re Karykeion, 435 B.R. 666, 681 (Bankr. C.D. Cal. 2010) (what amounts to reasonable time to negotiate depends on the circumstances; finding that three meetings with union satisfied the requirements of Section 1113(b)(2) s meet, at reasonable times, requirement); In re Chi. Constr. Specialties, Inc., 510 B.R. 205, 223 (Bankr. N.D. Ill. 2014) (debtor cannot be found to have failed to meet if it was the union that refused to meet, whatever were the union s reasons; the union must be mindful of its choice to not engage with the Debtor. ). 93. The SBCPF s arguments that rejection is not available until the City satisfies the requirements of state law for modifications to terms and conditions of employment are similar to those made in Bildisco. The Union also contends that the debtor-in-possession must comply with the procedural requirements of 8(d) of the NLRA, or at a minimum, bargain to impasse before it may request the Bankruptcy Court either to assume or to reject the collective bargaining agreement. Bildisco, 465 U.S. at 523, 104 S.Ct. at In response, the U.S. Supreme Court held that once reasonable efforts by the debtor to negotiate modifications have been made, the bankruptcy court need not determine that the parties have bargained to impasse or make any other determination outside the field of its expertise. 465 U.S. at , 104 S.Ct. at Our rejection of the need for full compliance with 8(d) procedures of necessity means that any corresponding duty to bargain to impasse under 8(a)(5) and 8(d) before seeking rejection must also be subordinated to the exigencies of bankruptcy. 465 U.S. at 533, 104 S.Ct. at The Supreme Court explained: 36

66 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of Before acting on a petition to modify or reject a collective-bargaining agreement, however, the Bankruptcy Court should be persuaded that reasonable efforts to negotiate a voluntary modification have been made and are not likely to produce a prompt and satisfactory solution. The NLRA requires no less. Not only is the debtor-in-possession under a duty to bargain with the union under 8(a)(5) of the NLRA, but the national labor policies of avoiding labor strife and encouraging collective bargaining generally require that employers and unions reach their own agreements on terms and conditions of employment free from governmental interference. The Bankruptcy Court need step into this process only if the parties' inability to reach an agreement threatens to impede the success of the debtor's reorganization. If the parties are unable to agree, a decision on the rejection of the collectivebargaining agreement may become necessary to the reorganization process. At such a point, action by the Bankruptcy Court is required, while the policies of the NLRA have been adequately served since reasonable efforts to reach agreement have been made. That court need not determine that the parties have bargained to impasse or make any other determination outside the field of its expertise. Bildisco, 465 U.S. at , 104 S.Ct. at 1196 (internal citations omitted). Thus, as long as the City satisfied the reasonable efforts rule of Bildisco, the City was not required to satisfy state law meet and confer and impasse rules in order to reject the MOU. 94. The Court is persuaded that reasonable efforts to negotiate voluntary modifications to the MOU have been made and that further negotiations are not likely to produce a prompt and satisfactory solution and, as discussed below, rejection of the MOU is necessary for the City s financial rehabilitation. Burden of the Contract 95. The City submitted substantial evidence that the MOU was a burden on the City s ability to recover from its insolvency. See FOF 17, 22, 24, 35, 38, and Two of the principal costs of operating the Fire Department that the City believed it could reduce were: (a) the cost of unnecessary overtime related to the fact that the MOU required a constant staffing model; and (b) the cost of paying all of the CalPERS premium, without any SBCPF member contribution, which the City paid based upon a formula that, at the time the Rejection Motion was filed, required the City to pay roughly 40 cents to CalPERS for every dollar of salary paid the employee. It is expected that the cost of the CalPERS benefit will increase from 42.8% of base salary in fiscal year to 59.9% of base salary in fiscal year (a 29% increase in costs 37

67 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of over just that 5 year time period), and then the rate will flatten out at roughly 59% of payroll. See FOF The SBCPF would not agree to any modification to the MOU that would allow the City to require SBCPF members to pay anything at all for their pension benefits The City showed that it cannot reasonably achieve a balanced budget based upon the cost reductions associated with rejecting the MOU, including the reduction in overtime. Without the long term cost savings associated with the City s rejection of the MOU, continued budget and service level insolvency remains a very real danger for the City. For example, the City currently needs $8 million to replace aging fire equipment and vehicles, but due to budgetary constraints there are no funds in the current City budget for Fire Dept. vehicle replacement. See FOF The City s financial condition remains precarious because the City's budget does not fund many of the City s basic obligations. For example, the City is not currently budgeting for the following: (a) infrastructure backlog of $243 million as summarized in the Busch declarations; (b) an equipment and fleet backlog estimated to be $20 million; (c) restoration of basic levels of service within the Police, City Manager, Human Resources, Finance and Economic Development Departments, estimated to be $8.6 million annually; (d) necessary working capital equal to 60 days of General Fund revenue, estimated to be $20 million; (e) reserves equal to 10% of annual revenues, 18 estimated to be $12 million; and (f) many millions of dollars owed to the City s creditors. 108 Mr. 19 Busch estimates that the savings associated with the rejection of the MOU will be at least $ In its Rejection Motion and all supporting briefs, the City argued that recently enacted provisions of the California Government Code, specifically Sections 20516(h) and , allowed the City to require its employees to pay 50% of the normal cost of the CalPERS benefit what the statutes describe as cost-sharing. However, at the September 11, 2014 hearing on the Rejection Motion, the City read into the record a stipulation it had entered into with CalPERS (the City/CalPERS Stipulation ), which City/CalPERS Stipulation the Court incorporated into the Rejection Order. In accordance with the intent of the City/CalPERS Stipulation, the Findings of Fact and Conclusions of Law contained herein: (a) do not make any determination regarding matters relating to California Government Code Sections 20516(h) and or any other provision found in Title 2, Division 5, Parts 3 through 8, Sections through of the California Government Code (often referred to as the Public Employees Retirement Law or the PERL); (b) shall not apply to or be binding upon CalPERS in any way in this or any other bankruptcy case; and (c) do not in any way modify or expand the scope of the Rejection Order or modify or limit the scope of the City/CalPERS Stipulation. 106 See SBCPF 8/29/2014 Opposition at p. 54, lines See also Busch Decl. 8/8/14 at Id. at 13; Busch 9/8/14 Decl., Exhibit 7. 38

68 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of million in the first year, and will be more than $79.7 million over the next 16 years. 109 That $79.7 million would be a substantial contribution towards the financial rehabilitation of the City. The Court concludes that the MOU is a burden on the City and its ability to reorganize. Balance of the Equities 99. The power to reject an executory contract is one of the fundamental powers that Congress provides debtors to enable them to reorganize their financial affairs. That said, the effect of rejection on the non-debtor counterparties cannot be understated. When a bankruptcy court considers a motion to reject a collective bargaining agreement, there are equities on the side of the scale representing the non-debtor contract counterparties and their interests. Considering the facts and circumstances of this chapter 9 case, those equities ultimately must yield to the resuscitation of the City and its financial affairs and the preservation of the jobs of the City s employees, which are dependent upon the City making adjustments to its principal cost employee compensation Over the course of the past few years, including the years immediately preceding the commencement of the chapter 9 case, the labor unions representing the City s employees, including the SBPOA (representing the City s police officers) made wage and benefit concessions requested by the City to help the City address the financial problems caused by the Great Recession. The SBCPF, however, did not make concessions to the same extent as the other unions, nor did it make the post-bankruptcy concessions made by five of the City s seven labor unions. See FOF In its proposed voluntary modifications to the MOU, the City did not seek to reduce SBCPF salaries, and the City did not propose to modify the pension benefits of SBCPF members. Rather, the City was primarily attempting to (a) achive control over overtime costs associated with the constant staffing model (that cost the City s Fire Department over $6.3 million of overtime pay in the last fiscal year), and (b) reduce the cost of the City s share of the CalPERS pension benefit. Compared to the compensation paid to SBCPF members (See FOF 41-42), even with reduced overtime, the cost of paying a portion of their CalPERS benefit is not an unreasonable burden for SBCPF members (See FOF 53). This is particularly so because, until February 1, 2013, the SBCPF members had not been paying anything at all for their pension benefits Busch Decl. 8/8/14 at

69 Case 6:12-bk MJ Doc Filed 11/04/14 07/09/15 Entered 11/04/14 07/09/15 14:10:12 18:29:48 Desc Main Document Page of The balance of the equities favor rejection of the MOU, given the substantial benefit to the City and its financial rehabilitation (including retaining the jobs of the City s employees), versus the relatively modest impact on the SBCPF members associated with the City s implementation of certain new terms and conditions of employment, particularly when the other unions of the City have agreed to concessions which impact their employees take home pay The City satisfied the test for rejection of a CBA under Section 365(a), and for that reason the Court approved the rejection of the MOU. # # # Date: November 4,

70 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 70 of 354 EXHIBIT B

71 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 1 of 24 Page ID #:8547 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 71 of O JS United States District Court Central District of California In Re: Case No. 5:14-cv ODW CITY OF SAN BERNARDINO, CALIFORNIA, OPINION Debtor, Appeal from the United States Bankruptcy Court for the Central SAN BERNARDINO CITY District of California, Riverside PROFESSIONAL FIREFIGHTERS Division; LOCAL 891 The Honorable Meredith A. Jury Appellant, Presiding (No. 6:12-bk-28006) v. CITY OF SAN BERNARDINO, CALIFORNIA, Appellee. I. INTRODUCTION Appellant San Bernardino City Professional Firefighters Local 891 (the Union ) appeals an order from the United State Bankruptcy Court for the Central District of California, Riverside Division, that granted in part and denied in part the City of San Bernardino s (the City ) motion to reject a memorandum of

72 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 2 of 24 Page ID #:8548 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 72 of understanding between the Union and the City. San Bernardino City Prof l Firefighters Local 891 v. San Bernardino (In re City of San Bernardino), No. 6:12-bk , ECF No (Bankr. C.D. Cal. Sept. 19, 2014) (the Rejection Order ). 1 The Union raises six arguments on appeal. The Union s principle argument is that the City failed to meet the necessary burden of proof for setting aside a collective bargaining agreement as established in N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984). For the reasons discussed below, the Court AFFIRMS the Bankruptcy Court s order in full. II. FACTUAL AND PROCEDURAL BACKGROUND A. Original Labor Agreement and Attempts to Reach Extension Over a decade ago, the City and the Union entered into a labor agreement titled Fire Safety Employees Memorandum of Understanding January 1, 2003 to June 30, 2009 (the MOU ). (ER , 655.) 2 The MOU contains an evergreen clause which states: Upon expiration of the MOU and until a new MOU has been negotiated between the Union and the City, all articles in this MOU shall remain in full effect, unless otherwise stated in this MOU. (Id. at 198.) In June 2009, the parties extended the MOU s expiration date to June 30, / / / 1 The Rejection Order is a two-page document that merely grants in part the Rejection Motion. On November 7, 2014, the Bankruptcy Court published the Findings of Fact and Conclusions of Law Regarding Order Granting in Part and Denying in Part City of San Bernardino s Motion Authorizing Rejection of Collective Bargaining Agreement with San Bernardino City Professional Firefighters. In re City of San Bernardino, No. 6:12-bk-28006, ECF No (Bankr. C.D. Cal. Nov. 4, 2014) (ER ). The Rejection Order is the appealable final order, while the Bankruptcy Court s November 4, 2014 Order provides the justifications and is the scrutinized order on appeal. Accordingly, both orders are treated as a single entity and are jointly referred to as the Rejection Order. 2 Due to the voluminous record below, the parties submitted their own excerpts. While managing two records is not ideal, the Court does not identify any conflict between the submissions and the parties raise no objections. Citations to the Excerpts of the Record or ER denote the excerpts submitted by the Union. (ECF Nos ) Citations to the Supplemental Excerpts of the Record or SER denote the excerpts submitted by the City. (ECF Nos ) The parties do not dispute any facts on appeal. 2

73 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 3 of 24 Page ID #:8549 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 73 of On April 16, 2012, the City s director of human resources sent a letter to the Union s counsel asking to meet and confer to determine if the parties could reach an agreement on a successor MOU. (Id. at 742.) On April 25, 2012, the City sent another to the Union seeking to schedule MOU negotiations. (Id. at ) On June 18, 2012, Bob Heitzman sent an to the Union indicating that he was hired by the City to assist with labor relations. (Id. at 747.) Heitzman noted that it was imperative that the City and the Union begin meeting regarding the extension of the current compensation or other alternatives. (Id.) The Union responded seeking clarification on the scope of discussions and the effect of a separate lawsuit between the Union and the City. (Id. at ) Heitzman replied that it would take some time to respond to all of the Union s questions, but he indicated that his request was to meet and confer for a successor MOU. (Id. at ) The parties agreed to meet on July 17, (Id. at 752.) On July 16, 2012, Heitzman postponed the meeting. (Id.) B. Bankruptcy Petition and Initial Financial Changes The City s financial situation deteriorated quickly in the summer of The City ran out of cash to pay its creditors and employees, and had a projected budget deficit of $45.8 million. (Id. at 82 84, 891.) Personnel costs alone were projected to exceed all of the City s General Fund revenue. (Id. at 84.) On August 1, 2012, the City filed a voluntary bankruptcy petition under Chapter 9, Title 11 of the United States Code. (Id. at 1 8.) Five days later, the San Bernardino City Council (the City Council ) passed a resolution deferring certain employment payments to include cashouts and sell-backs of unused leave time. (SER ) Shortly thereafter, the City contacted the Union to discuss modifications to the MOU. (ER 150, , , ) On September 10, 2012, the Union s labor negotiator, Corey Glave, responded that unless the City was willing to reverse or modify the City Council s cost-cutting measures, a meeting between the two parties was really just a waste of time, money and resources for both the City and the 3

74 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 4 of 24 Page ID #:8550 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 74 of Union. (Id. at 547.) On September 18, 2012, the City notified the Union that it hired a new attorney to handle labor negotiations and that it would like to begin MOU negotiations with the Union. (Id. at 761.) The parties met on September 26, 2012, but did not conduct any MOU negotiations. (Id.) After the City offered six dates for negotiations, Glave reiterated, inter alia, that recession of the cost-saving measures was a pre-condition to negotiations. (Id. at 57, ; SER ) C. Substantive Changes to Labor Agreements and Mediation On November 26, 2012, the City Council passed a Pendency Plan which set forth a series of expenditure reductions and required the City to negotiate contract modifications with the Union and the City s six other labor unions. (ER ) Five unions reached agreements with the City to modify their employment agreements. (Id. at , ) The Union and the City did not initially reach an agreement. During January 2013, the City and the Union engaged in a confidential, and ultimately unsuccessful, mediation session before the Honorable Scott Clarkson. (Id. at 658, 3530.) The parties met January 11, 17, and 23. (Id.) On February 1, 2013, the City Council, relying on its fiscal emergency status, passed a resolution that imposed interim terms and conditions of employment for the Union. (Id. at 658.) D. The Rejection Motion and Subsequent Discovery On March 4, 2013, the City filed a motion with the Bankruptcy Court seeking authorization to reject the MOU (the Rejection Motion ). (Id. at 9 30.) The Rejection Motion sought to set aside the MOU and nunc pro tunc approval of the City Council s February 1, 2013 resolution. (Id. at 29, ) On March 8, 2013, the Union filed a Motion to Confirm the Termination of the Automatic Stay, or Alternatively, for Relief from Automatic Stay (the Motion for Relief ). (Id. at ) In its Motion for Relief, the Union sought relief to file an action in a non-bankruptcy forum to challenge the interim employment terms imposed by the City Council s February 1 resolution. (Id.) On March 21, 2013, the Union filed a timely opposition to the Rejection Motion and raised two evidentiary 4

75 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 5 of 24 Page ID #:8551 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 75 of objections to declarations attached to the City s Rejection Motion. (Id. at 625, ) On April 4, 2013, the Bankruptcy Court held a preliminary hearing on the Rejection Motion. (Id. at ) At the hearing, the Bankruptcy Court defined discovery limits in connection with the planned depositions of the City s witnesses, but did not publish a corresponding discovery order. (Id. at ) Subsequent hearings were scheduled, but were each continued to allow for further discovery. (Id. at , ) On May 6, 2013, the parties filed a joint report regarding the status of the discovery. (SER ) The Union, in opposing the Rejection Motion, deposed three witnesses that the City cited and relied upon in its Rejection Motion. (Id. at , ) The Union claims that the City instructed its key witnesses to not respond to several lines of questioning at the depositions. (ER ) On July 10, 2013, the Union filed a motion to strike the testimony of two of the City s three witnesses or, in the alternative, to compel further answers to deposition questions. (Id. at ) The line of questioning at issue related to the City s ability to negotiate consensual modifications to the MOU. The City opposed the motion to strike, and on July 31, 2013, the Bankruptcy Court denied the Union s motion. (SER , ; ER , ) The Bankruptcy Court explained that it previously limited the scope of discovery in a manner that justified the City s witnesses from responding to certain questions. (ER ) The Bankruptcy Court acknowledged that it did not publish an order limiting the scope of discovery for the Rejection Motion. (Id. at ) The Bankruptcy Court, at the request of the Union, continued the Rejection Motion until it first determined whether the City was eligible for chapter 9 relief. (Id. at 637, ) From September 2013 through June 2014, the Rejection Motion was continued to the same dates as the status conferences in the underlying chapter 9 case. (SER , 1539, , , , , ) The 5

76 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 6 of 24 Page ID #:8552 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 76 of Bankruptcy Court continued the hearing dates for the Rejection Motion fifteen separate times. E. Further Mediation and Meetings On September 5, 2013, the Bankruptcy Court appointed the Honorable Gregg W. Zive as the Case Mediator and ordered all major creditors, which included the Union, to participate in mediation before Judge Zive. (Id. at ) The City and the Union met on three separate occasions prior to mediation to discuss the City s financial conditions and the City s cost-cutting proposals: October 2013, December 2013, and February (ER 2595.) On May 23, 2014, the City and the Union met outside of the confidential mediation process, and discussed the proposed budgets for the City and the fire department. (Id. at ) On May 27, 2014, the City and the Union attended a mediation session before Judge Zive, and the City made a proposal to the Union regarding changes to the MOU. (Id. at 2596.) This was the first mediation since the failed mediation before Judge Clarkson in January On June 19, 2014, the Bankruptcy Court granted the Union s request for relief from the September 5 mediation order. (Id. at 2152.) After releasing the Union from the mediation order, the Bankruptcy Court set a supplemental briefing schedule and hearing date for the then-still-pending Rejection Motion. (Id. at ) On July 18, 2014, the City delivered a proposal to the Union regarding implementation of a fire department budget previously approved by the City Council. (Id. at 2596.) On July 28, 2014, the City and the Union began discussing thirty-one proposed changes to the MOU. (Id. at ) On July 30, 2014, the City sent the Union a revised proposal. (Id. at ) The City and the Union met again on August 13, 2014, August 25, 2014, and September 3, 2014 to discuss the proposed changes to the MOU. (Id. at 2597, , ) / / / / / / 6

77 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 7 of 24 Page ID #:8553 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 77 of F. Adjudication of Rejection Motion On September 11, 2014, the Bankruptcy Court heard arguments on the Rejection Motion as it applied to the MOU. (Id. at ) On September 19, 2014, the Bankruptcy Court published the Rejection Order. (Id. at ) The Rejection Order, while authorizing the City to reject the MOU, specifically declined to provide the City with nunc pro tunc relief relating to the February 1, 2013 City Council resolution or any relief authorizing the implementation of new terms and conditions. (Id.) The City then lodged, at the Bankruptcy Court s request, proposed findings of fact and conclusions of law. (Id. at , ) The Union filed two separate objections and lodged its own proposed findings of fact and conclusions of law. (SER , 3485, ) After consulting with the California Public Employees Retirement System ( CalPERS ), the City lodged a revised findings of fact and conclusions of law, and replied to the Union s objections. (Id. at , , ) On November 4, 2014, the Bankruptcy Court published its findings of facts and conclusions of law to support the Rejection Order. (ER ) The Bankruptcy Court also published an order rejecting the Union s evidentiary objections. (SER ) III. STANDARDS OF REVIEW The Court has jurisdiction pursuant to 28 U.S.C. 158(a), and is sitting as a single-judge court of appeal. The traditional appellate review standards apply. The Court reviews the Bankruptcy Court s conclusions of law de novo and its factual findings for clear error. Salazar v. McDonald (In re Salazar), 430 F.3d 992, 994 (9th Cir. 2005). Review under the clearly erroneous standard requires significant deference to the trial court. Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1024 (9th Cir. 1999). A mixed question of law and fact occurs when the historical facts are established; the rule of law is undisputed... ; and the issue is whether the facts satisfy 7

78 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 8 of 24 Page ID #:8554 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 78 of the legal rule. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997) (citing Pullman-Standard v. Swint, 456 U.S. 273, 289 n.19 (1982)). Mixed questions presumptively are reviewed... de novo because they require consideration of legal concepts and the exercise of judgment about the value that animate legal principles. Id. (citing Boone v. United States, 944 F.2d 1489, 1492 (9th Cir. 1991)). A court s evidentiary rulings are reviewed for abuse of discretion. Watec Co. v. Liu, 403 F.3d 645, 650 n.3 (9th Cir. 2005). To reverse on the basis of an erroneous evidentiary ruling, [a court] must conclude not only that the bankruptcy court abused its discretion, but also that the error was prejudicial. Santa Barbara Capital Mgmt. v. Neilson (In re Slatkin), 525 F.3d 805, 811 (9th Cir. 2008) (internal citations omitted). A reviewing court should find prejudice only if it concludes that, more probably than not, the lower court s error tainted the verdict. McEuin v. Crown Equip. Corp., 328 F.3d 1028, 1032 (9th Cir. 2003) (internal quotation marks omitted). IV. ISSUES ON APPEAL The Union raises six issues on appeal: (1) Did the Bankruptcy Court err in finding the City met its burden of proof on the element of reasonable efforts to negotiate voluntary modifications to the collective bargaining agreement were made under [Bildisco]? ; (2) Did the Bankruptcy Court err in finding that City met its burden of proof when it found the [MOU] was a burden on the City? ; (3) Did the Bankruptcy Court err by limiting discovery on the Motion for an Order Authorizing Rejection of the [Union s] Collective Bargaining Agreement? ; (4) Did the Bankruptcy Court err by (a) waiting 18 months to render a decision on the [City s] Motion for an Order Authorizing Rejection of the [Union s] Collective Bargaining Agreement, and (b) authorizing further briefing? ; (5) Did the Bankruptcy Court err in finding the City can reject the [MOU] under 11 U.S.C. 365 even though the [MOU] expired under its own terms prepetition? ; and 8

79 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 9 of 24 Page ID #:8555 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 79 of (6) Did the Bankruptcy Court err by issuing an advisory opinion on the practical effect of the rejection of the [MOU]? (Appellant Br. 3 4.) V. DISCUSSION The parties do not dispute the applicable law or the factual record for the six issues on appeal. Instead, the Union merely contests the Bankruptcy Court s application of facts to law and discretionary rulings. As discussed below, the Court must reject each of the Union s arguments. The Court will discuss each issue in turn. A. Issue 1: Reasonable Efforts to Negotiate The first issue on appeal is whether the City made reasonable efforts to negotiate voluntary modifications to the MOU. This issue involves mixed questions of law and fact and is reviewed de novo. See In re Bammer, 131 F.3d at 792. Bankruptcy Code section 365(a) provides that a debtor may assume or reject any executory contract. 11 U.S.C. 365(a). In Bildisco, the Supreme Court held that the language executory contract in section 365(a) includes collective bargaining agreements. Bildisco, 465 U.S. at Bildisco instructs that in order for a debtor to reject a collective bargaining agreement under section 365(a), the debtor must show; (1) reasonable efforts to negotiate a voluntary modification have been made, and are not likely to produce a prompt and satisfactory solution, (2) the agreement is a burden on the debtor, and (3) the balance of the equities weigh in favor of the rejection. Id. at 526. The debtor bears the burden of establishing that these factors are satisfied. Id. Chapter 9 of the Bankruptcy Code, which authorizes a municipality to discharge its debt through bankruptcy, incorporates section 365(a). 11 U.S.C. 901(a); see also In re City of Vallejo, 403 B.R. 72, 77 (Bankr. E.D. Cal. 2009) aff d in 432 B.R. 262 (E.D. Cal. 2010) ( Congress incorporated section 365 into chapter 9 without restricting or limiting its application to collective bargaining agreements. ). The judicial consensus is that Bildisco controls rejection of collective bargaining agreements in chapter 9 cases. Ass n of Retired Employees of the City of Stockton v. 9

80 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 10 of 24 Page ID #:8556 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 80 of Stockton (In re City of Stockton), 478 B.R. 8, 23 (Bankr. E.D. Cal. 2012); see also In re City of Vallejo, 432 B.R. at 272 ( The Bankruptcy Court properly concluded that a municipality operating under Chapter 9 may utilize 11 U.S.C. Section 365 to reject a CBA, if the municipality can show that the requirements of Bildisco are met. ); Orange County Employees Ass n v. Orange (In re County of Orange), 179 B.R. 177, 183 (Bankr. C.D. Cal. 1995) ( Bildisco applies in Chapter 9. ). The inquiry into whether a municipality made reasonable efforts to negotiate a voluntary modification involves the application of case-specific facts to the law. Here, the parties do not dispute the law or the operative facts, but instead dispute the Bankruptcy Court s application. The Bankruptcy Court concluded that the City satisfied Bildisco by making reasonable efforts to negotiate a modification to the MOU. Rejection Order at The Bankruptcy Court reached this conclusion based on the aggregate of the following events: (a) the efforts made by the City in the first few months of the bankruptcy case to meet with the [Union], (b) the subsequent unsuccessful mediations between the City and the [Union] involving first Judge Clarkson and then Judge Zive, and (c) the meetings between the City and the [Union] in the five weeks after the City submitted its comprehensive set of proposals to the [Union] on or about July 28, Id. at 35. The Bankruptcy Court also explained that a prompt and satisfactory solution was not likely because the Union made no concessions to the City s offers even though the Union was informed that modifications were necessary. Id. at The Bankruptcy Court further noted that the lack of meetings was a result of the Union s reluctance to engage with the City and the Union refused to negotiate without first receiving a comprehensive proposal, which is not required under Bildisco. Id. at 36. / / / 10

81 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 11 of 24 Page ID #:8557 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 81 of On appeal, the Union makes two arguments regarding the reasonableness of the City s efforts to negotiate. First, the Union claims that the evidence of reasonable efforts is scant and the Bankruptcy Court relied on innuendo and supposition stemming from the confidential mediation sessions. (Appellant Br. 16.) The Union argues: The fact that the parties attended mediation does not sufficiently establish reasonable efforts to negotiate voluntary modifications to the MOU were made; the reasonableness of the City s efforts to negotiate cannot be ascertained by speculating on matters that occurred in a confidential mediation session. (Id.) The Union s argument is legally unsupported and lazy. As an initial matter, the mediation sessions were not the only occasions in which the parties met. The parties began discussions before the City even filed its voluntary petition and met on numerous occasions outside the mediation process. Communications between the parties began as early as April In fact, it was the Union s representative Glave that refused to meet in the fall 2014 despite the City s efforts to find a workable time. (ER 57, ; SER ) The City s willingness to meet and compromise, and the Union s stubbornness, is quite apparent from the wealth of traffic between the parties. (Id.) The Union s claim that the evidence regarding reasonable efforts is scant is a misrepresentation of the evidence. Furthermore, the Union wants this Court to believe that because the mediation sessions were confidential, the City can therefore not prove that they acted reasonably during the mediation. The Union cites no law for this proposition. The City and the Union mediated before Judge Clarkson for at least three days, and before Judge Zive at least once. The City showed up on time, sent the appropriate negotiators, and spent hours upon hours talking with Union representatives. The Court does not need to know the precise talking points of those discussions to conclude that such conduct was reasonable. There is no legal requirement that the Court pour over the contents of a mediation to determine if negotiations were reasonable. In fact, Bildisco only requires reasonable efforts to negotiate a voluntary modification without any mention of 11

82 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 12 of 24 Page ID #:8558 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 82 of judicial review of all matters discussed during negotiations. Bildisco, 465 U.S. at 526. The Union s reading of Bildisco would render all unsuccessful, confidential mediations per se unreasonable. Bildisco does not require the parties to reach a resolution and recognizes that even the lack of a prompt resolution can justify rejection of a collective bargaining agreement. Id. The parties mediated on at least four occasions, met outside the mediation process on at least three occasions, and exchanged a host of s and phone calls regarding meeting times and modifications. The Union cannot rely on the confidentiality of the mediation to claim the City failed to carry its burden. The Court rejects the Union s over-zealous reading of Bildisco. The Union s second argument regarding the reasonableness of negotiations is equally as vapid. The Union argues: the evidentiary record demonstrates the City made no real effort to make consensual changes to the MOU or negotiate a new MOU. (Appellant Br. 16.) In making this claim, the Union cherry picks the facts it wants while ignoring the entirety of the record. The Union also fails to cite any authority involving similar facts. Essentially, the Union wants the Court to take its word. The Union is correct that six months passed between the imposition of the interim terms of employment and the mediation sessions, but it is equally true that Union representatives refused to meet, the City kept the Union informed on the financial conditions and employment proposals, and the City struck deals with five of the other labor unions. The record is replete with s from the City seeking times to meet with the Union. The legal standard is reasonableness not no real effort and the City s extensive outreach to communicate and meet with the Union, while in the midst of a financial collapse, unquestionably satisfies Bildisco. The District Court in In re City of Vallejo affirmed a bankruptcy court s reasonableness findings on grounds that the bankruptcy court ordered the parties to judicially supervised settlement talks and the record indicated almost two years of negotiations between the City and its unions. 432 B.R. at 275. The efforts in this 12

83 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 13 of 24 Page ID #:8559 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 83 of case, also spanning nearly two years and involving judicially supervised settlement talks, were at least as expansive as those in In re City of Vallejo. There is no authority to suggest otherwise. The Bankruptcy Court found that the City acted reasonably, and based on its own review of the record, this Court agrees. The Union s no real effort argument is rejected. In passing, the Union complains that the Bankruptcy Court did not reference the Union s proposed findings of fact in the Rejection Order. (Id. at 17.) The Union fails to identify any of the alleged facts that the Bankruptcy Court ignored and how those facts would impact the case. The Bankruptcy Court is the finder of fact. It has the duty to weigh the evidence and make factual conclusions. The Bankruptcy Court did its job. If the Union wants to challenge the Bankruptcy Court s factual conclusions, it should have made a clearly erroneous argument. There is no legal principle that requires a court to reference the proposed findings of fact from both parties. The Court therefore rejects this cursory argument. The Court concludes that the City made reasonable efforts to make voluntary modifications to the MOU, thus satisfying the standard from Bildisco. The Bankruptcy Court s conclusion on this issue is affirmed. B. Issue 2: MOU a Burden on the City The second issue on appeal relates to the City s claim that the MOU was a financial burden to reorganization. This is also a mixed question of law and fact reviewed de novo. See In re Bammer, 131 F.3d at 792. As explained supra, the second element in Bildisco requires the debtor to prove that the collective bargaining agreement is a burden on the debtor s ability to reorganize. Bildisco, 465 U.S. at The Bankruptcy Court found that the City submitted substantial evidence that the MOU was a burden on the City s ability to recover from its insolvency. Rejection Order at 37. The Bankruptcy Court noted the costs of unnecessary overtime, the costs of paying CalPERS premiums, and the Union s refusal to agree to any modification that required more pension contribution 13

84 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 14 of 24 Page ID #:8560 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 84 of from the Union s members. Id. at The Bankruptcy Court also noted the City s dire financial situation and lack of funds to provide necessary services to its citizens. Id. On appeal, the Union claims that the City failed to prove it was financially burdened by focusing on the testimony of the City s financial expert, Michael Bush. The Union argues that Mr. Bush did not have an accurate understanding of the finances and could not testify as to what the overall cost savings to the City would be if the [Union] contract was rejected. (Appellant Br. 18.) The Union further argues that a cost to the City is not the equivalent of a burden on the City under Bildisco. (Id.) The Union claims that Bush admitted that he did not factor the budget surplus and cost savings for concessions of other employee groups, and therefore the City failed to carry its burden of proof. (Id.) The Unions arguments are flawed for several reasons. First, it is clear that the Union does not understand how the bankruptcy process works. On October 16, 2013, the Bankruptcy Court issued an order confirming the City s eligibility to file for chapter 9 bankruptcy. (SER ) In that order, the Bankruptcy Court ruled that [t]he uncontroverted facts establish that the City is insolvent. The City was unable to pay its forthcoming obligations when the resolutions were passed and faced a cash deficit of $45.9 million for fiscal year This issue is uncontested. (SER 1500.) It was also undisputed that the City s personnel costs alone surpassed the entire General Fund. (ER 89.) The costs of public safety specifically the fire and police departments accounted for 72 percent of the City s annual budget. (Id. at ) Despite these uncontested facts, the Union has the audacity to now claim that there is not enough evidence that the MOU was a burden. Any financial obligation for an insolvent debtor is a burden, which is why a debtor would seek bankruptcy protection in the first place. Additionally, the Court is appalled that the Union would suggest that the cuts to other labor unions must be considered before its own MOU is deemed a burden. 14

85 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 15 of 24 Page ID #:8561 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 85 of There is no law anywhere that allows a creditor to sandbag the bankruptcy process and then claim its debt is not a burden because other creditors already took cuts. The Union is not entitled preferential treatment because it held out the longest and refused to negotiate. This sly attempt to discredit the worth of the other public sector labor unions is astounding. Second, the Union waived any argument it had to challenge Bush testimony. During the proceedings before the Bankruptcy Court, the Union did not offer its own expert evidence regarding the MOU s burden and expressly waived an opportunity for an evidentiary hearing and cross-examination of Bush. (ER 2366, 2374, 2382, 2408, 3509.) In its Rejection Order, the Bankruptcy Court explains that the City s evidence on the financial burden of the contract was entirely unrebutted by any admissible evidence presented by the [Union], who chose to not present any expert testimony to counter the testimony of Michael Bush. Rejection Motion at 2. By not challenging the financial burden of the MOU before the Bankruptcy Court, the Union waived any right to do so on appeal. In re Mercury Interactive Corp. Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010) (holding arguments not raised in the bankruptcy court are waived on appeal). In presenting this meritless argument, the Union even fails to cite a single page from the record or a single authority. In passing, the Union also claims that the Bankruptcy Court s findings regarding the burden of the MOU were flawed due to several evidentiary errors. First, the Union argues that the Bankruptcy Court relied on evidence submitted after the initial hearing on the Rejection Motion and [t]hese items should not have been admitted by the Court because they were untimely. (Appellant Br. 19.) The Union claims that the Bankruptcy Court erred when it relied upon these untimely pleadings. (Id.) Unsurprisingly, the Union cites zero authority for this claim. This argument is baseless. The Union did not object to the Bankruptcy Court s consideration of this evidence until after it entered the Rejection Order, and thus this argument is waived on appeal. See Mercury Interactive Corp., 618 F.3d at

86 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 16 of 24 Page ID #:8562 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 86 of Furthermore, evidentiary rulings are reviewed under an abuse of discretion standard and the appellant must show prejudice. McEuin, 328 F.3d at Lower courts are afforded broad discretion in evidentiary rulings. Harper v. Los Angeles, 533 F.3d 1010, 1030 (9th Cir. 2008). There is no rule that prohibits evidentiary submissions following a hearing and there is no viable argument that the Bankruptcy Court committed any abuse of direction. The proceedings below were a fluid situation, and the Bankruptcy Court took the steps it felt were appropriate to reach the correct result. Affording the Bankruptcy Court broad discretion to consider filings after a posted hearing date, the Court finds no abuse of discretion. The Court therefore rejects the Union s argument. The Court concludes that the MOU was a financial burden to the City. The Bankruptcy Court s conclusion on this issue is affirmed. C. Issue 3: Discovery Limits The third issue on appeal relates to the Bankruptcy Court s April 4, 2013 discovery order related to the Rejection Motion. At the April 4 hearing, the Union sought permission from the Bankruptcy Court to depose the City s negotiators who were cited in the City s Rejection Motion. (Appellant Br. 19.) The Union sought information relating to the City s ability to negotiate consensual modifications to the MOU after the City disclosed a proposed budget. (Id. at ) As noted in the factual background section, supra, the Bankruptcy Court issued an oral order setting parameters for the deposition request. The Bankruptcy Court limited the depositions of the City s negotiators Diana Leibrich and Linda Daube to the source and scope of their authority to negotiate voluntary modifications to the MOU. (See ECF No. 560 at 17:11 15, 33:12 22, 55:3 8, 60:14 16.) On June 10, 2013, the Union filed a Motion to Strike Evidence, or in the Alternative, to Compel Deposition Responses. (ECF No. 686.) The motion claimed that Leibrich and Daube refused to answer the following questions: (1) the nature and extent of alleged negotiations between the City and the [Union]; (2) whether the City s negotiators had authority to conduct good 16

87 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 17 of 24 Page ID #:8563 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 87 of faith negotiations with the [Union] as opposed to merely proposing a predetermined ultimatum. (Id. at 2.) At a hearing on July 31, 2013, the Bankruptcy Court denied the Union s motion. (ECF No. 720.) The Bankruptcy Court described the Union s motion as unrealistic and backwards. (Id. at 5.) In explaining why it limited the depositions to only the authority to negotiate, the Bankruptcy Court explained: The nature and extent of the alleged negotiations between the City and the [Union] I said before at the first hearing, the second hearing, and now that it takes two parties to negotiate. It doesn t matter what was in the state of mind of the two women negotiating for the City, what was discussed in closed session, which is clearly confidential anyway, what might have been discussed with counsel which is privileged anyway, those things to the extent they were not communicated to the unions are just never going to come into relevant evidence, admissible evidence with the Court with concern. So inquiring further about that wouldn t assist the Court in making the decision. [ ] I did believe that the source and scope of the power of the negotiator s authority to negotiate was important.... So I am going to deny this motion and I no argument by the [Union] is going to change my mind. It is not within the scope of what I allowed and, in addition to that, the deponents actually answered many questions beyond the scope of what I allowed and I certainly don t mind that they did that, but they have answered the questions that are relevant to the Court s decision. (ER ) 17

88 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 18 of 24 Page ID #:8564 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 88 of Here, the Union argues that the Bankruptcy Court abused its discretion when it limited the [Union s] depositions of the City s witnesses. (Appellant Br. 19.) The Union claims that Federal Rule of Civil Procedure 26 authorizes broad discovery and a federal court may only limit discovery where justice requires the protection of a party from annoyance, embarrassment, oppression, or undue burden or expense. (Id. at [quoting Oppenheimer Fund v. Sanders, 437 U.S. 340, 351 (1979)].) According to the Union, [o]ther than saving the City the cost of responding to discovery, there was no other basis for limiting discovery, and there was no evidence that the costs would unduly burden the City; the Bankruptcy Court simply assumed significant costs would be incurred and elected to sua sponte limit discovery. (Id. at 21.) The Union further argues that [t]o ascertain the City s ability to negotiate anything more than a take-it-or-leave-it offer, the [Union] questioned the City s negotiators on the subject and [i]f responses were provided, it is likely that the discovery requests would have revealed whether or not the City could actually make reasonable efforts to negotiate consensual changes above its budgetary bottomline. (Id. at 22.) All of the Union s arguments are meritless. First, the Bankruptcy Court s discovery limitations had nothing to do with costs to the City. The Bankruptcy Court does not even mention the costs to the City. Instead, it correctly found that the deposition of the City s negotiators was not another opportunity for the Union to rehash issues from the confidential bargaining table. Discovery was limited to the scope of the negotiators authority and it appears that those questions were answered. (ER , , 1321, , ) Furthermore, a trial court is vested with broad discretion to permit or deny discovery, and a decision to deny discovery will not be disturbed except upon the clearest showing that the denial of discovery results in actual and substantial prejudice to the complaining litigant. Laub v. U.S. Dep t of Interior, 342 F.3d 1080, 1084 (9th Cir. 2003) (internal quotation marks and citations omitted). The Union fails to make a 18

89 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 19 of 24 Page ID #:8565 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 89 of clearest showing of substantial prejudice. The Bankruptcy Court succinctly explains that the confidential and privileged information from negotiations was not relevant in its determination of whether the City made reasonable efforts to negotiate under Bildisco. The Bankruptcy Court determined that it did not need all of the specifics of the negotiations to decide the issue. Both parties engaged in the same negotiation and both already knew exactly what occurred during that process. Deposing the negotiators on those same negotiations is simply not necessary or relevant. The Union s argument, which is unsupported by any precedent, is soundly rejected. The Union fails to make any showing of prejudice. In passing, the Union complains that the Bankruptcy Court failed to publish a formal discovery order and this failure created[d] havoc in discovery. (Appellant Br. 22.) The Union never once requested a written order, never availed itself of other remedies before the Bankruptcy Court, and never raised this objection below. This torpid argument is waived. See Mercury Interactive Corp., 618 F.3d at 922. The Court concludes that the Bankruptcy Court did not abuse its discretion in limiting discovery. D. Issue 4: Delay in Issuing Order The fourth issue on appeal focuses on the length of time between the filing of the Rejection Motion and its final disposition. The Rejection Motion was filed on March 8, 2013, and the Bankruptcy Court issued the Rejection Order on September 19, The Union challenges the Bankruptcy Court s docket management, and such challenge is reviewed for an abuse of discretion. Preminger v. Peake, 552 F.3d 757, 769 n.11 (9th Cir. 2008). Section 365 does not impose any deadlines for court rulings rejecting executory contracts. 11 U.S.C The Court cannot find, and the Union fails to identify, any rule or statute that mandates a bankruptcy court to issue any ruling within a certain time period. Relying on no case law or statutory authority, the Union argues that it was prejudiced by the delay because it resulted in a second round of briefing 19

90 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 20 of 24 Page ID #:8566 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 90 of whereby the City was given another opportunity to brief the Rejection Motion and was given a right to reply to any opposition of the [Union] to the supplement. (Appellant Br. 26.) There are no allegations that the City was provided with opportunities that the Union did not have. Both parties were treated equally and the Court strains to see any logic behind the Union s claim that more briefing is bad. Ironically, the Union even requested the Bankruptcy Court to continue the hearing on the Rejection Motion. (ER 637.) The proceedings below involved no less than seven different unions, dozens of creditors, millions of dollars of debt, and several confidential mediations. The Bankruptcy Court did not abuse its discretion by allowing the complex factual record to develop and both parties additional briefing opportunities. There is simply no rule preventing the Bankruptcy Court from authorizing further briefing and evidence, and the Court rejects any invitation to meddle with a lower court s docket management. The Bankruptcy Court did not abuse its discretion and the Court, therefore, rejects this legally unsupported claim. The Union further argues that the delay in ruling on the Rejection Motion left the interim terms of employment previously imposed on February 1, 2013 in effect for an unprecedented and protracted period. (Appellant Br. 26.) The Union acknowledges that Bildisco provides a temporary safe-haven for [the] City while its Rejection Motion was pending, but the interim terms of employment became something more than interim because the Bankruptcy Court did not immediately rule on the Rejection Motion. (Id. at 27.) Once again, the Union makes an argument without any support in the law. The Union does not even bother to analogize examples from other areas of law, but instead relies on hollow supposition. The Union s claim that the Bankruptcy Court s delay was unprecedented and protracted is unfounded, and its claim that the interim terms were something more than interim is unreasonable. Bildisco explicitly authorizes the imposed interim terms in this case, and the Court is not inclined to / / / 20

91 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 21 of 24 Page ID #:8567 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 91 of create an arbitrary rule regarding the outer limit of interim. There was no error of law or abuse of discretion. This argument is rejected in full. The Court concludes that the Bankruptcy Court did not abuse its discretion in ruling on the Rejection Motion. E. Issue 5: Expiration Before Rejection The fifth issue on appeal concerns the expiration of the MOU. Most of the Union s arguments on appeal concern the City s ability to reject the MOU. The Union also offers an argument in the alternative: The Bankruptcy Court erred when it found the MOU could be rejected even though it expired pre-petition. (Appellant Br. 23.) The Union argues that the MOU was extinguish[ed] in The MOU contains an evergreen clause which states that the MOU s terms and conditions remain in full effect after the MOU expires unless a new MOU is negotiated. (ER 198.) The MOU expired naturally on June 30, 2010 without a new agreement. The parties do not dispute that the MOU initially remained in effect. On appeal, the Union claims that the MOU was extinguish[ed] on February 22, 2011 when the City Council passed Resolution (Appellant Br. 23.) Resolution unilaterally imposed certain employment conditions on the Union s members. The Union claims that the MOU lost all characteristics of a contract upon the codification of the terms and conditions in Resolution because the terms and conditions of employment were not consensual. (Id. at 24.) The Union further argues that the Court s factual finding that the MOU continued on as a result of an evergreen is faulty; the MOU cease[d] to exist upon the implementation of Resolution and any evergreen clause that may have existed in the MOU was extinguished. If not, then the Resolution would be void in its entirety. (Id.) This argument is meritless for a number of reasons. First, the Union waived this argument by not raising it below. The Union never once argued to the Bankruptcy Court that Resolution extinguished the entire MOU, and in fact, 21

92 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 22 of 24 Page ID #:8568 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 92 of the Union continually argued that the MOU was still in effect. The Union s opposition to the Rejection Motion repeatedly acknowledged that the MOU was in effect (ER ), and the Union s proposed statement of facts also acknowledges that the MOU was in effect (SER 3817; see also ER , SER , , ). The Union even requested that the Bankruptcy Court conclude that the evergreen clause in the MOU is enforceable, and the MOU is subject to rejection under Section 365(a). (Id.) The Union s new claim that [Resolution ], and not the MOU, were the terms and conditions of employment that existed on the Petition Date, contradicts the first half of its appellate brief as well as every representation it made to the Bankruptcy Court. Accordingly, the Union s argument is waived. See Mercury Interactive Corp., 618 F.3d at 922. Second, and notwithstanding the waiver issue, the Union s argument is meritless. The evergreen clause states that the MOU remained in effect until a new MOU has been negotiated. (ER 198.) The Union s claim that the MOU was extinguish[ed] is factually and legally unsupported. Resolution contains no language that suggests that the entire MOU is void or that the evergreen clause is no longer applicable. The Union conveniently makes no mention of the terms in Resolution or why those terms would extinguish the entire MOU, but both parties concede that some of those terms came directly from the MOU and others were thrown out by a California Superior Court. (ER ) In addition to lacking any factual basis for this claim, there is no authority to support the Union s position. No legal authority supports the Union s argument that an entire MOU is nullified as a result of a city council employment resolution. The parties are bound by the plain language in the MOU s evergreen clause. The Court rejects this argument in full. F. Issue 6: Advisory Opinion The sixth issue on appeal relates to the scope of the Bankruptcy Court s Rejection Order. The Union argues that the Bankruptcy Court held that the practical effect of rejection of the MOU is the right afforded to the City to implement new 22

93 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 23 of 24 Page ID #:8569 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 93 of terms and conditions of employment and [s]ection 365 does not provide any authority for the Bankruptcy Court to make this conclusion. (Appellant Br ) These conclusions, according to the Union, constitute an impermissible advisory opinion. (Id. at 28.) The statement from the Bankruptcy Court at issue is as follows: For that reason, where a court approves rejection of a collective bargaining agreement under Section 365(a), the practical effect of rejection is that the debtor is permitted to implement new terms and conditions of employment, notwithstanding that there may be applicable labor laws that permit such changes only after the parties have negotiated to impasse. (ER 3540.) This statement from the Bankruptcy Court is nothing more than dicta. Contrary to the Union s claim, the Bankruptcy Court s statement did not authorize the imposition of new employment terms. The statement merely recognizes the proper legal standards going forward. There is no basis in the law for this Court to overturn an order from a bankruptcy court solely on dicta. The statement from the Bankruptcy Court is an accurate statement of the law and does nothing to change the relationship between the parties. The Court rejects this argument in full. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 23

94 Case 5:14-cv ODW Document 47 Filed 05/07/15 Page 24 of 24 Page ID #:8570 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 94 of VI. CONCLUSION The Court hereby AFFIRMS the Bankruptcy Court s Order Granting in Part and Denying in Part City of San Bernardino s Motion Authorizing Rejection of Collective Bargaining Agreement with San Bernardino City Professional Firefighters. In re City of San Bernardino, No. 6:12-bk-28006, ECF No The Clerk of the Court shall close this case. IT IS SO ORDERED. May 7, 2015 OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE

95 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 95 of 354 EXHIBIT C

96 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page 961 of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA PAUL R. GLASSMAN (State Bar No ) FRED NEUFELD (State Bar No ) KATHLEEN D. DeVANEY (state Bar No ) STRADLING YOCCA CARLSON & RAUTH A Professional Corporation 100 Wilshire Blvd., Suite 440 Santa Monica, CA Telephone: (424) Facsimile: (424) pglassman@sycr.com fneufeld@sycr.com kdevaney@sycr.com JAMES F. PENMAN (State Bar No ) OFFICE OF THE CITY ATTORNEY 300 N. D STREET, Sixth Floor San Bernardino, CA Telephone: (909) Facsimile: (909) Penman_Ja@sbcity.org Attorneys for Debtor City of San Bernardino In re: CITY OF SAN BERNARDINO, CALIFORNIA, Debtor. CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/ UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION Case No. 6:12-bk MJ Chapter 9 NOTICE OF MOTION AND MOTION OF DEBTOR CITY OF SAN BERNARDINO, PURSUANT TO 11 U.S.C. 365, 901 AND 904, FOR ORDER APPROVING: (A) REJECTION OF COLLECTIVE BARGAINING AGREMEENTS WITH SAN BERNARDINO PUBLIC EMPLOYEES ASSOC., SAN BERNARDINO POLICE OFFICERS ASSOC. AND SAN BERNARDINO CITY PROFESSIONAL FIREFIGHTERS; AND (B) FEBRUARY 1, 2013 INTERIM MODIFICATIONS TO SUCH COLLECTIVE BARGAINING AGREEMENTS [filed contemporaneously herewith: Declarations of Diana Leibrich, Linda Daube, Michael Busch and Kathleen DeVaney; Compendium of Unreported Cases; Request for Judicial Notice] Hearing Date: March 27, 2013 Time: 10:00 a.m. Place: Courtroom Twelfth Street Riverside, CA

97 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page 972 of TABLE OF CONTENTS Page A. Introduction and Summary of Argument...1 B. Jurisdiction and Venue...4 C. The Law Applicable to Rejection of Collective Bargaining Agreements in Chapter 9 Municipal Bankruptcy Cases...5 D. Bankruptcy Code Section 365 Preempts State Labor Law...11 E. The City Made Reasonable Efforts to Negotiate Consensual Modifications...13 F. The MOUs of the Dissenting Unions are a Burden on the City...16 G. On Balance, the Equities Weigh in Favor of Granting the Motion...16 H. Conclusion STRADLING YOCCA CARLSON & RAUTH LAWYERS NEWPORT B EACH -iii- CITY S OPPOSITION TO SCHOOL DISTRICT MOTION FOR RELIEF FROM STAY DOCSOC/ v5/

98 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page 983 of CASES TABLE OF AUTHORITIES Page(s) Central Virginia Community College v. Katz, 546 U.S. 356, 126 S. Ct. 990 (2006)...12 In re Bloss Glass Co., 39 B.R. 694 (Bankr. D. Pa. 1984)...15 In re City of Stockton, 478 B.R. 8 (Bankr. E.D. Cal. 2012) In re City of Vallejo, 2009 Bankr. Lexis 970 (Bankr. E.D. Cal. 03/02/2009) In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. 2009), aff d, 432 B.R. 262 (E.D. Cal. 2010) , In re County of Orange, 179 B.R. 177 (Bankr. C.D. Cal. 1995) In re McCarther-Morgan, 2009 Bankr. Lexis 4579 (B.A.P. 9th Cir. 01/27/2009)...13 In re Rath Packing Co., 36 B.R. 979 (Bankr. N.D. Iowa 1984), aff d, 48 B.R. 315 (D. Iowa 1985)...15 In re S.A. Mechanical, Inc., 1986 Bankr. Lexis 6051 (B.A.P. 9 th Cir. May 15, 1986)...15 International Shoe Co. v. Pinkus, 278 U.S. 261, 49 S. Ct. 108 (1929)...12 Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d F.3d 980, as amended in 677 F.3d 869 (9th Cir. 2012) N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984) ( Bildisco ) STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA -ii- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

99 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page 994 of STATUTES U.S. Constitution, Bankruptcy Clause...12, 17 U.S. Constitution, Supremacy Clause...12 U.S. Constitution, Tenth Amendment U.S.C U.S.C U.S.C U.S.C Bankruptcy Code Section , 6, 8-13, 17 Bankruptcy Code Section Bankruptcy Code Section Bankruptcy Code Section Bankruptcy Code Section Bankruptcy Code Section , 8 National Labor Relations Act...11 California Government Code Section , 6, 7 California Government Code Section STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA -iii- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

100 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of TRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA considerable amount of time during the second half of 2012 and into January 2013 attempting to -1- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/ Notice of Motion and Motion PLEASE TAKE NOTICE THAT debtor City of San Bernardino ( City ) hereby moves this United States Bankruptcy Court (the Court ), pursuant to Sections 365, 901 and 904 of Title 11 of the U.S. Code (the Bankruptcy Code ), for an order approving: (a) the rejection of the City s collective bargaining agreements with the following three employee organizations: (i) the San Bernardino Public Employees Association ( SBPEA ); (ii) the San Bernardino Police Officers Association ( SBPOA ); and (iii) the San Bernardino City Professional Firefighters, Local 891 ( SBCPF ) (the Motion ); and (b) the February 1, 2013 modifications of those collective bargaining agreements. Filed concurrently herewith are: (a) the Declarations of Diana Leibrich, Director of Human Resources for the City (the Leibrich Decl. ), Linda Daube, principal labor negotiator for the City ( Daube Decl. ) Michael Busch, the President of Urban Futures, Inc. and the principal financial advisor to the City in this chapter 9 case (the Busch Decl.), and Kathleen DeVaney, counsel for the City; (b) a Compendium of Case Decisions Not in Official Reporters ( Compendium ); (c) a Request for Judicial Notice. A proposed order granting the Motion is attached hereto as Exhibit A. PLEASE TAKE FURTHER NOTICE that Local Bankruptcy Rule (f) requires that any opposition to the Motion must be in writing and filed and served at least 14 days prior to the hearing. The failure to timely file and serve a written response to a motion may be deemed by the Court to be consent to the granting of the relief requested in the motion. A. Introduction and Summary of Argument. The City commenced this chapter 9 case on August 1, 2012 (the Petition Date ). At that time, the City was party to collective bargaining agreements with seven labor organizations that represent the City s employees. The collective bargaining agreements for each of the labor organizations are documented in Memoranda of Understanding and attendant documents, including City resolutions, side letters and amendments (collectively, an MOU ). Given its severe financial crisis, and the fact that employee wages and benefits are the largest single cost of running the City (constituting approximately 75% of the City s expenditures), the City spent a

101 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of negotiate a common set of consensual modifications to its MOUs with the seven labor organizations, including pursuant to mediation conducted by U.S. Bankruptcy Judge Scott C. Clarkson. See generally Leibrich Decl. at 17-20; Daube Decl. at The MOU modifications that the City requested from the unions were expressly contemplated in the City s Pendency Plan adopted on November 26, 2012, and they are critical to the successful implementation of the Pendency Plan. In general, the proposed MOU modifications: (a) suspended the City employees ability to sell back to the City accrued sick leave, holiday and vacation leave; (b) capped the accrual of sick leave at 1040 hours; (c) continued the deferral of cashouts of sick, holiday and vacation leave for terminated employees; and (d) required that employees share in payment of the City s contractual obligation to the California Public Employees Retirement System ( CalPERS ) such that each employee would pay 50% of the normal cost of the benefit. See Leibrich Decl. at 10. California Government Code Section , which became effective January 1, 2013, provides that, with respect to employer/employee contributions to CalPERS: Equal sharing of normal costs between a contracting agency or school employer and their employees shall be the standard. It shall be the standard that employees pay at least 50 percent of normal costs and that employers not pay any of the required employee contribution. California Government Code Four of the seven labor organizations (the International Union of Operating Engineers that represents the General Bargaining Unit; the San Bernardino City Fire Management Association that represents the Fire Management Bargaining Unit; the San Bernardino Police Management Association that represents the Police Management Bargaining Unit; and the San Bernardino Management/Confidential Association that represents the Management/Confidential Bargaining Unit) reached agreement with the City on the modifications to their MOUs, and the modifications took effect on February 1, See Leibrich Decl. at 10; Daube Decl. at 12. Three unions (the SBPEA, SBPOA and SBCPF) did not agree (the Dissenting Unions ). The STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA -2- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

102 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of City Council voted to impose the modifications on the Dissenting Unions, in City Council Resolutions adopted on January 28, See Leibrich Decl. at 16; Daube Decl. at 12. The City s Pendency Plan contemplates employment related cost savings of $26 million, and approximately $31 million in deferrals. The cost savings that will result from the imposition of modifications to the MOUs with the City s police, fire and middle management labor units, and the consensual modifications reached with the City s other labor units constitute a substantial part of the savings identified in the Pendency Plan. See Busch Decl. at 12. The City has no choice but to reduce its employment related costs, and the City cannot do so except in a manner that is equitable to all its employees. The unions that agreed to the MOU modifications did so on the reasonable expectation that the City would apply the modifications across the board. Since the City cannot afford, both financially and equitably, to maintain the benefit levels that were in the MOUs of the Dissenting Unions on the Petition Date, the City has no choice but to reject those MOUs. The City made every effort, through negotiation and mediation, to achieve a consensual deal with all of the labor organizations, before it imposed the MOU modifications on the Dissenting Unions. See generally Leibrich Decl. at 21-30; Daube Decl. at Faced with a financial crisis and having determined that a financial emergency existed (see Leibrich Decl. at 21) for the purposes of California Government Code Section , 2 nothing more was required of the City under applicable state law or controlling federal bankruptcy law. The MOUs of the Dissenting Unions are a burden on the City s efforts to both implement its Pendency Plan and provide essential services to the City s residents. If the City were required to continue the benefit levels of the City employees at the rates required in the MOUs as of the Petition Date, the City simply could not implement its Pendency Plan. The City s financial crisis STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA 1 Copies of the three City Council resolutions adopting the modifications to the SBPEA, SBPOA and SBCPF MOUs are attached to the Leibrich Decl. as Exhibits California Government Code Section generally provides that, in the event of an emergency, a municipality may take unilateral actions inconsistent with its MOUs as long as it gives notice of its intent to do so and makes itself available to meet with the applicable unions after implementation. The City gave prior notice to, and continues to make itself available to meet with, the unions. -3- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

103 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of is such that, even with these cuts in employee benefits, the City remains in dire financial straits. See Busch Decl. at 12. For now, the practical effect of the rejection of the MOUs is that the members of the Dissenting Unions will have to live with the same changes to the terms and conditions of employment that the consenting unions agreed to. The Dissenting Unions had an option that avoided rejection of their MOUs, but rejected it. The City did not single out the Dissenting Unions, rather the City sought consent of the same changes from all unions, and the City spread the burden of the benefit changes across all the unions. Rapidly increasing wages and benefits of municipal employees in the years prior to the national financial crisis, 3 and circumstances beyond the City s control the unprecedented collapse of the housing market and severe unemployment have placed the City in the unenviable position of having to balance the needs of its 200,000 residents with the Petition Date wage and benefit levels of the City s employees. See Busch Decl. at 7 and Those are difficult choices to make, but they must be made. On balance, the City must survive as a financially viable municipality, and the desire of the Dissenting Unions to protect their MOUs must yield to the greater common need of the City s residents and employees for the City to survive. There are equities on both sides of the equation, but the balance of the equities unmistakably weighs in favor of the survival of the City. Accordingly, as part of the City s efforts to get its financial house in order, the City must be able to reject the MOUs of the Dissenting Unions. B. Jurisdiction and Venue The Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). Venue in this district is appropriate pursuant to 28 U.S.C and STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA 3 The City s employee pension costs have risen from $6.2 million in fiscal year , to $19 million for fiscal year , and are projected to further increase to $22.6 million for fiscal year See Busch Decl. at CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

104 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of C. The Law Applicable to Rejection of Collective Bargaining Agreements in Chapter 9 Municipal Bankruptcy Cases Under controlling U.S. Supreme Court precedent, (a) (b) (c) the City is entitled to reject the MOUs at any time until a plan of adjustment is confirmed, the City may make changes to the MOUs in the interim, and applicable state law that may require bargaining to impasse, obtaining the consent of the union or authorization from a state labor panel or similar procedures prior to the City making unilateral changes to the MOUs do not apply because the City has made reasonable efforts to negotiate voluntary modifications This case is controlled by the U.S. Supreme Court decision in N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984) ( Bildisco ), and the California bankruptcy and district court precedents applying Bildisco to the modification and rejection of municipal employee labor agreements in the chapter 9 cases of Orange County, the City of Vallejo and the City of Stockton. In Bildisco, the debtor made post-petition unilateral modifications to the collective bargaining agreement, several months prior to filing a motion to reject the contract. The modifications included failing to make required contributions to pension and health plans and failing to implement contractually agreed wage increases. Over the objection of the employee unions and the National Labor Relations Board, The Supreme Court held that: (i) (ii) (iii) a debtor may reject a collective bargaining agreement under Bankruptcy Code Section 365 if the agreement is a burden on the debtor and the balance of the equities weighs in favor of rejection, 104 S.Ct. at 1196, a debtor may make unilateral changes to the agreement prior to bringing a motion to reject, 104 S.Ct. at , and applicable labor laws that require an employer to bargain to impasse, obtain the consent of the union or comply with similar procedures before making unilateral 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA changes to a collective bargaining agreement do not apply when the employer is -5- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

105 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page 105 of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA and amendment of collective bargaining agreements. Judge Ryan concluded that the Bildisco -6- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/ in bankruptcy, as long as the debtor makes reasonable efforts to negotiate voluntary modifications to the agreement and those efforts are not likely to produce a prompt and satisfactory solution, 104 S.Ct. at Section 901 of the Bankruptcy Code makes Section 365 applicable in chapter 9 proceedings. 11 U.S. 901(a). Every federal court that has considered the question has concluded that Bankruptcy Code Section 365 applies in chapter 9 to the rejection of municipal employee labor agreements and the Bildisco standard for rejection applies to such agreements, and no federal court has prevented a municipality in chapter 9 from making changes to its MOUs after the municipality made reasonable efforts to negotiate voluntary modifications with the unions, even if those efforts did not strictly comply with applicable state law governing such bargaining. See e.g., In re County of Orange, 179 B.R. 177 (Bankr. C.D. Cal. 1995) ( Orange County ); In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. 2009), aff d, 432 B.R. 262 (E.D. Cal. 2010) ( Vallejo ); In re City of Stockton, 478 B.R. 8 (Bankr. E.D. Cal. 2012) ( Stockton ). Moreover, although Bildisco makes clear that the City was not required to strictly comply with applicable state law governing bargaining with municipal employees prior to making changes to the MOUs or seeking to reject the MOUs, the City has in fact complied with such state law, i.e., California Government Code Section , by declaring a fiscal emergency, giving notice to the unions of the City s intent to make modifications to the MOUs, and making itself available to meet with the unions. The first California bankruptcy court to consider application of Bildisco to chapter 9 cases was Judge Ryan s decision in the Orange County case. Judge Ryan noted that very soon after the Bildisco decision, Congress enacted Bankruptcy Code Section 1113 (Section 1113(f) allows debtors to implement interim modifications to MOUs only upon court order), and although it had several opportunities to do so, Congress did not make Section 1113 applicable to chapter 9 cases. Later, in 1994, Congress considered, but rejected legislation that would have prohibited chapter 9 debtors from making unilateral changes to municipal employee collective bargaining agreements without first exhausting state laws governing bargaining, implementation

106 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA standards for rejection of municipal employee labor agreements apply to chapter 9 debtors. 179 B.R. at Like the Bildisco decision, Judge Ryan held that the right to reject a contract does not relieve the debtor from continuing requirements to bargain with its employees. Judge Ryan found that the County had made no attempt at all to negotiate before implementing the unilateral changes, and that Bildisco did not excuse the County from attempting to do so. 179 B.R. at 184. Judge Ryan also noted, that under California Government Code Section , in emergency situations a chapter 9 debtor may make unilateral changes to MOUs, and he found that the debtor had established the existence of a fiscal emergency. Nevertheless, Judge Ryan held that the debtor should have made attempts to negotiate a consensual resolution prior to implementing the modifications. 179 B.R. at 183. Here, in the instant case, the City determined that it was facing a fiscal emergency on July 18, 2012, it did in fact meet and attempt to negotiate with the unions prior to making the February 1, 2013 unilateral modifications, the City moved the effective date of the modifications from January 1 to February 1, 2013 to facilitate even further discussions, and four of the seven unions ultimately consented. The City then had no choice but to implement the modifications with respect to the Dissenting Unions in order not to run out of the funds. Here, the City complied with the strictest test for unilateral modifications, that in Judge Ryan s Orange County decision. In a series of later decisions from the Vallejo and Stockton chapter 9 cases, the ability of a chapter 9 debtor to make unilateral changes to collective bargaining agreements pending a decision to assume or reject has come into clearer focus. In the first Vallejo decision to consider Bildisco, In re City of Vallejo, 2009 Bankr. Lexis 970 (Bankr. E.D. Cal. 03/02/2009) (copy attached to Compendium as Exhibit 1), a labor union argued that the automatic stay did not apply to its prosecution of a grievance against the debtor for the debtor s unilateral modifications to the collective bargaining agreement (the very same argument being made by the SBPEA in a motion for relief from stay pending before the Court). The court held that (a) the stay did apply, (b) the debtor had moved to reject the contract so that the matter was properly before the bankruptcy -7- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

107 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of court and not the grievance resolution mechanisms under the collective bargaining agreement, 4 and (c) if the court were to determine that Bildisco applied, then, quoting from Bildisco, from the filing of a petition in bankruptcy until formal acceptance, the collectivebargaining agreement is not an enforceable contract. [internal citations omitted]. This would mean the City would not have to abide to the terms of the CBA [collective bargaining agreement], pending its rejection or after its rejection Bankr. Lexis at *10. Two weeks later, in In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. 2009), aff d, 432 B.R. 262 (E.D. Cal. 2010), Judge McManus issued his decision on the City of Vallejo s motion to reject its collective bargaining agreements with two municipal employee unions (several unions had consented to modifications to their MOUs, and the motion then only applied to the dissenting unions). The court held that: (a) California state laws do not set the standards for, and cannot interfere with the rejection of MOUs under Bankruptcy Code Section 365; (b) none of the procedural or substantive requirements of Bankruptcy Code Section 1113 apply in chapter 9, and (c) the standards for rejection set forth in Bildisco apply in chapter 9. The court held off granting the rejection motion to give the parties more time to negotiate after one additional union consented to modifications to its MOU, leaving only one dissenting union. Several months later, on August 31, 2009, the bankruptcy court issued its Findings of Fact and Conclusions of Law (Compendium, Exhibit 2). The court granted the motion to reject and found that the City had satisfied each of the Bildisco standards -- the MOU was a burden on the debtor, the balance of the equities favored the city, and the city had made reasonable efforts to negotiate with the union prior to rejection. On appeal, the District Court affirmed. It held that the City of Vallejo could reject its MOUs without interference from state law, the standard for rejection is the one articulated in Bildisco, and the city had satisfied the Bildisco standards STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA 4 Judge McManus reasoned that it made little sense to grant relief from stay to enable a grievance under the collective bargaining agreement to go forward when the court was considering a motion to reject the collective bargaining agreement Bankr. Lexis 970 at *8-9. The City believes it similarly makes eminent sense in the instant case for the Court to first consider the City s motion to reject the MOUs before considering whether to lift the stay for the SBPEA and SBPOA to prosecute unfair labor practices complaints. -8- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

108 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA More recently, in In re City of Stockton, 478 B.R. 8 (Bankr. E.D. Cal. 2012) Judge Klein addressed the applicability of Bildisco in chapter 9 proceedings. Three days after filing its chapter 9 case, Stockton s City Council adopted a budget that included unilateral changes to retired employee health care benefits. A group of retired employees filed a class action complaint and sought a temporary restraining order to prevent the City of Stockton from implementing the changes to the health care benefits. The retirees argued that their benefits are vested contractual rights no longer subject to any executory contract. Judge Klein agreed that the contract was not executory and therefore not governed by Bankruptcy Code Section 365, and held that, absent any other applicable Bankruptcy Code provision, Bankruptcy Code Section 904(2) prevents the bankruptcy court from requiring the debtor to make the retiree health benefit payments. Bankruptcy Code Section 904 provides that: Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with (1) any of the political or govern-mental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property. 11 U.S.C As Judge Klein explained, [Section 904 s] preambular language [n]otwithstanding any power of the court,... the court may not, by any stay, order, or decree, in the case or otherwise... is so comprehensive that it can only mean that a federal court can use no tool in its toolkit -- no inherent authority power, no implied equitable power, no Bankruptcy Code 105 power, no writ, no stay, no order -- to interfere with a municipality regarding political or governmental powers, property or revenues, or use or enjoyment of income-producing property. 11 U.S.C As a practical matter, the 904 restriction functions as an antiinjunction statute -- and more. 478 B.R. at 31. Judge Klein also considered what the impact would be if the retiree health benefits were in fact the subject of collective bargaining agreements, and he concluded that the outcome would be the same because of the Bildisco holding that it is not an unfair labor practice for a debtor unilaterally to modify a collective bargaining agreement during the interval between the filing of -9- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

109 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA the case and the formal rejection of the executory contract. Bildisco, 465 U.S. at In other words, regardless of whether the retiree insurance benefit arises from a collective bargaining or not, the benefit can be modified or suspended during the pendency of the chapter 9 case. Id. at 24. The court explained: Suspending payment of various obligations during a case under the Bankruptcy Code is a routine aspect of the reorganization process. When the Supreme Court clarified in Bildisco that it is not an unfair labor practice for a chapter 11 debtor unilaterally to implement changes to a collective bargaining agreement -- i.e. unilaterally to breach it -- before the bankruptcy court acts on a 365 motion to reject the contract, it necessarily determined that such unilateral changes do not offend due process. The rationale is that upon filing a chapter 11 case, the debtor becomes "empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing." [internal citations to Bildisco omitted]. 478 B.R. at 31. Thus, a line of decisions from Bildisco to Stockton have established that: (a) a chapter 9 debtor may make unilateral changes to its MOUs pending a decision to assume or reject under Section 365, free of any federal or state law requirements regarding negotiation to impasse or obtaining union consent, subject only to the debtors continuing obligations (whether under federal or state law) to negotiate with the representatives of its employees; and (b) a chapter 9 debtor s motion to reject an MOU should be granted if the Bildisco standards are met. Here, the City s actions fall well within the four corners of Bildisco. Employee wages and benefits comprise approximately 75% of the City s operating costs and, unless they are reduced, they are a substantial burden on the debtor. However, the Dissenting Unions will not consent to the proposed modifications. The City negotiated for a substantial amount of time with all of its unions for a set of MOU modifications that were required to implement the Pendency Plan. Several unions agreed, some did not, but it would not be fair to apply the concessions to only the consenting unions. Accordingly, the City concluded that it would make substantially the same changes to each MOU. With the Dissenting Unions unwilling to consent, the City is forced to reject their MOUs. The City s financial crisis is well established and the changes are absolutely necessary to implement the Pendency Plan. The City provides basic and essential services to its residents that -10- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

110 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA would not otherwise be available to them, and the City recognizes that it does so through the City employees. Unfortunately, employee wages and benefits are such a large percentage of City expenditures that in difficult financial times like these the City cannot operate under the confines of the Pendency Plan and still honor the MOUs of the Dissenting Unions. Accordingly, the balance of the equities weighs in favor of granting the Motion to reject the MOUs of the Dissenting Unions. D. Bankruptcy Code Section 365 Preempts State Labor Law In Bildisco, the U.S. Supreme Court held that the National Labor Relations Board is precluded from enforcing the terms of a collective bargaining agreement by filing unfair labor practice charges against the debtor for violating federal labor law. The Court explained that [T]hough the Board's action is nominally one to enforce 8(d) of that [National Labor Relations] Act, the practical effect of the enforcement action would be to require adherence to the terms of the collective-bargaining agreement. But the filing of the petition in bankruptcy means that the collective-bargaining agreement is no longer immediately enforceable, and may never be enforceable again. Consequently, Board enforcement of a claimed violation of 8(d) under these circumstances would run directly counter to the express provisions of the Bankruptcy Code and to the Code's overall effort to give a debtor-in-possession some flexibility and breathing space. We conclude that from the filing of a petition in bankruptcy until formal acceptance, the collective-bargaining agreement is not an enforceable contract within the meaning of NLRA 8(d). 104 S.Ct. at 1199 (internal citations omitted). The Court reconciled the two statutes, the National Labor Relations Act and the Bankruptcy Code, by determining that there was no enforceable contract for the NLRB to enforce. Since the National Labor Relations Act ( NLRA ) does not cover municipal employees, many states, including California, have adopted their own labor relations laws governing the rights of municipal employees to organize and bargain collectively with their employers. And each of the bankruptcy courts to have considered the question have held that such state laws governing collective bargaining and collective bargaining agreements must yield to Section 365 of the Bankruptcy Code. In the Vallejo case, Judge McManus expressly held that state laws that interfere with the operation of Bankruptcy Code Section 365 are unconstitutional, because the -11- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

111 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA U.S. Constitution authorizes the federal government to enact uniform bankruptcy laws, as to which states cannot interfere. 403 Bankr. at The court rejected imposition of any state law on the standards for rejection of MOUs, including specifically the standards described in Sonoma County Organization of Public Employees v. County of Sonoma, 23 Cal. 3d 296, 152 Cal. Rptr. 903 (1979). Id. at 77. In its affirmance of Judge McManus decision, the District Court held that state labor law is preempted by federal bankruptcy law with respect to a debtor s ability to reject MOUs under Section B.R. at Similarly, in the Stockton decision, Judge Klein also held that the Section 365 power to reject contracts preempts contrary state law, including provisions of the California state constitution that prohibit the enactment of laws that impair the obligation of contracts. 478 B.R. at 16. The decisions in the Stockton and Vallejo cases are entirely consistent with Supreme Court and Ninth Circuit jurisprudence on the interplay of the Bankruptcy and Supremacy Clauses of the U.S. Constitution. For example, in Central Virginia Community College v. Katz, 546 U.S. 356, 370, 126 S. Ct. 990, 1000 (2006), the U.S. Supreme Court recently held that, notwithstanding the state sovereign immunity provisions of the Tenth Amendment to the Constitution, states are not immune from being sued in a bankruptcy court for avoidance of a preferential transfer and must comply with an order under Bankruptcy Code Section 550 to return the avoided transfer. The Court explained that Article I, 8, cl. 4 the U.S. Constitution, the Bankruptcy Clause, which empowers Congress to establish uniform Laws on the subject of Bankruptcies throughout the United States, encompasses the entire subject of bankruptcy, and the power granted by the Bankruptcy Clause is a unitary concept, rather than an amalgam of discrete segments. 546 U.S. at 370, 126 S. Ct. at In an earlier case, International Shoe Co. v. Pinkus, 278 U.S. 261, 49 S. Ct. 108 (1929), the Court held that a state is without power to make or enforce any law that conflicts with the national bankruptcy laws. Very recently, in Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 980, as amended in 677 F.3d 869 (9th Cir. 2012) the U.S. Court of Appeals for the Ninth Circuit held that federal bankruptcy law preempts state law where state law stands as an obstacle to the accomplishment and execution of the purposes and objectives of -12- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

112 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA the Bankruptcy Code. Specifically, the Ninth Circuit held that Bankruptcy Code Section 524(g), which governs the confirmation of chapter 11 plans involving asbestos-related claims, preempts state laws that limit or restrict the right of an insured to transfer its rights in an insurance contract because, as the court explained, enforcing the anti-assignment provisions would subject virtually all Section 524(g) plans (and the transfer of insurance coverage to Section 524(g) trusts) to insurance company vetoes. See also McCarther-Morgan v. Asset Acceptance, LLC (In re McCarther-Morgan, 2009 Bankr. Lexis 4579 (B.A.P. 9th Cir. 01/27/2009) (claims arising under California Fair Debt Collection Practices Act, Cal. Civ. Code 1788 et seq., are preempted by comprehensive scheme for handling proofs of claim in bankruptcy cases) (copy attached to Compendium as Exhibit 3). In the instant case, Bankruptcy Code Section 365 must preempt state law that interferes with the ability of the City to reject the MOUs and change the terms and conditions of employment, including modifying employee benefits. If the City is required to comply with state law on collective bargaining and modifying employee benefits, the real effect would be to deny the City access to the powers of Section 365 of the Bankruptcy Code. E. The City Made Reasonable Efforts to Negotiate Consensual Modifications The record is beyond dispute that the City approached the Dissenting Unions and attempted to reach a consensual deal on the modifications to their MOUs. The City reached out to the SBPEA as early as February 2012 to discuss modifications to the MOU. Meetings between the City and SBPEA were held in May Negotiations began in June 2012, and negotiations continued through July 25, After the Petition Date, the City continued to meet with the SBPEA, including in October and December The City continued to provide financial information and, during January 2013, the City made three additional requests for meetings with the SBPEA, as to which the City received no responses. On January 15, 2013 the City notified the SBPEA in writing that it would soon impose the proposed MOU modifications absent a consensual deal, but the SBPEA responded that it would not appear at any proposed meeting. See Leibrich Decl. at 22-30; Daube Decl. at 6-11 and CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

113 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA Beginning in April 2012, the City made efforts to meet and confer with the SBCPF (Firefighters) regarding possible modifications to the MOUs. After the filing of the Declaration of Fiscal Emergency on July 18, 2012, the City s negotiating team made several written requests to the SBCPF to meet and to negotiate regarding modifications to the MOU. The City and the SBCPF did participate in mediation, but the mediation did not lead to any agreement. See Leibrich Decl. at 22; Daube Decl. at 4-5. After the filing of the Declaration of Fiscal Emergency on July 18, 2012, the City s negotiating team met with the SBPOA (Police) on three occasions, on October 17, November 27 and December 12, 2012 regarding the City s proposed requests for MOU modifications. The City also continued to provide financial information requested by SBPOA, all in an effort reach a consensual deal. In January 2013, the City and SBPOA participated in a two-day mediation in an effort to reach consensual deal, however no deal was reached. See Leibrich Decl. at 21; Daube Decl. at 4. Notwithstanding the failure to reach agreement with the three Dissenting Unions, the City did reach agreement with four other unions and, having determined that it was facing a continuing financial emergency and that further negotiations with the Dissenting Unions would not change their minds, the City implemented the MOU modifications effective Feb. 1, 2013 and filed the instant Motion. Nothing more could be expected of the City it complied with the requirements and underlying policies of applicable law in attempting to negotiate a consensual deal. The City s efforts equal or exceed efforts made by other debtors who were found to have satisfied the Bildisco standards. For example, in the Vallejo case, Judge McManus found that (a) (b) (c) -14- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/ Since the entry of the order for relief, the City has met numerous times individually with IBEW in both on and off the record discussions. The City reached voluntary modifications of the CBAs with VPOA and CAMP, and an agreement for the rejection of the IAFF CBA, demonstrating that the City has been acting reasonably and making proposals that are reasonable. The City and IBEW have exchanged several proposals, and the court finds that all parties have made those proposals in a reasonable and good faith attempt to reach

114 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of (d) agreement. The court rejects the contention that the City is acting unreasonably or in bad faith. Given the differences among the City and IBEW in the respective discussions and the differences in the terms of their respective proposals, the court does not believe that a prompt and satisfactory resolution short of contract rejection is forthcoming STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA In re City of Vallejo, Findings of Fact and Conclusion of Law (Bankr. C.D. Cal. 8/31/2009) (Compendium, Exhibit 2, at 27). In its affirmance, the district court found that the Vallejo and its unions had been negotiating for a considerable time, and pursued judicially supervised settlement talks, but to no avail, and that satisfactory resolution short of contract rejection was unlikely, which satisfied the Bildisco reasonable efforts test. 432 B.R. at 274. Similarly, in an oft-cited decision, In re Rath Packing Co., 36 B.R. 979 (Bankr. N.D. Iowa 1984), aff d, 48 B.R. 315 (D. Iowa 1985), the bankruptcy court found, and the district court affirmed, that, although the parties did not engage in extensive prepetition negotiations, they did engage in negotiations during the six weeks prior to the hearing on the motion to reject. During those negotiations the debtor, like the City in the instant case, attempted to procure concessions that would make rejection of the collective bargaining agreement unnecessary, but agreement could not be reached. The court concluded that a consensual deal was not in the offing and approved the motion to reject the contract. See also In re Bloss Glass Co., 39 B.R. 694 (Bankr. D. Pa. 1984) (reasonable efforts to reach consensual deal found when debtor and union representatives met to discuss concessions in wage and benefit package); In re S.A. Mechanical, Inc., 1986 Bankr. Lexis 6051 (B.A.P. 9 th Cir. May 15, 1986) (debtor s rejection of collective bargaining agreement on petition date without any prepetition or postpetition negotiations with union does not meet the reasonable effort to negotiate Bildisco standard; denial of rejection motion affirmed) (copy attached to Compendium as Exhibit 4). The Declarations of Diana Leibrich and Linda Daube describe in detail the City s efforts to reach agreement with the unions on the MOU modifications. The City delayed implementation of the MOU modifications to facilitate the chances for consensual resolution CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

115 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA The City acted eminently in good faith in making determined efforts to achieve consensus, but it can no longer wait for the Dissenting Unions the City must implement its Pendency Plan. F. The MOUs of the Dissenting Unions are a Burden on the City In its resolutions adopting the modifications to the MOUs, the City Council found that (a) nearly two-thirds of the City s General Fund is tied directly to the salaries and benefits paid to City employees, (b) the City s labor costs for the Fiscal Year exceed the City s projected revenues, and (c) despite cost savings measures previously taken by the City, the City's financial situation is dire, with no available cash to meet on-going operating expenses, including payroll, and no revenue or other funding sources are available to balance the City's budget and address prior years' deficits. See Resolutions, Exhibits attached to Leibrich Decl. The cost savings from implementation of the MOU modifications and rejection of the Dissenting Unions MOUs are critical to the implementation of the Pendency Plan and the ability of the City to propose a confirmable plan of adjustment. The City s financial crisis is such that, even with these cuts in employee benefits, the City remains in dire financial straits. See Busch Decl. at 12. No one can reasonably dispute that the Dissenting Unions MOUs are a financial burden on the City and an obstacle to the rehabilitation of the City and its ability to provide services to its residents. If the City was a chapter 11 debtor, there would be no doubt that the Dissenting Unions MOUs should be rejected. Given the overwhelming legal precedent that the standards for rejection of collective bargaining agreements described in Bildisco apply in chapter 9 as well, there should be no doubt in this chapter 9 case that the Dissenting Unions MOUs are a burden on the City and should be rejected. G. On Balance, the Equities Weigh in Favor of Granting the Motion The power to reject an executory contract is one of the fundamental powers that Congress provides debtors to enable them to reorganize their financial affairs. That said, the effects on the non-debtor counterparties cannot be underestimated. Very large invoices for prepetition services and delivery of goods often do not get paid, sometimes resulting in a spate of creditor bankruptcies. Similarly, bondholders and other investors, sometimes holding hundreds of millions of dollars of unsecured high yield bonds, often see their claims valued at zero in a -16- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

116 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA bankruptcy case, and often those investors represents pools of pension plan investments. Clearly, when a bankruptcy court considers a motion to reject an executory contract, there are many equities on the side of the scale representing the non-debtor contract counterparties and their interests. But those equities ultimately must yield, as the U.S. Supreme Court explained in Bildisco, to the Congressional policy and federal law favoring the rehabilitation of debtors, and as the courts in the Vallejo and Stockton decisions explained, the preemption of contrary state law under Supremacy and Bankruptcy Clauses of the U.S. Constitution. Here, in the instant case, the resuscitation of the City and its financial affairs, and the preservation of the jobs of the City s employees, is entirely dependent on the City making adjustments, however dramatic, to its principal costs of operations employee wages and benefits. Our bankruptcy system is different from that in other developed nations where liquidation, rather than rehabilitation, is the norm for bankrupt entities. In the U.S. our bankruptcy laws favor rehabilitation; and Section 365 reflects a Congressional policy choice that, in the long run, the nation s economy is better off by saving enterprises and the job s they generate. That s exactly what is driving the City s agenda its desire to survive as a viable entity for the benefit of its residents and employees. The Dissenting Unions have made a choice to oppose the necessary cost cutting. It is a self-interested choice, but theirs to make. The Court, however, must decide whether the City has shown that the survival of the City, the services it provides to 200,000 people, and the more than 950 jobs it provides to its employees outweigh the interests of the Dissenting Unions. The City believes it has made that showing. H. Conclusion For all of the foregoing reasons, the City respectfully requests that the Court enter an order, in substantially the form attached hereto as Exhibit A, granting the Motion, approving the interim modifications to the MOUs that went into effect on February 1, 2013, approving the \ \ \ \ \ \ -17- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

117 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of rejection of the MOUs of the Dissenting Unions, and requiring that all interested parties cooperate in the implementation of those employee benefit modifications Dated: March 4, 2013 STRADLING YOCCA CARLSON & RAUTH A Professional Corporation By: /s/ Paul R. Glassman Paul R. Glassman Fred Neufeld Attorneys for City of San Bernardino, Debtor 28 STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA -18- CITY S MOTION TO REJECT AGREEMENTS WITH SBPEA, SBPOA AND SBCPF DOCSOC/ v5/

118 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of Exhibit A

119 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of PAUL R. GLASSMAN (State Bar No ) FRED NEUFELD (State Bar No ) LAURA L. BUCHANAN (State Bar No ) KATHLEEN D. DeVANEY (State Bar No ) STRADLING YOCCA CARLSON & RAUTH A Professional Corporation 100 Wilshire Blvd., Suite 440 Santa Monica, CA Telephone: (424) Facsimile: (424) pglassman@sycr.com lbuchanan@sycr.com kdevaney@sycr.com JAMES F. PENMAN (State Bar No ) CITY ATTORNEY 300 North D STREET, Sixth Floor San Bernardino, CA Telephone: (909) Facsimile: (909) Penman_Ja@sbcity.org Attorneys for Debtor City of San Bernardino In re CITY OF SAN BERNARDINO, CALIFORNIA, Debtor. UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION Case No. 6:12-bk MJ Chapter 9 ORDER: (A) APPROVING CITY OF SAN BERNARDINO S FEBRUARY 1, 2013 INTERIM MODIFICATIONS TO COLLECTIVE BARGAINING AGREEMENTS WITH SAN BERNARDINO PUBLIC EMPLOYEES ASSOCIATION, SAN BERNARDINO POLICE OFFICERS ASSOCIATION AND SAN BERNARDINO CITY PROFESSIONAL FIREFIGHTERS; AND (B) APPROVING REJECTION OF SUCH COLLECTIVE BARGAINING AGREEMENTS Hearing: Date: March 27, 2013 Time: 10:00 a.m. Place: United States Bankruptcy Court 3420 Twelfth Street Courtroom 301 Riverside, CA STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA DOCSOC/ v1/

120 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA Order Upon the Motion of debtor City of San Bernardino ( City ) for an order pursuant to Bankruptcy Code Sections 365, 901 and 904 approving (a) the interim modifications to the City s collective bargaining agreements ( MOUs ) with three employee organizations (the San Bernardino Public Employees Association, the San Bernardino Police Officers Association and the San Bernardino City Professional Firefighters, Local 891, collectively the Unions ) that went into effect on February 1, 2013, and (b) the rejection of the MOUs with such labor organizations (the Motion ), hearings were held in this United States Bankruptcy Court for the Central District of California (the Court ) on March 27, 2013 and (the Hearings ). The Court, having determined that notice of the Motion and of the Hearings was consistent with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the Local Rules of this Court and concepts of due process; and having reviewed the papers filed in support of and in opposition to the Motion and the arguments of counsel at the Hearings and thereupon concluded that the Motion satisfies the tests articulated in N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984) for interim modifications to and rejection of collective bargaining agreements as those tests have been applied in other recent chapter 9 cases; and having concluded that rejection of the MOUs is in the best interests of the City and its creditors generally; IT IS HEREBY ORDERED AND ADJUDGED THAT: 1. The Motion is granted as provided below. 2. The interim modifications to the MOUs pursuant to City Council Resolutions , , , , , , and (the Resolutions ) that went into effect on February 1, 2013 are approved as of that date. 2. The MOUs are rejected pursuant to Bankruptcy Code Section 365 and they shall have no further force or effect other than for the purpose of calculating rejection damages claims under Bankruptcy Code 365(g). 3. All interested parties in this chapter 9 case shall cooperate with the City in implementing the modifications to the MOUs contained in the Resolutions. 5. All objections to the Motion and entry of this Order are overruled. 2 DOCSOC/ v1/

121 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of The Court shall retain jurisdiction to resolve any issues or disputes regarding the interpretation or implementation or this Order. # # # STRADLING YOCCA CARLSON & RAUTH LAWYERS SANTA MONICA DOCSOC/ v1/

122 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of PROOF OF SERVICE OF DOCUMENT I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is: 100 Wilshire Blvd., Suite 440, Santa Monica, CA A true and correct copy of the foregoing document entitled NOTICE OF MOTION AND MOTION OF DEBTOR CITY OF SAN BERNARDINO, PURSUANT TO 11 U.S.C. 365, 901 AND 904, FOR ORDER APPROVING: (A) REJECTION OF COLLECTIVE BARGAINING AGREMEENTS WITH SAN BERNARDINO PUBLIC EMPLOYEES ASSOC., SAN BERNARDINO POLICE OFFICERS ASSOC. AND SAN BERNARDINO CITY PROFESSIONAL FIREFIGHTERS; AND (B) FEBRUARY 1, 2013 INTERIM MODIFICATIONS TO SUCH COLLECTIVE BARGAINING AGREEMENTS will be served or was served (a) on the judge in chambers in the form and manner required by LBR (d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On March 4, 2013, I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the addresses stated below: The United States trustee will be served electronically by the court to: United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov ATTORNEYS FOR DEBTOR Paul R. Glassman pglassman@sycr.com Jerrold Abeles abeles.jerry@arentfox.com, labarreda.vivian@arentfox.com Franklin C Adams franklin.adams@bbklaw.com, arthur.johnston@bbklaw.com;lisa.spencer@bbklaw.com;bknotices@bbklaw.com Joseph M Adams jadams@lawjma.com Andrew K Alper aalper@frandzel.com, efiling@frandzel.com;ekidder@frandzel.com Thomas V Askounis taskounis@askounisdarcy.com Anthony Bisconti tbisconti@bmkattorneys.com Brett Bissett brett.bissett@klgates.com, carolyn.orphey@klgates.com;klgatesbankruptcy@klgates.com Jeffrey E Bjork jbjork@sidley.com Sarah C Boone sboone@marshackhays.com, ecfmarshackhays@gmail.com J Scott Bovitz bovitz@bovitz-spitzer.com John A Boyd fednotice@tclaw.net Jeffrey W Broker jbroker@brokerlaw.biz Deana M Brown dbrown@milbank.com Michael J Bujold Michael.J.Bujold@usdoj.gov Christopher H Conti chc@sdlaborlaw.com, sak@sdlaborlaw.com Christina M Craige ccraige@sidley.com Alex Darcy adarcy@askounisdarcy.com Susan S Davis sdavis@coxcastle.com Robert H Dewberry robert.dewberry@dewlaw.net Todd J Dressel dressel@chapman.com, lubecki@chapman.com Chrysta L Elliott elliottc@ballardspahr.com, manthiek@ballardspahr.com Scott Ewing contact@omnimgt.com, sewing@omnimgt.com;katie@omnimgt.com John A Farmer jfarmer@orrick.com Paul R. Glassman pglassman@sycr.com Robert P Goe kmurphy@goeforlaw.com, rgoe@goeforlaw.com;mforsythe@goeforlaw.com David M Goodrich dgoodrich@marshackhays.com, ecfmarshackhays@gmail.com Christian Graham cgraham23@dlblaw.net Everett L Green everett.l.green@usdoj.gov Chad V Haes chaes@marshackhays.com, ecfmarshackhays@gmail.com James A Hayes jhayes@jamesahayesaplc.com This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012 DOCSOC/ v1/ F PROOF.SERVICE

123 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of M Jonathan Hayes jhayes@srhlawfirm.com, roksana@srhlawfirm.com;carolyn@srhlawfirm.com;eroberson@srhlawfirm.com;erin@srhlawfirm.com D Edward Hays ehays@marshackhays.com, ecfmarshackhays@gmail.com Eric M Heller eric.m.heller@irscounsel.treas.gov Jeffery D Hermann jhermann@orrick.com Bonnie M Holcomb bonnie.holcomb@doj.ca.gov, rosita.eduardo@doj.ca.gov Whitman L Holt wholt@ktbslaw.com Michelle C Hribar mch@sdlaborlaw.com Steven J Katzman SKatzman@bmkattorneys.com Jane Kespradit jane.kespradit@limruger.com, amy.lee@limruger.com Mette H Kurth kurth.mette@arentfox.com Sandra W Lavigna lavignas@sec.gov Michael B Lubic michael.lubic@klgates.com, jonathan.randolph@klgates.com Richard A Marshack rmarshack@marshackhays.com, lbergini@marshackhays.com;ecfmarshackhays@gmail.com Gregory A Martin gmartin@winston.com David J Mccarty dmccarty@sheppardmullin.com, pibsen@sheppardmullin.com Reed M Mercado rmercado@sheppardmullin.com Fred Neufeld fneufeld@sycr.com Aron M Oliner roliner@duanemorris.com Scott H Olson solson@seyfarth.com Brian T Pedigo brian@pedigolaw.com Dean G Rallis drallis@sulmeyerlaw.com Christopher O Rivas crivas@reedsmith.com Kenneth N Russak krussak@frandzel.com, efiling@frandzel.com;dmoore@frandzel.com Gregory M Salvato gsalvato@salvatolawoffices.com, calendar@salvatolawoffices.com Mark C Schnitzer mschnitzer@rhlaw.com, mcschnitzer@gmail.com Diane S Shaw diane.shaw@doj.ca.gov Jason D Strabo jstrabo@mwe.com, apolin@mwe.com Cathy Ta cathy.ta@bbklaw.com, Arthur.Johnston@bbklaw.com;lisa.spencer@bbklaw.com Benjamin R Trachtman btrachtman@trachtmanlaw.com, sstraka@trachtmanlaw.com Matthew J Troy matthew.troy@usdoj.gov United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov Anne A Uyeda auyeda@bmkattorneys.com Annie Verdries verdries@lbbslaw.com Joseph M Welch jwelch@buchalter.com, svanderburgh@buchalter.com;docket@buchalter.com;bkgroup@buchalter.com Brian D Wesley brian.wesley@doj.ca.gov Kirsten A Roe Worley kworley@wthf.com, bcordova@wthf.com Pamela Jan Zylstra zylstralaw@gmail.com Service information continued on attached page 2. SERVED BY UNITED STATES MAIL: On March 4, 2013, I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Service information continued on attached page 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on March 4, 2013, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012 DOCSOC/ v1/ F PROOF.SERVICE

124 Case 6:12-bk MJ Doc Filed 03/04/13 07/09/15 Entered 03/04/13 07/09/1510:42:39 18:29:48 Desc Main Document Page of PRESIDING JUDGE Honorable Meredith A. Jury (Overnight delivery) U.S. Bankruptcy Court 3420 Twelfth Street, Suite 325 Riverside, CA Via overnight mail with Norco Delivery Tracking number: V10 Service information continued on attached page I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct. March 4, 2013 Christine Pesis /s/ Christine Pesis Date Printed Name Signature This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012 DOCSOC/ v1/ F PROOF.SERVICE

125 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 125 of 354 EXHIBIT D

126 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX David M. Goodrich (CA Bar No ) dgoodrich@sulmeyerlaw.com SulmeyerKupetz A Professional Corporation 333 South Hope Street, Thirty-Fifth Floor Los Angeles, California Telephone: Facsimile: Corey W. Glave, (CA Bar No ) SBCPFattorney@gmail.com Attorney at Law nd Street Hermosa Beach, California Telephone: (323) Facsimile: (310) Attorneys for San Bernardino City Professional Firefighters Local 891 In re City of San Bernardino, California, Debtor. UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION CASE NO. 6:12-bk MJ Chapter 9 REPLY TO CITY OF SAN BERNARDINO'S SUPPLEMENTAL BRIEF IN OPPOSITION TO THE MOTION CONFIRMING THAT NO STAY APPLIES, OR, IN THE ALTERNATIVE, RELIEF FROM THE AUTOMATIC STAY FILED BY THE SAN BERNARDINO CITY PROFESSIONAL FIREFIGHTERS; DECLARATIONS OF COREY W. GLAVE AND DAVID M. GOODRICH IN SUPPORT Hearing Date and Time: Date: September 11, 2014 Time: 1:30 p.m. Ctrm: 301 Place: 3420 Twelfth Street Riverside, CA DGOODRICH\ /4/2014 (3:38 PM)

127 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page 1272 of of TABLE OF CONTENTS 2 Page 3 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX I. Summary of Reply... 2 A. The MOU Does Not Cover All of the Terms of Employment B. The City is Applying the Holding of the Bildisco Decision Well Beyond Its Limits and Attempting to Use Rejection as Authority to Violate State Law C. Section 922 Does not Bar the Planned Action D. The City Failed to Meet and Confer Before Making Changes to Terms and Conditions of Employment E. The PERB Court Specializes in Adjudicating the Claims Asserted by the SBCPF F. Bildisco Does Not Bar the Planned Action G. The City Has Waived All Arguments on Preemption H. The City Is Impermissibly Arguing the Merits of Its Defenses Within the Limited Confines of the SBCPF's Motion II. Conclusion DECLARATION OF COREY GLAVE DECLARATION OF DAVID M. GOODRICH...21 DGOODRICH\ /4/2014 (3:38 PM) i

128 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of TABLE OF AUTHORITIES 2 Page 3 SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX CASES Banning Teachers Assn. v. Public Employment Relations Bd., 44 Cal.3d 799, 804 (1988) Bellini Imports, Inc. v. The Mason & Dixon Lines, Inc., 944 F.2d 199, 201 (4th Cir. 1991)... 8 Chick Smith Ford, 46 B.R. 515, 519 (Bankr. M.D. Fla. 1985)... 6 County of Los Angeles v. Los Angeles County Employee Relations Com., 56 Cal.4th 905, 922 (2013) De Tie v. Orange County, 152 F.3d 1109 (9th Cir. Cal. 1998)... 9 Fighters Union v. City of Vallejo, 12 Cal.3d 608, 621 (1974) In re Curtis 40 B.R. 795, (Bankr. D. Utah 1984) or In re Tucson Estates, 912 F. 2d 1162 (9th Cir. 1990) In re Gull Air, Inc., 890 F.2d 1255, 1262, 21 C.B.C.2d 1324, (1st Cir. 1989)... 8 In re Jefferson County, Alabama, 484 B.R. 427 (Bankr. N.D. Ala. 2012)... 9 In re Pac. Gas And Elec. Co., 2004 U.S. Dist. LEXIS 22023, (N.D. Cal. Sept. 30, 2004), citing Public Serv Co., 884 F.2d 11, 14; Data-Link, 715 F.2d at 378 (7th Cir. Ind. 1983)... 6 N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984)... 2, 5 Paulsen v. Local No. 856 of Internat. Brotherhood of Teamsters, 193 Cal.App.4th 823, 830 (2011) San Mateo City School Dist. v. Public Employment Relations Bd., 33 Cal.3d 850, 856 (1983) Schwartz v. United States (In re Schwartz), 954 F.2d 569 (9th Cir. Wash. 1992)... 9 DGOODRICH\ /4/2014 (3:38 PM) ii

129 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX STATUTES 11 U.S.C , 8 11 U.S.C. 362(a)... 6, 8, 9, U.S.C. 362(c) U.S.C. 362(d) U.S.C , 7, 8, 9 11 U.S.C. 922(a)... 8, 9, U.S.C. 922(a)(1) U.S.C. 922(a)(2) U.S.C. 922(d) U.S.C. 362(d)... 10, U.S.C. 502(b) California Gov't. Code Code of Civil Procedure DGOODRICH\ /4/2014 (3:38 PM) iii

130 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of I. Summary of Reply The San Bernardino City Professional Firefighters Local 891 ("SBCPF") filed a Motion for Confirming that No Stay Applies or, in the alternative, Relief from the Stay ("Motion for Relief") seeking an order allowing it to proceed with an action that relates to post-petition acts of the City which are not tied to any pre-petition agreement or claim. The City argues Section 922 and 7 Bildisco 1 bars all post-petition actions. 2 Section 922 does not "bar" all post-petition actions. To SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX the extent Bildisco "bars" a post-petition action, it does not bar the SBCPF's planned action because the action does not relate to any pre-petition contractual rights of the SBCPF. Instead, any action to address the City's violations of state law (all unrelated to the MOU) cannot be shielded under the injunctions provided by 362 or 922. Neither stay applies. Even though the City claims the MOU controls these matters, the City has still failed to submit the MOU into evidence. The reason for the omission is obvious - the MOU does not govern these matters. Further, while the City would like to litigate its actions within the context of this Motion, the merits of the City's defenses are best left for the underlying litigation, not law and motion. The litigation should be adjudicated before the PERB, a highly specialized court designed to adjudicate the types of claims asserted by the SBCPF, and the Court should enter an order allowing the litigation to proceed. Accordingly, the Court should grant the relief requested by the SBCPF. A. The MOU Does Not Cover All of the Terms of Employment. At the preliminary hearing on the Motion for Relief held on July 29, 2014, the City proclaimed that all of the terms and conditions of employment between the City and the SBCPF are contained in the Memorandum of Understanding ("MOU"). 3 The City's statement was The Bildisco case is cited throughout this pleading and all references to "Bildisco" refer to N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984). 2 Curiously, the City goes to great lengths to defend its actions that violated state law. Instead of taking a defensive position, the City needed only take corrective measures and follow state law and the Motion for Relief would be moot. To date, the City has failed to take those corrective measures and continues to disparage the significance of state law in the process. 3 See Exhibit 1, Pages to the Declaration of David M. Goodrich, attached hereto. DGOODRICH\ /4/2014 (3:38 PM) 2

131 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX apparently made in an effort to convince the Court that the process of rejection of the MOU casts an infinite net over all terms of employment thereby rendering all rights contractually based. Without briefing the issue or offering the MOU into evidence, the City argued on July 29, 2014 the "entire employment relationship" between the City and the SBCPF is covered by the MOU. 4 One month later, the City again failed to offer the MOU into evidence. Nevertheless, the City continues to bombard the Court with inadmissible hearsay evidence as part of its claim that the City's Motion to Reject the Collective Bargaining Agreement with the SBCPF ("Rejection Motion") empowers the City to bypass state procedural and substantive law because all terms of employment are contained in the MOU. If the MOU truly governed all of the terms and conditions of employment, wouldn't the MOU be essential for this Court's consideration? Instead, the City wants the Court to rely exclusively on inadmissible hearsay and blind faith. The City has failed to meet its burden of proof and any reference to matters contained in the MOU should be ignored. Additionally, the City has yet to explain how the MOU usurps all terms of employment including those terms and conditions which are absent from the MOU. In contrast to the City's unsubstantiated claims, the City Charter and California Government Code demonstrate not all terms of employment are found in the MOU. Specifically, Section 186 of the City Charter states: "Section 186. Salaries. There is hereby established for the City of San Bernardino a basic standard for fixing salaries, classifications, and working conditions of the employees of the Police and Fire Departments of the City of San Bernardino, and the Mayor and the Common Council in exercising the responsibility over these departments vested in them by this Charter shall hereafter be guided and limited by the following provisions..." San Bernardino City Charter, Section See Exhibit 1, Page 16, Lines 6-10, to the Declaration of David M. Goodrich. DGOODRICH\ /4/2014 (3:38 PM) 3

132 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX It would be quite a stretch of the imagination to interpret Section 186 of the City Charter - which serves as the City's constitution - as anything other than a statute that governs the salaries, classifications, and working terms and conditions of the firefighters. The plain language of the City's Charter shows not all of the terms and conditions of employment for the firefighters are contained in the MOU. While the City has claimed that the MOU covers all aspects of employment of the firefighters, the City Charter demonstrates otherwise. As a result, a postpetition violation of Section 186 is enforceable as a statutory right - not a contractual default. Additionally, various state statutes also govern the terms and conditions of employment of the firefighters. For example, California Gov't. Code (aka "PERL") regulates pensions and implementation of cost sharing between a municipality and a collective bargaining unit. The Gov't. Code also provides procedures for pursuing grievances of employees covered by a collective bargaining agreement. The process for remedying violations of California labor law is established under the California Code for Civil Procedure. 5 As these statutes demonstrate, the MOU does not govern the entire employment relationship between the City and the SBCPF. In reality, state law provides independent rights and obligations. As discussed below, the lack of incorporation of all of the terms and conditions of employment within the MOU means the process of rejection, including the order rejecting the MOU (should one be entered), cannot and does not allow the City to make unilateral changes to all terms and conditions of employment where such terms and conditions are governed exclusively by state law. At this juncture, there is simply no legal justification for protecting the City's unlawful actions and the Court should allow the SBCPF to pursue its rights and remedies. 5 The laying off of senior P-1 employees in violation of the Charter and Civil Service Rules would give rise to a Petition for Writ of Mandate pursuant to Code of Civil Procedure Under California state law a writ of mandate may be issued by any court to any inferior tribunal, corporation, board, or person, to compel the performance of an act which the law specially enjoins, as a duty resulting from an office, trust, or station, or to compel the admission of a party to the use and enjoyment of a right or office to which the party is entitled, and from which the party is unlawfully precluded by that inferior tribunal, corporation, board, or person. C.C.P This issue has become moot as the City has rescinded the Layoff/Termination notices to the two senior P-1 employees; evidently realizing that the action was truly unlawful, and/or unnecessary. DGOODRICH\ /4/2014 (3:38 PM) 4

133 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of B. The City is Applying the Holding of the Bildisco Decision Well Beyond Its Limits and Attempting to Use Rejection as Authority to Violate State Law. The City believes the N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct (1984) decision provides boundless authority to trample state law procedure and substance as part of the process of rejection of the MOU. Bildisco does not go so far. In Bildisco, the Supreme Court found a pre-petition collective bargaining agreement to be 7 "unenforceable" after the filing of a chapter 11 bankruptcy petition. 6 Bildisco at 532. The SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX Supreme Court went on to explain that certain pre-rejection unilateral modifications could be made by a debtor because the contract was not enforceable and may never be enforceable again. Id. at 532. Unfortunately, the reasoning of Bildisco on "enforceability" of a collective bargaining agreement is somewhat ambiguous, 7 but nevertheless it fits within the framework of the Bankruptcy Code. Here's how: a unilateral change to a contract generally results in a breach. A breach leads to the activation of default rights for the non-breaching party. One right typically found in a default clause is contract termination. Upon an election of contract termination, the non-breaching party is relieved of most contractual obligations (excluding provisions such as nondisclosure, anti-assignment, etc.) and may enforce its rights to pursue damages, specific performance, etc., against the defaulting party. In a bankruptcy case, however, any modification to a pre-petition contract by a debtor cannot be "immediately enforced" by the non-breaching 19 party. 8 Again, Bildisco reaches the conclusion that the contract is "unenforceable" without reference to a particular reason the contract is "unenforceable." It is likely the Bildisco court is referring to the stay on enforcement of rights of a creditor as a result of the imposition of the automatic stay which enjoins "immediate" enforcement of a contract. This stay on enforcement It is noteworthy that this section of the Bildisco decision was a plurality decision. The remaining parts of Bildisco were unanimous. 7 The Bildisco court does reference the automatic stay of enforcement of a pre-petition claim and notes that a rejected contract renders a claim arising from a rejected contract a pre-petition claim. 8 "But the filing of the petition in bankruptcy means that the collective-bargaining agreement is no longer immediately enforceable." See Bildisco at 532. DGOODRICH\ /4/2014 (3:38 PM) 5

134 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX appears to be the basis for the Bildisco court's conclusion that a collective bargaining agreement is not "immediately enforceable" after a petition is filed. Because the collective bargaining agreement is not "immediately enforceable" after a petition is filed by operation of the automatic stay, modifications which breach the collective bargaining agreement cannot be enforced by a union because any breach of the collective bargaining agreement is not "immediately enforceable" without an order of the bankruptcy court allowing enforcement (i.e., relief from the automatic stay). Even though an executory contract is not "immediately enforceable" by the non-debtor party, a non-debtor party must still continue to perform under a pre-petition executory contract until it is rejected. In re Pac. Gas And Elec. Co., 2004 U.S. Dist. LEXIS 22023, (N.D. Cal. Sept. 30, 2004), citing Public Serv Co., 884 F.2d 11, 14; Data-Link, 715 F.2d at 378 (7th Cir. Ind. 1983); Chick Smith Ford, 46 B.R. 515, 519 (Bankr. M.D. Fla. 1985). Once rejected, the executory contract is no longer enforceable by the non-debtor or the debtor. Chick Smith Ford, 46 B.R. 515, 519 (Bankr. M.D. Fla. 1985). In this Motion, the SBCPF is not asking the Court to allow it to take action to enforce the City's breach of the MOU resulting from its unilateral modifications to the MOU. If, hypothetically, the Court was asked to find cause existed to terminate or modify the automatic stay so the City's breach could be enforced by the SBCPF, the Court would be well within its scope of authority under 362(d) to grant relief. Instead, the SBCPF has asked for very narrow relief authorizing it to pursue certain rights and remedies provided outside the confines of the MOU and established under state law. There simply is no "bar" to the relief sought. The City has taken the holding of Bildisco and brazenly expanded its findings to accommodate its position. It is not disputed that Bildisco found unilateral modifications may be made to a collective bargaining agreement before rejection. While not explained in any detail in Bildisco, pre-rejection modifications to a collective bargaining agreement may be made because a breach (i.e., unilateral modification) of a collective bargaining agreement by a debtor is not "immediately enforceable" by a union based upon Section 362(a)'s stay on enforcement. Further, a union remains bound by a collective bargaining agreement which has not been rejected even if the collective bargaining agreement has been breached by a debtor vis-a-vis unilateral DGOODRICH\ /4/2014 (3:38 PM) 6

135 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX modifications. Understanding the interplay of these core concepts yields a result consistent with the Bildisco court's holding - pre-rejection modifications may be made because a union cannot enforce the collective bargaining agreement unless it obtains relief from the automatic stay. Unlike the modifications addressed in Bildisco, the City has unilaterally modified terms and conditions of employment which are not governed by the MOU. In defense of these unilateral changes, the City argues the process of rejection of a collective bargaining agreement under 365 authorizes changes to all of the terms and conditions of employment because all terms and conditions of employment are controlled by the MOU. As discussed above, this position is factually incorrect - the City Charter and state law also govern the parties' employment relationship. Further, the City's position is legally incorrect. Bildisco found, inter alia, that unilateral modifications could not be enforced by a union pending rejection of a collective bargaining agreement. 9 Bildisco did not hold that: (a) unilateral modifications are authorized under bankruptcy law, or (b) the process of rejecting a collective bargaining agreement empowers a debtor to violate state procedures and substantive rights. Instead, Bildisco holds that modifications to the collective bargaining agreement are not immediately enforceable. Where terms or conditions of employment are not governed by a collective bargaining agreement, changes to employment cannot be unilaterally made under Bildisco because Bildisco did not address unilateral changes to rights not governed by a collective bargaining agreement. Reading contractual rights into an agreement where no such rights previously existed is an extension of the holdings and reasoning of Bildisco that is well beyond the four corners of the decision. Rejection of a collective bargaining agreement does not authorize violations of state rights and procedure and Bildisco does not provide a basis for denying the SBCPF's Motion for Relief. C. Section 922 Does not Bar the Planned Action. The City claims that 922 enjoins post-petition actions. 9 As noted above, the imposition of the automatic stay appears to be the basis for the Bildisco court's finding that unilateral modifications are unenforceable. DGOODRICH\ /4/2014 (3:38 PM) 7

136 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX The plain language does not support such a contention. In fact, Section 922 only supplements 362(a), which is incorporated into chapter 9 under 901, by providing a stay of (1) legal proceedings against an officer or inhabitant of a debtor relating to a "claim" 10, and (2) the enforcement of a lien on or arising out of taxes or assessments owed to the debtor. See 922(a). In fact, Collier opines: "Section 922 of the Bankruptcy Code both expands and modifies the provisions of section 362, which are incorporated into chapter 9 by section 901(a). The automatic stay is expanded by section 922(a)(1) to protect 'an officer or inhabitant of the debtor' and by section 922(a)(2) to preclude 'enforcement of a lien on or arising out of taxes or assessments owed to the debtor.' These provisions of section 922(a) are subject in both instances to sections 362(c), (d), (e), (f) and (g), and to the limitation of section 922(d) which precludes the automatic stay from applying to the application of pledged special revenues in a manner inconsistent with section " Collier on Bankruptcy [P ] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Noticeably absent from Collier's analysis of 922 is any mention of a stay of proceedings for post-petition acts or liabilities of a debtor. The reason is self-evident: the stay provided under 922 merely supplements 362(a) to prevent actions against officers or inhabitants of a municipality and to preclude the enforcement of tax lien. Section 362(a) does not enjoin actions arising post-petition. See Bellini Imports, Inc. v. The Mason & Dixon Lines, Inc., 944 F.2d 199, 201 (4th Cir. 1991); In re Gull Air, Inc., 890 F.2d 1255, 1262, 21 C.B.C.2d 1324, (1st 22 Cir. 1989). Similarly, Section 922 does not enjoin actions arising post-petition. If Congress intended to provide a stay that enjoins post-petition actions in chapter 9, it could have specifically done so, yet it did not. Section 922 does not expressly enjoin actions arising post-petition The extent and scope of the stay provided under 922, including the intentional use of the word "claim," was discussed in the SBCPF's Reply filed on July 28, 2014 [docket no.: 1070] and incorporated herein. DGOODRICH\ /4/2014 (3:38 PM) 8

137 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of The City cites to De Tie v. Orange County, 152 F.3d 1109 (9th Cir. Cal. 1998) for the 2 proposition that 922 enjoins post-petition actions. 11 A reading of De Tie reveals the De Tie court did not find that the underlying claim was stayed under 922. Id. Instead, the De Tie court reasoned that the delay in serving the summons was excusable because of the stay issued under 922. Id. at While the De Tie court discusses the date of a post-petition act of the debtor, it does not discuss the date of bankruptcy filing by the County of Orange or the fact the lawsuit was 7 filed post-petition. 12 See Id. The omission of this discussion is important because it appears the SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX De Tie court was not concerned with the post-petition filing of the action (which would have been void 13 if a stay applied because it would have violated the stay), but instead focused a party's excuse for failing to timely serve a summons. If De Tie court truly believed the post-petition action was stayed under 922, then the omission of any discussion regarding the fact that the action would be void as a matter of law is a curious omission and a grave oversight. The City urges this Court to apply the logic of De Tie here because the "reasonable inference" from the De Tie decision is 922(a) stays post-petition actions. The "reasonable inference" the City urges, however, is riddled with questions and is more speculation than substance. Regardless, if the De Tie court intended to hold a post-petition action was stayed under 922, it likely would have stated so, yet it did not. De Tie does not support the City's argument. The City also cites In re Jefferson County, Alabama, 484 B.R. 427 (Bankr. N.D. Ala. 2012), a bankruptcy decision from an 11th Circuit, in support of its position that 922(a) provides a stay on post-petition actions. In Jefferson County, the bankruptcy court's reasoned that 922(a) applies to post-petition actions is premised upon two theories: (1) a "claim" in chapter 9 includes post-petition liabilities of the debtor, and (2) the absence of the limiting language of 362(a) 11 It is noteworthy the De Tie case deals with the time for service of a summons and not the effect of 922 on postpetition claims against a municipality. 12 To support its argument, the City refers this Court to a fact (the petition date) not discussed in the De Tie case. See Id. 13 See Schwartz v. United States (In re Schwartz), 954 F.2d 569 (9th Cir. Wash. 1992) [violations of the automatic stay are ovoid, not voidable]. DGOODRICH\ /4/2014 (3:38 PM) 9

138 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page 138 of (which enjoins pre-petition claims) means 922(a) applies to post-petition liabilities of a debtor. Id. at As is discussed in the SBCPF's reply, the SBCPF does not hold a "claim" against the City 4 for post-petition violations of state law. 14 Oddly, Jefferson County cites the definition of "claim" SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX under 101(5), yet fails to discuss the limiting effect of 502(b) (i.e., a "claim" is determined on the petition date). The limiting effect of 502(b) is a integral part of defining "claim" and the failure of the Jefferson County court to discuss 502(b) suggests the decision is of questionable value. If a "claim" is not being enforced against a debtor, Section 922(a) does not apply. Further, the absence of the limiting language of 362(a) (i.e., the stay of any action on a pre-petition claim) does not conclusively establish an extension of a stay on post-petition actions under 922(a). The Jefferson County court notes the stay provided under 922(a) "supplements" the stay provided under 362(a). Id. at 448. Jefferson County's interpretation of 922(a) is more than a supplement to 362(a), it is a creation of an entirely new set of protections for a debtor. These protections should not be read into 922(a). If Congress intended 922 to stay all postpetition actions, it would have expressly done so. Section 922 does not stay post-petition actions. In sum, Section 922 does not provide an additional stay which enjoins all post-petition liabilities of a chapter 9 debtor. The City's reliance on Section 922 is unavailing. D. The City Failed to Meet and Confer Before Making Changes to Terms and Conditions of Employment. The City asserts that is provided the SBCPF with notice of its proposed changes and has 21 "met and conferred" with the SBCPF. 15 This is not true. The first time that the City and SBCPF met to negotiate was on May 23, At that time, the City did not provide the SBCPF with any proposals, but discussed what the City was proposing to include in the City s budget that was being discussed with the City Council. See Exhibit A, 10-23, to the Declaration of Corey Glave 14 The extent and scope of a "claim" was discussed in the SBCPF's Reply filed on July 28, 2014 [docket no.: 1070] and incorporated herein. 15 As discussed below, the merits of the SBCPF's claims are not a factor in determining "cause" under 11 U.S.C. 362(d). For the purposes of clearing the record, this section simply addresses the City's claims. DGOODRICH\ /4/2014 (3:38 PM) 10

139 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX ("Glave Dec."). At that time the City presented a Bat Chiefs proposal. A couple days later, the Bat Chiefs withdrew their plan and told the City that they needed to review the City Gate plan prior to making any recommendations. On June 26, 2014, after quickly reviewing the City Gate plan, and after rehiring the formerly retired Fire Chief, a new Drasil Plan was created (but not shared with the SBCPF). The City adopted the Drasil Plan on June 30th. See Exhibit A, 4-11:6; Exhibits B and C, generally, and Exhibit D, 6-18, to the Glave Dec. At no time prior to its passage and/or implementation did the City meet and confer over the Drasil Plan. The first time that the City provided the SBCPF with an actual negotiations proposal was on July 28, See Ex. A, 2-17, to the Glave Dec. That proposal led to a meeting between the parties on August 13, See Ex. A to the Glave Dec. During that meeting, the City indicated that it was incorporating the entire Drasil Plan into its proposal. See Ex. A, 49:6-19, to the Glave Dec. The City also stated that the Drasil Plan, alone, reduced the Fire Department budget to $28,000,000 (as budgeted for by the City Council). See Ex. A, 69:15-18, to the Glave Dec. It should be noted that the City then conceded that while the Drasil Plan was proposing a minimum staffing model this was only in concept and the City had no actual proposal for any staffing model. See Ex. A, 49:23-25, 51:1-23; 78:20-25, to the Glave Dec. In addition to the August 13th meeting, the parties met on August 25th. As a result of these meetings, which should have taken place prior to any layoff notices being issued, the City has rescinded two Layoff/Termination Notices and has engaged in discussions regarding the impact and consequences of the Drasil Plan. These conversations have led to the scheduling of additional meetings with Fire Management and the SBCPF to determine how to best implement the City s imposed stations closures and personnel reductions. These are the discussions that should have been, by law, conducted prior to the City making its firm decision and implementing fire reductions. While the City asserts that it is now complying with the law (meeting subsequent to the implementation), this is not what the law requires. In the City of Sacramento, PERB Decision No M (Issued on 12/24/13), the PERB overturned an ALJ decision dismissing an unfair DGOODRICH\ /4/2014 (3:38 PM) 11

140 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX practice charge. The union alleged that the City of Sacramento violated the MMBA by refusing to bargain on a decision to lay off all employees and reassign those duties to other employees. The ALJ dismissed the case, in part, on a finding that the union failed to request bargaining after learning of the city s plans. The PERB rejected the proposed decision based on its determination that the City had already made a firm decision to proceed with its actions before notifying the union, and therefore, the union was not obligated to request to bargain since the unfair practice had already occurred. Furthermore, the PERB affirmed prior precedent requiring that an employer must provide notice to the union of a proposed change within the scope of representation before making a firm decision. If an employer makes a firm decision before providing notice to the union, the employer has committed an unfair practice as of the date of its firm decision. In that case, the PERB found that there was no official notice to the union of the change. However, the PERB assumed, for purposes of its decision, that the union received a Budget Cuts Update from the city discussing the plan to reorganize the Police Department and to lay off the Supervising Dispatchers. But the PERB held that the update did not provide the union adequate notice of the negotiable aspects of the city s plans. Thus, the PERB rejected the ALJ s finding that the union had actual notice of the proposed change and therefore should have requested bargaining. The PERB also held that, Where the representative s 'actual' or 'constructive' knowledge of a 'proposed' policy change is the result of the employer s implementation of that change, by definition, there has been inadequate notice. The PERB held that in such a case, the employer s notice is nothing more than its announcement of a fait accompli. In terms of proving when an employer has made a firm decision, the PERB cited to Clovis Unified School District PERB Decision No (2002), for the proposition that, even if an employer does not implement a change in policy until later, or perhaps not at all, its direct communications with employees soliciting the change demonstrates that the employer has already reached a firm decision, for the purpose of demonstrating that a unilateral change has occurred. The City further asserts that personnel reductions/layoff decision are not subject to any meet and confer requirement. This is not the law. In addition to the argument provided in the SBCPF moving papers, there is language in the seminal Vallejo case that the number of DGOODRICH\ /4/2014 (3:38 PM) 12

141 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX employees subject to a layoff is a negotiable effect. See Fire Fighters Union v. City of Vallejo, 12 Cal.3d 608, 621 (1974) [timing and number of employees to be laid off negotiable]. Finally, the City has implemented it decision, and moved forward with its Layoff Notices (for demotions/bumping rights) prior to any meeting and conferring. If the City was smart, they would rescind the prior Layoff Notices 16 and begin the process anew, but this time in accordance with the law. While the City asserts that they are in bankruptcy and have an ongoing financial difficulties, the City continues to battle the SBCPF instead of taking simple corrective measures. 17 E. The PERB Court Specializes in Adjudicating the Claims Asserted by the SBCPF. On July 29, 2014, the City consented to this Court's adjudication of the claims the SBCPF seeks to pursue in the Public Employment Relations Board ("PERB ). While this Court routinely adjudicates claims and rights arising out of state law, the PERB specializes in the types of matters the SBCPF seeks to pursue if relief from the automatic stay is granted. The Court should defer to the PERB's expertise in these matters by granting limited relief from the automatic stay. The failure to meet and confer regarding changes to the terms and conditions of employment; to wit, reductions in work force is covered by the PERB. PERB is a quasi-judicial 16 The demotions letters only give two options: A) Voluntary Demote or B) be terminated. There was nothing voluntary about choosing between demotion and termination. Additionally, the employees were not told that the Civil Service rules provided for an election to be demote in lieu of lay-off, and election to displace employees in equal or lower classes as the employees subject to lay-off. Finally, the notices failed to notify the employees that under the City rules they shall have the right for two (2) years to be re-employed, transferred or promoted to the former class upon the first vacancy occurring in any such class in the department and such right shall take precedence over the regular employment or promotional lists. 17 In the PERB case of County of Riverside, PERB Decision No M (Issued on 3/25/14), the PERB recognized that determining whether an impasse exists is a fact intensive inquiry. Among the factors the PERB will consider include: the number and length of negotiating sessions between the parties; the time period over which negotiations have occurred; the extent to which proposals and counterproposals have been made and discussed; the number of tentative agreements reached; and the extent to which unresolved issues remain. The Board also took into consideration that the employer considered it absolutely imperative to have concessions in place by the time the new budget began hitting the books. In response to the County s claim of economic urgency, the Board responded that: "We recognize that it, and virtually every other public agency in California was under severe economic pressure during the period of time encompassed by these negotiations. It has long been noted that such economic exigency provides no justification for suspending the duty to bargain in good faith Nor is an employer s deadline such as the beginning of a budget year or the expiration of an MOU, an excuse to avoid bargaining in good faith. DGOODRICH\ /4/2014 (3:38 PM) 13

142 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX administrative agency charged with administering the collective bargaining statutes covering employees of California's public schools, colleges, and universities, employees of the State of California, employees of California local public agencies (cities, counties and special districts), trial court employees and supervisory employees of the Los Angeles County Metropolitan Transportation Authority. It is one of those agencies presumably equipped or informed by experience to deal with a specialized field of knowledge, whose findings within that field carry the authority of an expertness which courts do not possess and therefore must respect. Banning Teachers Assn. v. Public Employment Relations Bd., 44 Cal.3d 799, 804 (1988); County of Los Angeles v. Los Angeles County Employee Relations Com., 56 Cal.4th 905, 922 (2013). Courts generally defer to PERB's construction of labor law provisions within its jurisdiction. See San Mateo City School Dist. v. Public Employment Relations Bd., 33 Cal.3d 850, 856 (1983); Paulsen v. Local No. 856 of Internat. Brotherhood of Teamsters, 193 Cal.App.4th 823, 830 (2011). 18 There is no question that issues related to meeting and conferring on issues of wages, hours and terms and conditions of employment are best determined by a tribunal that has the expertise to hearing and decide these issues. The PERB is that court of expertise. Here, the Court should defer to the expertise and experience of the PERB. F. Bildisco Does Not Bar the Planned Action. The City argues that Bildisco "bars" a lawsuit from being filed under a collective bargaining agreement. The City cites to the following language: "Consequently, claims arising after filing, such as result from the rejection of an executory contract, must also be presented through the normal administration process by which claims are estimated and classified. (citations omitted). Thus suit may not be brought against the debt-or-in-possession under the collective-bargaining agreement; recovery may be had only through administration of the claim in bankruptcy." 18 For more information regarding what PERB is, does and its rules and regulations, please seewww.perb.ca.gov. DGOODRICH\ /4/2014 (3:38 PM) 14

143 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of The language cited by the City from Bildisco, however, is limited to actions arising out of 2 a collective bargaining agreement. Here, the claims the SBCPF intends to pursue are wholly 3 unrelated to the MOU and arise under state law. Moreover, the rights the SBCPF seeks to enforce 4 5 cannot be enforced through the "claims process." 19 from pursuing claims relating to violations state law. Hence, Bildisco does not "bar" the SBCPF SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX G. The City Has Waived All Arguments on Preemption. At the preliminary hearing on the Motion for Relief, the City claimed that it had not waived its right to argue the preemptive effect, if any, of any applicable bankruptcy law or procedure over state law or procedure in connection with the City's planned layoffs, demotions, fire station closures, reductions in staff and elimination of fire apparatus. 20 When the Motion for Relief was continued by the Court, the City was given a second chance to argue the merits of any preemptive effect of bankruptcy law over procedural and substantive state law. The City has yet again failed to argue this issue in its Supplement. Accordingly, the City has waived its right to argue that Section 365 or any other section of the Bankruptcy Code or Bankruptcy Rules of Procedure preempt substantive and procedural state laws relating to layoffs, demotions, fire station closures, reductions in staff and elimination of fire apparatus. 21 To the extent the City attempts to argue the preemptive effect of bankruptcy over non-bankruptcy law, the Court should not entertain any such argument because the City has waived its rights on two separate occasions. H. The City Is Impermissibly Arguing the Merits of Its Defenses Within the Limited Confines of the SBCPF's Motion. The City is attempting to litigate its position within the narrow confines of a relief from stay motion. 22 Even if the City held the upper hand on the issues to be litigated, the success of the The dilemma of the "claims process" as it relates to injunctive and mandamus relief was discussed in the SBCPF's Reply filed on July 28, 2014 [docket no.: 1070] and incorporated herein. 20 See Exhibit 1, Page 16, Line 7 to the Declaration of David M. Goodrich 21 The issue was discussed in the SBCPF's Reply filed on July 28, 2014 [docket no.: 1070] and incorporated herein. 22 The issue was discussed in the SBCPF's Reply filed on July 28, 2014 [docket no.: 1070] and incorporated herein. DGOODRICH\ /4/2014 (3:38 PM) 15

144 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of litigation is not a factor under In re Curtis 40 B.R. 795, (Bankr. D. Utah 1984) or In re Tucson 2 Estates, 912 F. 2d 1162 (9th Cir. 1990). 23 Assuming, arguendo, the Curtis and Tucson Estate SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX factors apply in the aggregate to a relief from stay motion, then 24 factors are considered in determining "cause" for relief from stay under 362(d). Of the 24 factors provided, the likely success of the litigation is not one. Even if the Court were inclined to examine the merits of the planned litigation, it would do so in determining "cause" to terminate or modify the automatic stay. The merits of the underlying litigation, however, is not a factor to be considered under 362(d) or the Curtis and Tucson Estate factors. The validity of the City's acts should not be examined in the context of the Motion for Relief and should be disregarded. II. Conclusion For the reasons set forth above, the SBCPF respectfully requests that the Court enter an order that (1) confirms the automatic stay does not apply to enjoin the post-petition acts of the City that violate state labor law and the City Charter, or, in the alternative, (2) terminates or modifies the automatic stay to allow the SBCPF to pursue its rights and remedies in connection with the planned layoffs, demotions, station closures, staffing reductions and elimination of fire apparatus. DATED: September 4, 2014 SulmeyerKupetz A Professional Corporation By: /s/ David M. Goodrich David M. Goodrich Attorneys for San Bernardino City Professional Firefighters Local The standards announced in each case are discussed in the SBCPF's Motion for Relief filed on July 21, 2014 [docket no.: 1054] and incorporated herein. DGOODRICH\ /4/2014 (3:38 PM) 16

145 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX DECLARATION OF COREY GLAVE I, Corey Glave, declare and say: 1. I am an attorney duly licensed to practice law in the State of California and in this District. I am an attorney of record for the San Bernardino City Professional Firefighters, Local 891 ("SBCPF"), in this case. I have personal knowledge of the facts hereinafter stated and if sworn as a witness I could testify competently thereto. 2. I have been legal counsel to the SBCPF for approximately twenty (20) years and have served as one of their Chief Negotiators since approximately This declaration is based on matters of my own personal knowledge or knowledge I have gained from a review of the business records of the City of San Bernardino ("City") provided to me either by the City and/or my client, which I believe have been maintained in the ordinary course of the City s business and which were made at or near the time of the acts or events recorded therein by, or from information transmitted by, a person with knowledge of the acts or events who had personal knowledge of the event and had or has a business duty to record such event accurately. 3. In its Supplement to its Opposition to the SBCPF's Motion for Relief from the Automatic Stay, the City asserts, on the merits of "PERB" claim, that is provided the SBCPF with notice of its proposed changes and has meet and conferred with the SBCPF. This is not true. The first time that the City and SBCPF met to negotiate was on May 23, At that time, the City did not provide the SBCPF with any proposals, but discussed what the City was proposing to include in the City s budget that was being discussed with the City Council. Attached hereto as Exhibit A are true and correct copies of excerpts from the certified transcript, which I received directly from the transcript service, for the SBCPF's meeting with the City held on August 13, 2014 at City Hall that I attended (See Ex. 10, at 9:10-23). At that time the City presented a Bat Chiefs proposal. A couple days later, the Bat Chiefs withdrew their plan and told the City that they needed to review the City Gate plan prior to making any recommendations. 4. On June 26, 2014, after quickly reviewing the City Gate plan, and after rehiring the formerly retired Fire Chief, a new Drasil Plan was created (but not shared with the SBCPF). The City adopted the Drasil Plan on June 30th. (See Exhibit A, at 10:4-11:6). Attached hereto as Exhibits B is a true and correct copy of the City's Estimated Revenue and Expenditures, Fiscal DGOODRICH\ /4/2014 (3:38 PM) 17

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232 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of SulmeyerKupetz, A Professional Corporation 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA TEL FAX DECLARATION OF DAVID M. GOODRICH I, David M. Goodrich, declare and say: 1. I am an attorney duly licensed to practice law in the State of California and in this District. I am an attorney of record for the San Bernardino City Professional Firefighters, Local 891 ("SBCPF"), in this case. I have personal knowledge of the facts hereinafter stated and if sworn as a witness I could testify competently thereto. 2. This declaration is based on matters of my own personal knowledge or knowledge I have gained from a review of the court transcripts that I have received from escribers, a certified electronic court transcription service, which I believe have been maintained in the ordinary course of the court transcription services business and which were made at or near the time of the acts or events recorded therein by escribers, who had personal knowledge and possession of the audio information obtained from the Court, and had or has a business duty to record and transcribe such event accurately. I have maintained the court transcripts in my electronic file for this case and my electronic file has remained secure from third-party access ever since the court transcripts were received by me. To my knowledge, none of the court transcripts attached hereto have been altered or modified. 3. Attached hereto as Exhibit 1 are true and correct copies of excerpts that I received from escribers for the Court's hearing in this matter conducted on July 29, 2014 from my electronic file for this case. I declare under the penalty of perjury under the laws of the State of California and the United States that the foregoing is true and correct. Executed this 4th day of September, 2014, in Los Angeles, California By /s/ David M. Goodrich David M. Goodrich DGOODRICH\ /4/2014 (3:44 PM) 21

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241 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of PROOF OF SERVICE OF DOCUMENT I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is 333 South Hope Street, Thirty-Fifth Floor, Los Angeles, California A true and correct copy of the foregoing document entitled (specify): REPLY TO CITY OF SAN BERNARDINO'S SUPPLEMENTAL BRIEF IN OPPOSITION TO THE MOTION CONFIRMING THAT NO STAY APPLIES, OR, IN THE ALTERNATIVE, RELIEF FROM THE AUTOMATIC STAY FILED BY THE SAN BERNARDINO CITY PROFESSIONAL FIREFIGHTERS; DECLARATIONS OF COREY W. GLAVE AND DAVID M. GOODRICH will be served or was served (a) on the judge in chambers in the form and manner required by LBR (d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On (date) September 4, 2014 I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the addresses stated below: SEE ATTACHED SERVICE LIST Service information continued on attached page. 2. SERVED BY UNITED STATES MAIL: On (date), I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Service information continued on attached page. 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on (date) September 4, 2014, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. The Honorable Meredith A. Jury U.S. Bankruptcy Court Bin outside of RS Courtroom Twelfth Street Riverside, CA Service information continued on attached page. I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct. September 4, 2014 Maria R. Viramontes /s/ Maria R. Viramontes Date Printed Name Signature

242 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of ADDITIONAL SERVICE INFORMATION (if needed): 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Jerrold Abeles on behalf of Interested Party Ambac Assurance Company Jerrold Abeles on behalf of Interested Party Erste Europische Pfandbrief-und Kommunalkreditbank AG Jerrold Abeles on behalf of Interested Party Wells Fargo Bank, N.A. Franklin C Adams on behalf of Creditor San Bernardino Associated Governments franklin.adams@bbklaw.com, arthur.johnston@bbklaw.com;lisa.spencer@bbklaw.com Franklin C Adams on behalf of Creditor San Bernardino Local Agency Formation Commission franklin.adams@bbklaw.com, arthur.johnston@bbklaw.com;lisa.spencer@bbklaw.com Franklin C Adams on behalf of Interested Party Courtesy NEF franklin.adams@bbklaw.com, arthur.johnston@bbklaw.com;lisa.spencer@bbklaw.com Andrew K Alper on behalf of Interested Party Courtesy NEF aalper@frandzel.com, efiling@frandzel.com;ekidder@frandzel.com Thomas V Askounis on behalf of Interested Party Courtesy NEF taskounis@askounisdarcy.com Julie A Belezzuoli on behalf of Defendant California Department of Finance julie.belezzuoli@kayescholer.com Julie A Belezzuoli on behalf of Defendant Office of State Controller, State of California julie.belezzuoli@kayescholer.com Julie A Belezzuoli on behalf of Defendant Ana J Matosantos julie.belezzuoli@kayescholer.com Julie A Belezzuoli on behalf of Defendant John Chiang julie.belezzuoli@kayescholer.com Anthony Bisconti on behalf of Creditor Certain Retired Employees of the City of San Bernardino tbisconti@bmkattorneys.com, admin@bmkattorneys.com Anthony Bisconti on behalf of Interested Party Courtesy NEF tbisconti@bmkattorneys.com, admin@bmkattorneys.com Jeffrey E Bjork on behalf of Interested Party Courtesy NEF jbjork@sidley.com Michael D Boutell on behalf of Creditor Comerica Bank mdbell@comerica.com J Scott Bovitz on behalf of Creditor U.S. TelePacific Corp. bovitz@bovitz-spitzer.com John A Boyd on behalf of Interested Party Courtesy NEF fednotice@tclaw.net John A Boyd on behalf of Interested Party Thompson & Colegate LLP fednotice@tclaw.net Jeffrey W Broker on behalf of Creditor The Glen Aire Mobilehome Park Corporation June 2012 This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F PROOF.SERVICE

243 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of Jeffrey W Broker on behalf of Interested Party Courtesy NEF jbroker@brokerlaw.biz Laura L Buchanan on behalf of Debtor City of San Bernardino, California lbuchanan@sycr.com Michael J Bujold on behalf of U.S. Trustee United States Trustee (RS) Michael.J.Bujold@usdoj.gov Christopher Celentino on behalf of Creditor Erste Europische Pfandbrief und Kommunalkredictbank Aktiengesellschaft in Luxemburg S.A. celentinoc@ballardspahr.com, burkec@ballardspahr.com Christopher Celentino on behalf of Interested Party Courtesy NEF celentinoc@ballardspahr.com, burkec@ballardspahr.com Lisa W Chao on behalf of Interested Party Courtesy NEF lisa.chao@doj.ca.gov Shirley Cho on behalf of Interested Party National Public Finance Guarantee Corp. scho@pszjlaw.com Alicia Clough on behalf of Defendant California Department of Finance alicia.clough@kayescholer.com Alicia Clough on behalf of Defendant Office of State Controller, State of California alicia.clough@kayescholer.com Alicia Clough on behalf of Defendant State of California alicia.clough@kayescholer.com Alicia Clough on behalf of Defendant Ana J Matosantos alicia.clough@kayescholer.com Alicia Clough on behalf of Defendant John Chiang alicia.clough@kayescholer.com Marc S Cohen on behalf of Defendant California Department of Finance mcohen@kayescholer.com, dhernandez@kayescholer.com Marc S Cohen on behalf of Defendant Office of State Controller, State of California mcohen@kayescholer.com, dhernandez@kayescholer.com Marc S Cohen on behalf of Defendant State of California mcohen@kayescholer.com, dhernandez@kayescholer.com Marc S Cohen on behalf of Defendant Ana J Matosantos mcohen@kayescholer.com, dhernandez@kayescholer.com Marc S Cohen on behalf of Defendant John Chiang mcohen@kayescholer.com, dhernandez@kayescholer.com Christopher H Conti on behalf of Interested Party San Bernardino Public Employees Association chc@sdlaborlaw.com, sak@sdlaborlaw.com Christopher J Cox on behalf of Interested Party National Public Finance Guarantee Corp. chris.cox@weil.com, janine.chong@weil.com Christina M Craige on behalf of Interested Party Courtesy NEF ccraige@sidley.com Alex Darcy on behalf of Creditor Marquette Bank adarcy@askounisdarcy.com, akapai@askounisdarcy.com June 2012 This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F PROOF.SERVICE

244 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of Susan S Davis on behalf of Interested Party Courtesy NEF sdavis@coxcastle.com Robert H Dewberry on behalf of Creditor Allison Mechanical, Inc. robert.dewberry@dewlaw.net Donn A Dimichele on behalf of Plaintiff City Of San Bernardino, California dimichele_do@sbcity.org, brigman_ch@sbcity.org Todd J Dressel on behalf of Creditor Pinnacle Public Finance, Inc. dressel@chapman.com, lubecki@chapman.com Scott Ewing on behalf of Interested Party Rust Consulting/Omni Bankruptcy contact@omnimgt.com, sewing@omnimgt.com;katie@omnimgt.com John A Farmer on behalf of Creditor County of San Bernardino, California jfarmer@orrick.com Lazaro E Fernandez on behalf of Creditor Lori Tillery lef17@pacbell.net, lef-karina@pacbell.net;lef-mari@pacbell.net;lefkarina@gmail.com Dale K Galipo on behalf of Defendant Michael Malcom Wade dalekgalipo@yahoo.com, mpartow@galipolaw.com;lcostanza@galipolaw.com;rvasquez@galipolaw.com Victoria C Geary on behalf of Defendant California State Board Of Equalization victoria.geary@boe.ca.gov Victoria C Geary on behalf of Defendant Cynthia Bridges victoria.geary@boe.ca.gov Paul R. Glassman on behalf of Attorney Paul R. Glassman pglassman@sycr.com Paul R. Glassman on behalf of Debtor City of San Bernardino, California pglassman@sycr.com Paul R. Glassman on behalf of Plaintiff City of San Bernardino, California pglassman@sycr.com Robert P Goe on behalf of Creditor Miramontes Const. Co., Inc. kmurphy@goeforlaw.com, rgoe@goeforlaw.com;mforsythe@goeforlaw.com David M Goodrich on behalf of Creditor San Bernardino City Professional Firefighters Local 891 dgoodrich@sulmeyerlaw.com, asokolowski@sulmeyerlaw.com;dgoodrich@ecf.inforuptcy.com Christian Graham on behalf of Creditor Miramontes Const. Co., Inc. cgraham23@dlblaw.net Everett L Green on behalf of U.S. Trustee United States Trustee (RS) everett.l.green@usdoj.gov James A Hayes, Jr on behalf of Interested Party Courtesy NEF jim@jarvislawyers.com, jhayes@jamesahayesaplc.com M Jonathan Hayes on behalf of Interested Party Courtesy NEF jhayes@srhlawfirm.com, roksana@srhlawfirm.com;carolyn@srhlawfirm.com;matthew@srhlawfirm.com;rosarioz@srhlawfirm.com;jfisher@srhlawfirm.com;anastasia@sr hlawfirm.com;maria@srhlawfirm.com;staci@srhlawfirm.com;jhayesecf@gmail.com Eric M Heller on behalf of Interested Party Courtesy NEF eric.m.heller@irscounsel.treas.gov Jeffery D Hermann on behalf of Creditor County of San Bernardino, California June 2012 This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F PROOF.SERVICE

245 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of Jeffery D Hermann on behalf of Defendant County of San Bernardino jhermann@orrick.com Whitman L Holt on behalf of Interested Party Courtesy NEF wholt@ktbslaw.com Michelle C Hribar on behalf of Interested Party San Bernardino Public Employees Association mch@sdlaborlaw.com Steven J Katzman on behalf of Creditor Certain Retired Employees of the City of San Bernardino SKatzman@bmkattorneys.com, admin@bmkattorneys.com Steven J Katzman on behalf of Creditor Committee Official Committee of Retired Employees SKatzman@bmkattorneys.com, admin@bmkattorneys.com Steven J Katzman on behalf of Interested Party Courtesy NEF SKatzman@bmkattorneys.com, admin@bmkattorneys.com Jane Kespradit on behalf of Interested Party Courtesy NEF jane.kespradit@limruger.com, amy.lee@limruger.com Mette H Kurth on behalf of Interested Party Ambac Assurance Company kurth.mette@arentfox.com, nancy.peters@arentfox.com Mette H Kurth on behalf of Interested Party Erste Europische Pfandbrief-und Kommunalkreditbank AG kurth.mette@arentfox.com, nancy.peters@arentfox.com Mette H Kurth on behalf of Interested Party Wells Fargo Bank, N.A. kurth.mette@arentfox.com, nancy.peters@arentfox.com Mette H Kurth on behalf of Trustee Ambac Assurance Company, Erste Europaische Pfandbrief-Und Kommunalkreditbank Ag And Wells Fargo Bank, N.A. kurth.mette@arentfox.com, nancy.peters@arentfox.com Sandra W Lavigna on behalf of Interested Party U. S. Securities and Exchange Commission lavignas@sec.gov Michael B Lubic on behalf of Creditor California Public Employees' Retirement System michael.lubic@klgates.com, jonathan.randolph@klgates.com Michael B Lubic on behalf of Interested Party California Public Employees' Retirement System michael.lubic@klgates.com, jonathan.randolph@klgates.com David J McCarty on behalf of Interested Party David J. McCarty dmccarty@sheppardmullin.com Reed M Mercado on behalf of Interested Party M. Reed Mercado rmercado@sheppardmullin.com Fred Neufeld on behalf of Debtor City of San Bernardino, California fneufeld@sycr.com Fred Neufeld on behalf of Plaintiff City of San Bernardino, California fneufeld@sycr.com Aron M Oliner on behalf of Interested Party San Bernardino Police Officers Association roliner@duanemorris.com Scott H Olson on behalf of Creditor Kohl's Department Stores, Inc. solson@vedderprice.com, ecfdocket@vedderprice.com,jcano@vedderprice.com,jparker@vedderprice.com Allan S Ono on behalf of Interested Party Courtesy NEF June 2012 This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F PROOF.SERVICE

246 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of James F Penman on behalf of Plaintiff City Of San Bernardino, California Mark D Potter on behalf of Creditor Timothy Crowley mark@potterhandy.com, rhondahandy@potterhandy.com;kevin@potterhandy.com Dean G Rallis, Jr on behalf of Interested Party Courtesy NEF drallis@afrct.com, bcruz@afrct.com Manoj D Ramia on behalf of Creditor California Public Employees' Retirement System manoj.ramia@klgates.com, klgatesbankruptcy@klgates.com Manoj D Ramia on behalf of Interested Party California Public Employees' Retirement System manoj.ramia@klgates.com, klgatesbankruptcy@klgates.com Christopher O Rivas on behalf of Interested Party Courtesy NEF crivas@reedsmith.com Esperanza Rojo on behalf of Interested Party Rust Consulting/Omni Bankruptcy contact@omnimgt.com, sewing@omnimgt.com Kenneth N Russak on behalf of Interested Party Courtesy NEF krussak@frandzel.com, efiling@frandzel.com;dmoore@frandzel.com Gregory M Salvato on behalf of Interested Party Courtesy NEF gsalvato@salvatolawoffices.com, calendar@salvatolawoffices.com;jboufadel@salvatolawoffices.com Vicki I Sarmiento on behalf of 3rd Party Plaintiff C.A. minor vsarmiento@vis-law.com, jfregoso@vis-law.com Vicki I Sarmiento on behalf of 3rd Party Plaintiff X.J.G. minor vsarmiento@vis-law.com, jfregoso@vis-law.com Vicki I Sarmiento on behalf of 3rd Party Plaintiff Angelina Cesar vsarmiento@vis-law.com, jfregoso@vis-law.com Vicki I Sarmiento on behalf of 3rd Party Plaintiff Brunilda Gonzalez vsarmiento@vis-law.com, jfregoso@vis-law.com Vicki I Sarmiento on behalf of 3rd Party Plaintiff Sasha Gonzalez vsarmiento@vis-law.com, jfregoso@vis-law.com Vicki I Sarmiento on behalf of 3rd Party Plaintiff Xochilt Gutierrez vsarmiento@vis-law.com, jfregoso@vis-law.com Mark C Schnitzer on behalf of Attorney Mark C. Schnitzer mschnitzer@rhlaw.com, mcschnitzer@gmail.com John R Setlich on behalf of Creditor Francisca Zina Gomez jrsetlich@setlichlaw.com Diane S Shaw on behalf of Interested Party Courtesy NEF diane.shaw@doj.ca.gov Ariella T Simonds on behalf of Interested Party Courtesy NEF asimonds@sidley.com Jason D Strabo on behalf of Creditor U.S. Bank National Association, not individually, but as Indenture Trustee jstrabo@mwe.com, cgilbert@mwe.com Cathy Ta on behalf of Interested Party Courtesy NEF cathy.ta@bbklaw.com, Arthur.Johnston@bbklaw.com;lisa.spencer@bbklaw.com June 2012 This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F PROOF.SERVICE

247 Case 6:12-bk MJ Doc Filed 09/04/14 07/09/15 Entered 09/04/14 07/09/15 17:00:54 18:29:48 Desc Main Document Page of Sheila Totorp on behalf of Creditor Landmark American Insurance Company Benjamin R Trachtman on behalf of Interested Party Courtesy NEF btrachtman@trachtmanlaw.com, sstraka@trachtmanlaw.com Matthew J Troy on behalf of Creditor United States of America matthew.troy@usdoj.gov United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov Anne A Uyeda on behalf of Interested Party Courtesy NEF auyeda@bmkattorneys.com Annie Verdries on behalf of Interested Party Courtesy NEF verdries@lbbslaw.com, Autodocket@lbbslaw.com Brian D Wesley on behalf of Interested Party Courtesy NEF brian.wesley@doj.ca.gov Kirsten A. Worley on behalf of Creditor Safeco Insurance Company Of America kw@wlawcorp.com, admin@wlawcorp.com Arnold H Wuhrman on behalf of Creditor April Clark Wuhrman@serenitylls.com Arnold H Wuhrman on behalf of Creditor Kayla Clark Wuhrman@serenitylls.com Clarisse Young on behalf of Interested Party Courtesy NEF youngshumaker@smcounsel.com, levern@smcounsel.com June 2012 This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F PROOF.SERVICE

248 Case 6:12-bk MJ Doc 1539 Filed 07/09/15 Entered 07/09/15 18:29:48 Desc Main Document Page 248 of 354 EXHIBIT E

249 Case 6:12-bk MJ Doc Filed 07/31/14 07/09/15 Entered 07/31/14 07/09/15 12:00:27 18:29:48 Desc 1 Main Document Page of UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA --ooo-- In Re: ) Case No. 6:12-bk ) Chapter 9 CITY OF SAN BERNARDINO, ) Riverside, California ) Tuesday, July 29, 2014 Debtor. ) 10:00 a.m. ) ) Motion for Relief From the Automatic Stay Under 11 U.S.C. Section 362 (With Supporting Declarations) (Action in Nonbankruptcy Forum). Filed by San Bernardino City Professional Firefighters Local 891 APPEARANCES: For the Debtor: TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE MEREDITH JURY UNITED STATES BANKRUPTCY JUDGE PAUL R. GLASSMAN, ESQ. FRED NEUFELD, ESQ. Stradling Yocca Carlson & Rauth, P.C. 100 Wilshire Boulevard 4th Floor Santa Monica, CA GARY D. SAENZ, ESQ. City of San Bernardino 300 North "D" Street Sixth Floor San Bernardino, CA LINDA L. DAUBE, ESQ. (Telephonically) Law Office of Linda L. Daube 438 First Street 4th Floor Santa Rosa, CA 95401

250 Case 6:12-bk MJ Doc Filed 07/31/14 07/09/15 Entered 07/31/14 07/09/15 12:00:27 18:29:48 Desc40 Main Document Page of CITY OF SAN BERNARDINO THE COURT: I'm not nearly as concerned about the requirements of the government code as I am about the layoff procedure, which is the one thing that, in fact, as Mr. Glave pointed out, those notices have already been given. And you think that they were not given in compliance with the City charter, apparently. MR. GOODRICH: Correct. THE COURT: And that therefore you think that that needs to be stopped, right? MR. GOODRICH: Right. THE COURT: Okay. MR. GOODRICH: So it could either be stopped by this Court or it could be stopped by the state court. And, as I argued in the reply brief, we're running into issues if we come into this Court and seek relief for the first time today, and I assume the City'll stand at its word, it's consenting under 904 to the relief that we'd be seeking and -- THE COURT: They did consent. That's correct. MR. GOODRICH: -- to jurisdiction for the Court to hear a matter against the City. THE COURT: That's correct. MR. GOODRICH: The second part would be -- THE COURT: And I'm offering you to file it here, and I will continue to make that offer. MR. GOODRICH: I understand.

251 Case 6:12-bk MJ Doc Filed 07/31/14 07/09/15 Entered 07/31/14 07/09/15 12:00:27 18:29:48 Desc70 Main Document Page of C E R T I F I C A T I O N I, Esther Accardi, certify that the foregoing transcript is a true and accurate record of the proceedings /s/ ESTHER ACCARDI AAERT Certified Electronic Transcriber CET**D escribers 700 West 192nd Street, Suite #607 New York, NY Date: July 31,