Case 5:13-cv-01952-DMG Document 21 Filed 12/13/13 Page 1 of 19 Page ID #:1446

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UNITED STATES DISTRICT COURT9CENTRAL DISTRICT OF CALIFORNIA

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) Case No. CV 5:13-01952 DMG)
CALIFORNIA,) Bankruptcy Case No. CV 6:12-28006 MJ)
Debtor,) ORDER RE APPELLANT’S MOTION) FOR LEAVE TO APPEAL AND___________________________________) MOTION REQUESTING) CERTIFICATION FOR DIRECTCALIFORNIA PUBLIC) APPEAL TO NINTH CIRCUIT)EMPLOYEES’ RETIREMENT SYSTEM, ))Appellant,
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v.
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CITY OF SAN BERNARDINO,))CALIFORNIA,))
Appellee.
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IN RE CITY OF SAN BERNARDINO,

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This matter is before the Court on Appellant California Public Employees’

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Retirement System’s (“CalPERS”) motion for leave to appeal and motion requesting25

certification for direct appeal to the Unites States Court of Appeals for the Ninth Circuit.

26[Doc. ## 3, 6.] The Court held a hearing on the motions on December 13, 2013.

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Having duly considered the respective positions of the parties, the Court now

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renders its decision. For the reasons set forth below, the motion for leave to appeal is-1-Case 5:13-cv-01952-DMG Document 21 Filed 12/13/13 Page 2 of 19 Page ID #:1447

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GRANTED, and the motion requesting certification for direct appeal to the Ninth Circuit

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is DENIED as moot.

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I.

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PROCEDURAL HISTORY1

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On August 1, 2012, the City of San Bernardino (“the City”) filed its petition for

6bankruptcy protection under chapter 9 of the Bankruptcy Code in the Central District of7

California. CalPERS filed objections to the City’s eligibility for relief on two grounds:

8(1) the City did not “desire to effect a plan to adjust debts” pursuant to 11 U.S.C. §9109(c)(4); and (2) the City did not file the petition in good faith as required under 11

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U.S.C. § 921(c).2 At the request of the parties, the bankruptcy court did not set a

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discovery deadline or issue an order staying discovery.

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At a status conference in April or May 2013, the bankruptcy court questioned

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whether there were any disputed material facts regarding the contested eligibility issues

14that would require formal discovery. In June 2013, the bankruptcy court suggested that15

the remaining issues could be addressed in a summary judgment motion. After CalPERS

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objected that additional discovery was required, the court directed CalPERS to brief the17

issue, setting the argument for the same date as the argument on the City’s summary

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judgment motion.

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On August 28, 2013, the bankruptcy court held a hearing on the City’s motion for20summary judgment on eligibility and CalPERS’ motion for additional discovery and for21summary judgment of a nonmovant under Fed. R. Civ. P. 56(d) and 56(f)(1). (Mot. for

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Leave at 6-7 [Doc. # 3].) On September 17, 2003, the bankruptcy court entered an Order

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Unless otherwise noted, the facts are drawn from the “Factual Background” and “Procedural
Background in Chapter 9” set forth in the bankruptcy court’s eligibility opinion. (Bankruptcy Court
Eligibility Opinion of October 16, 2013 [Doc. # 3; Doc. # 8-1, Exh. 1; Doc. # 9-1, Exh. 1].)
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Initially another creditor—the San Bernardino Public Employees Association—also filed
objections to eligibility, but it withdrew the objections before they were resolved by the bankruptcy
court.

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granting the City’s motion for summary judgment on eligibility, denying CalPERS’

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motion for additional discovery and summary judgment, and granting the City relief

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under chapter 9. (Id. at 7.) The court concluded that the discovery CalPERS sought was

4either irrelevant or, even if the court accepted the facts CalPERS alleged as true, they5

would not defeat summary judgment in favor of the City. On October 16, 2013, the court

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issued its Eligibility Opinion discussing its findings of fact and conclusions of law. (Id.)

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On September 27, 2013, the bankruptcy court entered an order approving a

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stipulation by the parties to extend, pursuant to Federal Rule of Bankruptcy Procedure98002(c)(2), CalPERS’ time to file appeals from the court’s orders. (Id.)

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On October 25, 2013, CalPERS filed a motion for leave to appeal in this Court.

11[Doc. # 3.] On November 15, 2013, the City filed an opposition. [Doc. # 8.] On

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November 29, 2013, CalPERS filed a reply. [Doc. # 15.]

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On October 22, 2013, CalPERS filed in the bankruptcy court a motion for

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certification of direct review of the court’s eligibility orders. (Mot. for Cert. at 5.) The

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bankruptcy court denied CalPERS’ motion at a hearing on October 29, 2013. [Doc. # 9­

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1, Exh. 2.] The court reconsidered CalPERS’ motion at a hearing on November 13, 2013,17[Doc. # 9-1, Exh. 3], and denied the motion on November 15, 2013. [Doc. # 9-1, Exh. 4.]

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On November 15, 2013, CalPERS filed a motion in this Court requesting

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certification for direct appeal to the Ninth Circuit. [Doc. # 6.] On November 22, 2013,20

the City filed an opposition. [Doc. # 9.] On November 29, 2013, CalPERS filed a reply.

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On November 26, 2013, the Court received a Certificate of Readiness and23

Completion of Record with a copy of the docket from the bankruptcy court. [Doc. # 10.]

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II.

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JURISDICTION26

In relevant part, 28 U.S.C. § 158(a) provides:

27[t]he district courts of the United States shall have jurisdiction to hear appeals

28(1) from final judgments, orders, and decrees; [and]-3-Case 5:13-cv-01952-DMG Document 21 Filed 12/13/13 Page 4 of 19 Page ID #:1449

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(3) with leave of the court, from other interlocutory orders and decrees;23

and, with leave of the court, from interlocutory orders and decrees, of

4bankruptcy judges entered in cases and proceedings referred to the bankruptcy

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judges under section 157 of this title. An appeal under this subsection shall be

6taken only to the district court for the judicial district in which the bankruptcy

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judge is serving.

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28 U.S.C. § 158(a).

9CalPERS contends that (1) the bankruptcy court’s eligibility orders constitute final

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orders, and thus it may appeal them as of right under section 158(a)(1); (2) in the11

alternative, the eligibility orders should be subject to the collateral order doctrine

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established by the Supreme Court in Cohen v. Beneficial Industrial Loan Corp., 337 U.S.

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541, 545-57, 69 S. Ct. 1221, 93 L. Ed. 1528 (1949); and (3) in the alternative, if the Court

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construes the bankruptcy court’s eligibility orders to be interlocutory, the Court should

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grant CalPERS leave to appeal under section 158(a)(3).

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The City opposes CalPERS’ motion for leave to appeal on the grounds that (1) the17

eligibility orders are not final orders; (2) the collateral order doctrine is not available; and18(3) CalPERS has not met the standard for leave to appeal under section 158(a)(3).

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III.

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DISCUSSION

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A.

The Bankruptcy Order Is Not A Final Order22

The Ninth Circuit has considered whether a bankruptcy court’s denial of a motion

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to dismiss a chapter 9 bankruptcy is a final order and held that such orders are not final.

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In re City of Desert Hot Springs, 339 F.3d 782, 787-92 (9th Cir. 2003), cert. denied, 540

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U.S. 1110, 124 S. Ct. 1076, 157 L. Ed. 2d 897 (2004). The Desert Hot Springs court

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noted that the Ninth Circuit had previously held that a bankruptcy court’s denial of a27

creditor’s motion to dismiss was not a final decision in the chapter 11 context, but

28“significant differences between a chapter 11 bankruptcy and a chapter 9 bankruptcy”-4-Case 5:13-cv-01952-DMG Document 21 Filed 12/13/13 Page 5 of 19 Page ID #:1450

1changed the analysis in the chapter 9 context. Id. at 788-89. Specifically, the court noted2

that chapter 9 offers fewer protections to creditors than other chapters of the bankruptcy

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code. Id. at 789. Nonetheless, the Desert Hot Springs court found that the concern

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motivating earlier cases was “whether an order finally determines an issue in such a way

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that addressing the issue later would not serve to prevent a party from suffering

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irreparable injury,” id. at 790 (internal citations omitted), and the commencement of

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chapter 9 bankruptcy did not constitute irreparable injury:

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A court’s denial of such a motion merely allows the municipality to proceed

9with the bankruptcy.

10municipal bankruptcy statutory scheme is so skewed in favor of the

11municipality that the commencement of proceedings itself causes irreparable

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injury.

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determined before the bankruptcy process really begins.

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above, creditors do have less rights in a chapter 9 than in any other chapter

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but they still do have rights.

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We are not convinced that Congress’s whole

To so hold would essentially say that a creditor’s rights are
As discussed

Id. at 790.

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The Ninth Circuit identified some of the remedies available to creditors in a18

chapter 9 bankruptcy, including (1) “the right, under 11 U.S.C. § 362(d), to be granted

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relief from the automatic stay against enforcement of judgments,” the denial of which is a20

final decision; (2) the ability to ask the district court to withdraw the reference to the21bankruptcy court under 11 U.S.C. § 157(d); and (3) the ability to “ask the court to dismiss

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a case or suspend all proceedings if ‘the interests of creditors and the debtor would be23

better served by such dismissal or suspension.’”24

305(a)(1). Moreover, the court noted that if it appeared at some point that a debtor was

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failing to act in good faith, the bankruptcy court could dismiss the petition. Id.

Id. at 790, quoting 11 U.S.C. §26

CalPERS’ arguments that Desert Hot Springs is inapplicable or distinguishable are27

unavailing. First, CalPERS appears to argue that the reasoning of Desert Hot Springs is28

inapplicable on the ground that under the bankruptcy law at the time that case was-5-Case 5:13-cv-01952-DMG Document 21 Filed 12/13/13 Page 6 of 19 Page ID #:1451

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decided, the Ninth Circuit did not have jurisdiction over interlocutory bankruptcy

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appeals,3 and thus, the court ultimately held that it did not have jurisdiction over the order3

at issue. Id. (Reply re Leave at 3 (“Thus, the fundamental foundation of the court’s

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opinion—its concern over its jurisdiction—no longer exists.”) [Doc. # 15].) CalPERS

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fails to explain why, in the absence of a certification of issues on appeal, the Ninth

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Circuit’s finality analysis does not govern the circumstances in this case. The Court sees7

no reason to cabin Desert Hot Springs in the manner that CalPERS suggests.

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Second, CalPERS contends that Desert Hot Springs “does not lay down a broad9

categorical rule” applying to all eligibility determinations in chapter 9 bankruptcy.

10(Reply re Leave at 3 [Doc. # 15].) CalPERS’ argument is not supported by the language

11or the reasoning of the Ninth Circuit’s opinion. The broad language of the opinion makes

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clear that its analysis was meant to apply to all chapter 9 cases rather than only the case13

before the court. See, e.g., Desert Hot Springs, 339 F.3d at 792 (“The denial of an

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objection to and a motion to dismiss a chapter 9 bankruptcy does not irreparably injure a15

party so that later addressing the issue would be futile. We therefore hold that such a

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denial is not a final decision and cannot be immediately appealed to this court.”)17(emphasis added); id. at 791 n.4 (“[W]e hold that chapter 9 supplies a creditor with18

adequate protections against irreparable harm . . . .”); see also In re City of Vallejo, 408

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B.R. 280, 288 (B.A.P. 9th 2009) (citing Desert Hot Springs for the proposition that an

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appeal of a bankruptcy court’s eligibility order is interlocutory). Moreover, as discussed,

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supra, the Desert Hot Springs court came to its conclusion based on reasoning that

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applies to all chapter 9 eligibility decisions, specifically, the court was “not convinced

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that Congress’s whole municipal bankruptcy statutory scheme is so skewed in favor of24

the municipality that the commencement of proceedings itself causes irreparable injury.”

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The statute was amended in 2005, see P.L. 109-8, 119 Stat. 23 (2005), to provide for circuit
court jurisdiction in certain circumstances, upon certification by the bankruptcy court, district court, orbankruptcy appellate panel. 28 U.S.C. § 158(d)(2)(A) & (B); see Weber v. U.S., 484 F.3d 154, 157 (2dCir. 2007) (discussing the 2005 amendments).

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Desert Hot Springs, 339 F.3d at 790 (emphasis added). Finally, to the extent that2

CalPERS appears to suggest that a “hard and fast rule on eligibility orders” in the chapter

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9 context would “eschew” the Ninth Circuit’s pragmatic approach to finality in4bankruptcy court cases (Reply re Leave at 4 [Doc. # 15]), see In re Mason, 709 F.2d

51313, 1318 (9th Cir. 1983), CalPERS’ interpretation of the pragmatic approach is directly

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contradicted by the Ninth Circuit’s observation in Desert Hot Springs that it adopted a7“hard and fast rule” on eligibility orders in the chapter 11 context. See Desert Hot

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Springs, 339 F.3d at 788, citing In re 405 N. Bedford Dr. Corp., 778 F.2d 1374 (9th Cir.

91985) and In re Rega Properties, 894 F.2d 1136 (9th Cir. 1990). In sum, Desert Hot

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Springs stands for the proposition that chapter 9 eligibility decisions are interlocutory

11orders, and CalPERS’ attempts to distinguish it are unpersuasive.

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Finally, CalPERS contends that the equitable mootness doctrine4 could deprive it

13of Article III review of the bankruptcy court’s eligibility orders, and the Ninth Circuit did

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not consider this issue in Desert Hot Springs because that case involved a single creditor,

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rather than thousands of creditors. (Reply at 5-9.) This argument is equally unavailing as

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it amounts to another variant of CalPERS’ unsupported argument that Desert Hot

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Springs’ holding was limited to the facts of the case, rather than to chapter 9 cases

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Equitable mootness doctrine refers to the mooting of an appeal where a “comprehensive changeof circumstances has occurred so as to render it inequitable for th[e] court to consider the merits of theappeal.” In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) (internal citations omitted).
The Ninth Circuit has noted that the doctrine of equitable mootness “has some sway in bankruptcy cases
where public policy values the finality of bankruptcy judgments because debtors, creditors, and third
parties are entitled to rely on a final bankruptcy court order.” Id. In In re Thorpe, the Ninth Circuit
adopted a “comprehensive test” similar to those developed by the Second, Third, and Fifth Circuits todetermine if an appeal is equitably moot: (1) the court “look[s] first at whether a stay was sought, forabsent that a party has not fully pursued its rights”; and (2) where a stay was sought and not gained, thecourt looks to (a) “whether substantial consummation of the plan has occurred,” (b) “the effect a remedy
may have on third parties not before the court,” and (c) “whether the bankruptcy court can fashioneffective and equitable relief without completely knocking the props out from under the plan andthereby creating an uncontrollable situation for the bankruptcy court.” Id. at 881. CalPERS contends
that given the complexity of the instant appeal and the large number of creditors involved, there is a“very real threat of equitable mootness being applied against CalPERS,” in contravention of Congress’
intent to provide for appeals. (Reply re Leave at 8 [Doc. # 15].)-7-

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generally. While CalPERS contends that “arguments regarding equitable mootness . . .

2would have been of little force” in Desert Hot Springs because the debtor in that case3

filed its chapter 9 petition to avoid a single creditor (Mot. for Leave at 5, 7 [Doc. # 3]),4equitable mootness doctrine would apply in this case as it would in many, if not most,5

chapter 9 bankruptcy cases where the municipality has many creditors and a complex

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plan is anticipated. Although the Ninth Circuit presumably was aware of the equitable7

mootness doctrine,5 it nonetheless broadly held that “chapter 9 supplies a creditor with8

adequate protections against irreparable harm” in order to distinguish chapter 9 appeals

9from orders denying motions to dismiss, from a denial of a motion to dismiss an

10involuntary chapter 7 petition, for which the Ninth Circuit found that approval of an

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involuntary petition finally determined the debtor’s rights. See Desert Hot Springs, 339

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F.3d at 790-91 & 791 n.4, distinguishing In re Mason, 709 F.2d 1313 (9th Cir. 1983).

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While this Court understands and is not unsympathetic to the concerns animating

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CalPERS’ equitable mootness argument, Desert Hot Springs controls this case and this15

Court is bound by it.

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B.

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The Collateral Order Doctrine Does Not Apply
The Court also rejects CalPERS’ argument that the Court should apply the18collateral order doctrine.6

19collateral order doctrine was inapplicable because “[t]he same considerations which [led20

the court] to conclude that denying [the creditor] an immediate appeal causes no

In Desert Hot Springs, the Ninth Circuit found that the

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Though the Ninth Circuit articulated a “comprehensive” equitable mootness test in In re Thorpe
Insulation Co., 677 F.3d at 880-81, the Ninth Circuit applied the equitable mootness doctrine wellbefore its decision in Desert Hot Springs. See, e.g., In re Onouli-Kona Land Co., 846 F.2d 1170, 1172
(9th Cir. 1988).
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Collateral order doctrine “allows courts of appeals to treat orders that are interlocutory in nature
as final under 28 U.S.C. § 1291 if three conditions are met. The order must (1) conclusively determine
the disputed question, (2) resolve an important question completely separate from the merits of theactions, and (3) be effectively unreviewable on appeal from final judgment.” In re Westwood Shake &Shingle, Inc., 971 F.2d 387, citing Coopers & Lybrand v. Livesay, 437 U.S. 463, 468, 98 S. Ct. 2454, 57
L. Ed. 2d 351 (1978).

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irreparable harm also [led the court] to conclude that the bankruptcy court’s ruling is not2‘effectively unreviewable on appeal from a final judgement [sic].’” 339 F.3d at 788 n.1,

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quoting Does I thru XXIII v. Advanced Textile Corp., 214 F.3d 1058, 1066 (9th Cir.

42000). CalPERS again tries to distinguish Desert Hot Springs on the grounds that

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CalPERS “will likely suffer irreparable harm” if the equitable mootness doctrine is6

enforced. (Reply re Leave at 11 [Doc. # 15].) The Court rejects this analysis for the7

reasons previously articulated in its discussion of finality, supra.

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In sum, applying Desert Hot Springs as the controlling precedent, this Court finds

9that the bankruptcy court’s order is an interlocutory order, and the Court must determine

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whether to grant CalPERS leave to appeal.

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C.

Motion for Leave to Appeal

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CalPERS moves the Court to grant leave to appeal the bankruptcy court’s

13interlocutory order under 28 U.S.C. § 158(a)(3). While neither section 158 nor the

14bankruptcy procedural rule governing motions for leave to appeal7 provides standards for15

a determination of whether leave to appeal should be granted, the Ninth Circuit

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Bankruptcy Appellate Panel (“BAP”) “looks to the standards set forth in 28 U.S.C. §171292(b), which concerns the taking of interlocutory appeals from the district courts to the18

court of appeals.” In re Roderick Timber Co., 185 B.R. 601, 604 (B.A.P. 9th Cir. 1995).

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As the Ninth Circuit treats the BAP’s decisions as persuasive authority, In re Silverman,

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616 F.3d 1001, 1005 n.1 (9th Cir. 2010), and the Court finds no reason to depart from21

BAP precedent here, the Court looks to the standards of section 1292(b).

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Federal Rule of Bankruptcy Procedure 8003(a) provides:
A motion for leave to appeal under 28 U.S.C. § 158(a) shall contain:(1) a statement of the facts necessary to an understanding of the questions to bepresented by the appeal; (2) a statement of those questions and of the relief
sought; (3) a statement of the reasons why an appeal should be granted; and (4) acopy of the judgment, order, or decree complained of and of any opinion or
memorandum relating thereto. Within 14 days after service of the motion, an
adverse party may file with the clerk an answer in opposition.
Fed. R. Bankr. P. 8003(a).

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Under section 1292(b), granting leave to appeal is appropriate where an order2“involves a controlling question of law as to which there is substantial ground for3

difference of opinion and that an immediate appeal from the order may materially4advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b). The Ninth

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Circuit has construed section 1292(b) to constitute three separate requirements,

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specifically: (1) a controlling question of law; (2) on which there are substantial grounds

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for difference of opinion; and (3) an immediate appeal may materially advance the8ultimate termination of the litigation. See In re Cement Antitrust Litig. (MDL No. 296),9673 F.2d 1020, 1026 (9th Cir. 1982). Some courts have added an additional requirement

10that “[l]eave to appeal should not be granted unless refusal would result in wasted

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litigation and expense.” See In re NSB Film Corp., 167 B.R. 176, 180 (B.A.P. 9th Cir.

121994).

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The Court addresses each of these requirements in turn.

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1.

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The Ninth Circuit has held that a “controlling question of law” is one in which “the16resolution of the issue on appeal could materially affect the outcome of litigation in the17[trial] court.” In re Cement Antitrust Litig., 673 F.2d 1020 (9th Cir. 1982); see Conte v.

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Jakks Pac., Inc., 12-CV-00006, 2013 WL 246985, at *2 (E.D. Cal. Jan 22, 2013).

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Controlling Question of Law

CalPERS identifies the following issues as the questions to be presented by its
appeal:21

Whether the bankruptcy court’s entry of the order granting summary

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judgment in the City’s favor is proper where:

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(i)

adjustment;

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(ii)

the City filed its Petition without negotiating with any of its
major creditors;

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the City filed its Petition without any concept of a plan of(iii)

the City failed to explore any alternatives to bankruptcy;

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(iv)

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a year after the City filed its Petition, [sic] had not even tasked2

someone with developing the basic terms of a plan of3

adjustment;(v)

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the City failed to make meaningful financial information

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available to pre- and postpetition creditors during the course of6

its bankruptcy;(vi)

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the City made significant prepetition preferential transfers prior
to filing its Petition; and89(vii) the bankruptcy court denied CalPERS’ request to obtain any

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discovery regarding the City’s eligibility and good faith.

11(Mot. for Leave at 7-8 [Doc. # 3].) In its statement of reasons why an appeal should be

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granted, CalPERS explains that these issues go to whether the bankruptcy court judge

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improperly interpreted the standards for eligibility—specifically the requirement under

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11 U.S.C. § 109(c)(4) that a municipality “desires to effect a plan to adjust its debts,”815

and the requirement under 11 U.S.C. § 921(c) that a chapter 9 petition be filed in good16

faith9—so as to “deprive[ ] the Bankruptcy Code’s eligibility requirements of real17

meaning.” (Id. at 8.)

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Section 109(c) provides that an entity “may be a debtor” under chapter 9 “if and only if” itmeets five requirements: (1) it is a municipality; (2) it “is specifically authorized . . . to be a debtor
under such chapter by State law, or by a governmental officer or organization empowered by State law
to authorize such entity to be a debtor under such chapter”; (3) it is insolvent; (4) it “desires to effect aplan to adjust such debts” and (5) it meets at least one of four additional requirements: (a) it has“obtained the agreement of creditors holding at least a majority in amount of the claims of each classthat such entity intends to impair under a plan in a case under such chapter”; (b) it “has negotiated ingood faith with creditors and has failed to obtain the agreement of creditors holding at least a majority inamount of the claims of each class that such entity intends to impair under a plan in a case under suchchapter”; (c) it “is unable to negotiate with creditors because such negotiation is impracticable”; or (d) it“reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547
of this title.” 11 U.S.C. § 109(c) (emphasis added).
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Section 921(c) provides that “[a]fter any objection to the petition, the court, after notice and ahearing, may dismiss the petition if the debtor did not file the petition in good faith or if the petition does
not meet the requirements of this title.” 11 U.S.C. 921(c) (emphasis added). Courts appear to have-11-

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The City contends that none of the issues raised by CalPERS are controlling2

questions of law as to which there is a substantial ground for difference of opinion,3

because the issues “involve fact issues, not controlling legal issues,” the law does not4require the City to engage in the actions identified by CalPERS, the bankruptcy court

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considered the issues CalPERS identified and rejected them, and/or the bankruptcy court

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found the issues to be irrelevant to its analysis. (Opp’n to Leave at 15-20 [Doc. # 8].)

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The City’s analysis misses the point. First, the issues presented by CalPERS are8

merely restatements of the facts that the bankruptcy court found to be uncontroverted for9

the purpose of the summary judgment motion on the City’s eligibility. (See Bankruptcy

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Court Eligibility Opinion of October 16, 2013 at 13-15 (hereinafter “Eligibility Order”).)

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Thus, they do not present questions of fact on appeal, as the City appears to contend.

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Second, CalPERS’ issues go to how sections 109(c)(4) and 921(c) should be construed,

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issues for which—as CalPERS notes—there is no binding authority. (Mot. for Leave at

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10 [Doc. # 3].) Thus, notwithstanding the City’s conclusory assertions about what “the15law does not require” (see, e.g., Opp’n at 16 [Doc. # 8]), at issue is precisely what the law

16does require. The fact that the bankruptcy court already considered the issues CalPERS

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raises or found the issues to be irrelevant to its consideration of eligibility does not18necessarily mean that the law does not require different analysis or construction. As the19bankruptcy court noted in a hearing on CalPERS’ motion to certify its appeal of the20

eligibility decision to the Ninth Circuit:

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There is a side of me that would support the Ninth Circuit weighing in on

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these tricky definitions of desire and good faith, to give direction not only to23

cities in the State of California, but my guess is if the Ninth Circuit ruled,24

there would be citations of that circuit authority by bankruptcy courts around

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uniformly construed the section 109(c) requirements to be mandatory despite the permissive language ofthe statute, and they have construed the good faith section to be permissive. 6 Collier on Bankruptcy ¶921.04[4] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 2007). This Court expresses no opinion
on these precedents.

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the country, because right now we’re citing each other’s opinions from the2trial level because there’s nothing else to look at, and . . . if there are some3

definitive rulings, it would give direction to potential debtor cities, as well as

4potential creditors in those proceedings, perhaps changing the landscape of5

how much the eligibility battle has become the war that it is . . . .

6(November 13, 2013 Hearing on CalPERS’ request for reconsideration regarding

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proposed order on certification, 124:25; 125:1-12 [Doc. # 8-1, Exh. 3].)8

Here, the interpretation of sections 109(c)(4) and 921(c) are controlling questions

9of law because the resolution of these issues on appeal could result in the City being

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found ineligible for chapter 9 bankruptcy, thereby “materially affect[ing] the outcome of

11

litigation in the [trial] court.” See In re Cement Antitrust Litig., 673 F.2d 1020 (9th Cir.

121982).

13

2.

Substantial Grounds for Difference of Opinion

14

Substantial grounds for difference of opinion exist where “novel legal issues are15

presented, on which fair-minded jurists might reach contradictory conclusions.” The

16

Ninth Circuit has clarified that “[a] substantial ground for difference of opinion exists

17

were reasonable jurists might disagree on an issue’s resolution, not merely where they18

have already disagreed.” Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 688 (9th19

Cir. 2011) (emphasis added).

20

CalPERS does not contend that reasonable jurists have already disagreed about the21

meaning of the relevant provisions, but rather that there is no binding precedent and22“reasonable jurists could differ in their interpretation of the ‘good faith’ and ‘desire’

23

eligibility requirements.” (Reply re Leave at 15-16 [Doc. # 15].) The City responds that24

regardless of the “dearth of cases . . . , there are no substantial grounds for a difference of25

opinion” on the meaning of the two provisions,” given that “the cases on what is26

sufficient for desire to effect a plan and good faith are all consistent, and Judge Jury’s

27

ruling is entirely within the four corners of such precedent.” (Opp’n to Leave at 20-21

28[Doc. # 8].)-13-

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1

The Court finds the City’s reasoning unpersuasive. As an initial matter, courts

2

considering eligibility for chapter 9 bankruptcy protection have widely divergent views

3

about how the eligibility requirements should be applied. Compare In re New York City

4

Off-Track Betting Corp., 427 B.R. 256, 264 (Bankr. S.D.N.Y. 2010) (“Bankruptcy courts

5should review chapter 9 petitions with a jaded eye. . . . In light of [constitutional]

6

concerns, bankruptcy courts scrutinize petitions for relief under chapter 9.”), and In re

7

Sullivan Cnty. Reg’l Refuse Disposal Dist., 165 B.R. 60, 82 (Bankr. D.N.H. 1994) (“The8bankruptcy court’s jurisdiction should not be exercised lightly in Chapter 9 cases, in light9of the interplay between Congress’ bankruptcy power and the limitations on federal

10

power under the Tenth Amendment. Considering the bankruptcy court’s severely limited

11

control over the debtor, once the petition is approved, access to Chapter 9 relief has been

12

designed to be an intentionally difficult task.”), with In re City of Vallejo, 408 B.R. 280,13289 (B.A.P. 9th Cir. 2009) (“We construe broadly § 109(c)’s eligibility requirements ‘to14

provide access to relief in furtherance of the Code’s underlying policies.’” (quoting In re

15

Valley Health Sys., 383 B.R. 156, 163 (Bankr. C.D. Cal. 2008))).

16

While courts applying section 109(c) have largely agreed that there is “no bright-

17

line test . . . for determining whether a debtor desires to effect a plan because of the18highly subjective nature of the inquiry,” and debtors “may satisfy the subjective

19

requirement with direct and circumstantial evidence,” see, e.g., In re City of Detroit,20

Mich., 13-53846, 2013 WL 6331931, at *62 (Bankr. E.D. Mich. Dec. 5, 2013), this21

provides little guidance as to the quantity and quality of evidence a debtor must provide

22of its intent, particularly in light of the paucity of controlling precedent. CalPERS

23

appears to suggest that certain factors, such as whether the debtor considered alternatives

24

to bankruptcy pre-petition, must be present for a municipality to be found eligible. (See25

Mot. for Leave at 8 [Doc. # 3].)26

Similarly, courts have agreed that “[g]ood faith in the chapter 9 context is not

27

defined in the Code and the legislative history of § 921(c) sheds no light on Congress’

28

intent behind the requirement.” Courts also have looked to analysis in the chapter 11-14-

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1

context for guidance, In re County of Orange, 183 B.R. 594, 608 (Bankr. C.D. Cal.

21995), but these cases again provide little insight into how the good faith requirement

3should be applied. Notably, some courts have found that they “must consider the broad

4

remedial purpose of the bankruptcy code” in conducting the good faith analysis and it

5

follows that there should be a “strong presumption in favor of chapter 9 relief” if the6criteria of section 109 are met, see, e.g., In re City of Detroit, Mich., 2013 WL 6331931,

7

at *72. Yet, such reasoning relies on the premise that chapter 9 relief should be broadly

8

available, which itself is the subject of substantial disagreement, as the court noted,

9supra.

10

While the Court expresses no opinion at this time about the appropriateness of the

11bankruptcy court’s construction of section 109(c)(4) and section 921(c), it finds

12

persuasive CalPERS’ argument that substantial grounds for difference of opinion exist on

13

these issues of statutory construction, which are of great public importance.

14

3.

Materially Advance the Ultimate Termination of the Litigation

15

The City contends—without citing any authority—that CalPERS must prove “that16

resolution of a controlling legal question would serve to avoid a trial or otherwise

17

substantially shorten the litigation.” (Opp’n to Leave at 23 (emphasis added) [Doc. # 8].)18

This is an incorrect statement of the law. The Ninth Circuit recently noted that “neither §191292(b)’s literal text nor controlling precedent requires that the interlocutory appeal have20

a final, dispositive effect on the litigation, only that it ‘may materially advance’ the21

litigation.” Reese, 643 F.3d at 688, quoting 28 U.S.C. § 1292(b) (emphasis added). In

22

Reese, the Ninth Circuit found that where reversal “may” remove a defendant and certain

23

claims from the case, it was sufficient to materially advance the litigation. Id.

24

Here, CalPERS contends that resolution of the issues may materially advance the25

ultimate termination of the litigation if a different construction of the relevant sections

26

results in a reversal of the bankruptcy court’s eligibility decision. The City disagrees

27

because it assumes that chapter 9 bankruptcy is a foregone conclusion and thus

28

“CalPERS’ appeal does not materially advance that process – it will only materially delay-15-

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1

resolution of the bankruptcy proceedings.” (Opp’n to Leave at 23 [Doc. # 8].) While the2

Court understands the dire position in which the City finds itself, as outlined by the3bankruptcy court (see Eligibility Order at 2-6), chapter 9 has mandatory eligibility

4

requirements which it must meet or its petition will be dismissed. Given that dismissal of5

the petition is a possible outcome, which would result in the termination of this litigation,

6

the Court finds the third factor satisfied. Similarly, if the City were ultimately found to7

be ineligible for chapter 9 protection, refusal to grant CalPERS leave to appeal “would

8

result in wasted litigation and expense” of unnecessary bankruptcy proceedings. See In

9re NSB Film Corp., 167 B.R. at 180.
For the foregoing reasons, the Court GRANTS CalPERS’ motion for leave to10
11

appeal.

12

D.

Motion for Certification

13

CalPERS moves for certification of its appeal of the bankruptcy court’s eligibility

14

decision directly to the Ninth Circuit pursuant to 28 U.S.C. § 158(d)(2)(B).10 [Doc. # 6.]

15

The City argues that the Court cannot grant CalPERS’ motion because CalPERS is

16unable to comply with the procedural requirements of section 158 and Federal Rule of17

Bankruptcy Procedure 8001, and these requirements are jurisdictional. (Opp’n to Cert. at

18

2, 4-6 [Doc. # 9].)

19
20
21
22
23
24
25
26
27
28

10

Section 158(d)(2)(B) provides that a bankruptcy court, district court, or bankruptcy appellate
panel shall make a certification to the court of appeals if “on its own motion or on the request of a party”
it determines that one of the following circumstances exist:(i) the judgment, order, or decree involves a question of law as to which there is nocontrolling decision of the court of appeals for the circuit or of the Supreme Court of theUnited States, or involves a matter of public importance;(ii) the judgment, order, or decree involves a question of law requiring resolution of
conflicting decisions; or(iii) an immediate appeal from the judgment, order, or decree may materially advance theprogress of the case or proceeding in which the appeal is taken[.]
28 U.S.C. § 158(d)(2)(A)&(B). Upon certification, the court of appeals shall have jurisdiction of
appeals if it authorizes the direct appeal of the judgment, order, or decree. 28 U.S.C. § 158(d)(2)(A).

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1

Under section 158, any request for certification by a party “shall be made not later2

than 60 days after the entry of the judgment, order, or decree.” 28 U.S.C. § 158(d)(2)(E).

3

Pursuant to Rule 8001, “[a] request for certification shall be filed, within the time4

specified by 28 U.S.C. § 158(d)(2), with the clerk of the court in which the matter is5pending.” Fed. R. Bankr. P. 8001(f)(3)(A). Where appeal of an interlocutory order is at

6

issue, “[a] matter is pending in a bankruptcy court until . . . the grant of leave to appeal

7

under 28 U.S.C. § 158(a)(3).” Fed. R. Bankr. P. 8001(f)(2).

8

In this case, the bankruptcy court entered its order holding that the City was

9eligible for chapter 9 bankruptcy on September 17, 2013. The deadline for filing the

10certification motion was 60 days later on November 18, 2013. On October 22, 2013,11

CalPERs filed a motion for certification in the bankruptcy court. (See Mot. at 5.) On

12

November 15, 2013, the bankruptcy court issued an order denying CalPERS’ motion

13

without prejudice11 on the following grounds:

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

11

This was the second time the bankruptcy court denied the motion without prejudice. The
bankruptcy court initially denied CalPERS’ motion without prejudice on the ground that the appeal was
not ripe for review by the Ninth Circuit where the district court had not yet ruled on the motion for leave
to file an appeal. (October 29, 2013 Hearing on CalPERS’ certification request, 104:11-25; 105:1-15[Doc. # 9-1, Exh. 2].) The court noted that it “expect[ed] [CalPERS] to renew the motion at the district
court,” and the court believed “that the questions of eligibility are issues that need to be addressed by anappellate court.” (Id. at 105:16-18; 106:7-8.)
The bankruptcy court reconsidered its initial ruling based on CalPERS’ identification of circuit
precedent in which the Ninth Circuit found it had jurisdiction over a case in a similar procedural posture.
(November 13, 2013 Hearing on CalPERS’ request for reconsideration regarding the proposed order on
certification, 96:1- 25; 97:1-24 [Doc. # 9-1, Exh. 3]). Discussing its reasoning about whether to grant
the certification motion, the bankruptcy court indicated that it “prefer[ed] not to certify questions in thiscase” because it felt certification “will make the mediation process much more difficult,” but at the sametime the court noted the absence of controlling authority regarding interpretation of the provisions at
issue and found “it would help everybody if we had a circuit’s view on how high a bar . . . eligibility [is]supposed to be.” (Id. at 98:15-24; 101:22-23.)
The City argued that the bankruptcy court should exercise its discretion not to grant thecertification motion and defer to the district court to decide the motion (1) out of deference to the district
court; (2) for reasons of judicial economy; and (3) and to avoid the possibility of inconsistent decisions.
(Paul R. Glassman, id.at 109:8-25;110:1-25;111:1-21; 118:21-25;119:2-17; 126:12-21, citing Simon &Schuster, Inc. v. Advanced Mktg. Serv., Inc., 360 B.R. 429 (Bankr. D. Del. 2007).) The bankruptcy
court appeared to adopt the City’s arguments in its order denying the motion for certification, findingthat “[t]he procedure asserted by CalPERS, in this Court’s view, is duplicative and not an efficient use-17-

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1

Leave to appeal must be granted before this interlocutory order qualifies for2

Direct Appeal under § 158(a)(3). CalPERS has a Motion for Leave pending3

at [the] District Court. If this Court had granted certification, Cal[PERS] has

4proposed to also file a Motion for Leave in the 9th Circuit. This duplication

5

is in [sic] inefficient and possibly may lead to inconsistent results. The

6

better procedure is to allow the District Court to rule on the Motion for7

Leave first. If that is granted, CalPERS may request the District Court to8

certify the Direct Appeal.

9(Bankruptcy Court Order of November 15, 2013 Denying CalPERS’ Motion for

10

Certification [Doc. # 9-1, Exh. 4].) On November 15, 2013, CalPERS filed a motion for

11certification in this Court. [Doc. # 6.]

12

Under Rule 8001(f)(2), this matter is not pending in this Court until the Court

13

grants CalPERS leave to appeal, which the Court does in the instant Order. Under

14

section 158 and Rule 8001, CalPERS’ motion is not properly before the Court because15

the action was not “pending” at the time CalPERS filed the motion on November 15,

16

2013. The Court may not decide a motion not properly before it.

17

There is a separate question, however, as to whether the Court may consider

18

CalPERS’ motion once the matter is pending in this court. There is some authority to19suggest that it may. See In re Frye, 389 B.R. 87, 90-91 (B.A.P. 9th Cir 2008). (“If a20

petition for certification filed with the bankruptcy court has not been acted upon as of the21

date of Rule 8007(b) ‘docketing,’ the petition needs to be transmitted to the bankruptcy

22

appellate panel or district court. If the bankruptcy court declines to certify an appeal, the23petition may be renewed with the appellate tribunal once the appeal is ‘docketed.’”).

24

The City contends that the 60-day requirement is jurisdictional and cannot be

25

waived. (Opp’n to Cert. at 2, 5 [Doc. # 9].) CalPERS argues that (1) it timely filed its

26
27
28

of judicial resources.” (Bankruptcy Court Order of November 15, 2013 Denying CalPERS’ Motion for
Certification [Doc. # 9-1, Exh. 4].)-18-

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1

motion in the bankruptcy court, as required under section 158; (2) Rule 8001’s

2

requirement that the motion be filed in the court where the matter is pending is not3jurisdictional; and (3) any technical noncompliance by CalPERS with Rule 8001 should4

be excused. (Reply re Cert. at 5-8 [Doc. # 13].)

5

The Court need not decide these questions. The Court agrees with the bankruptcy

6

court that it would be helpful, in the absence of any binding authority construing section

7

109(c)(4) and section 921(c), for “the Ninth Circuit [to] weigh[ ] in on these tricky

8

definitions of desire and good faith.” (See November 13, 2013 Hearing on CalPERS’

9request for reconsideration regarding the proposed order on certification, 124:25; 125:1­

10

12 [Doc. # 8-1, Exh. 3].) Under section 158, a district court “shall” make the certification

11

if “on its own motion . . . , [it] determines,” inter alia, that the bankruptcy court order

12“involves a question of law as to which there is no controlling decision of the court of13

appeals for the circuit or of the Supreme Court of the United States, or involves a matter14

of public importance.” 28 U.S.C. § 158(d)(2)(A)&(B). Accordingly, the Court will issue

15

the certification sua sponte.

16

IV.

17

CONCLUSION

18
19
20

In light of the foregoing, CalPERS’ motion for leave to appeal is GRANTED and
its certification motion is DENIED as moot.
IT IS SO ORDERED.

21
22

DATED:

December 13, 2013

23
DOLLY M. GEE
UNITED STATES DISTRICT JUDGE

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25
26

cc: Bankruptcy Court

27
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-19-