In re City of Stockton

OPINION REGARDING APPLICABILITY OF FEDERAL RULE OF BANKRUPTCY PROCEDURE 9019

The question is whether a chapter 9 municipal debtor must obtain court approval under Federal Rule of Bankruptcy Procedure 9019 of any compromise or settlement it makes during the course of the chapter 9 case. The City of Stockton says “no.” Its Capital market creditors say “yes.” The answer is: 11 U.S.C. § 904 gives a chapter 9 debtor freedom to decide whether to ignore or to follow the Rule 9019 compromise-approval procedure, but the debtor may need to account for prior compromises during plan confirmation proceedings.

Procedural History

The City of Stockton has agreed to settle a pending damages lawsuit for $55,000.

The capital market creditors, conceding that the settlement is unlikely to flunk Rule 9019 judicial scrutiny under the usual “fair and equitable” standard, contend that the City nevertheless must make a motion under Rule 9019 seeking court approval.

The City’s motion seeks a ruling that Rule 9019 does not apply in chapter 9 cases unless the City elects to consent to judicial scrutiny and, only if Rule 9019 mandatorily applies in chapter 9, to obtain approval of the subject compromise.…