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Franklin High Yield Tax-Free Income Fund v. City of Stockton, California (In re City of Stockton, California)

Ninth Circuit Bankruptcy Appellate Panel Case No. EC-14-1550-DJuF (December 11, 2015) Published
The Ninth Circuit Bankruptcy Appellate Panel ("BAP") dismissed, as equitably moot, Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund (collectively, “Franklin”) and affirmed the bankruptcy court's order confirming City of Stockton, California’s (“City”) first amended plan of adjustment (“Plan”) in chapter 9. The City did not waive its right to seek dismissal of the appeal even though the City did not assert it in its response brief. An appeal is equitably moot if the case presents transactions that are so complex or difficult to unwind’ that debtors, creditors, and third parties are entitled to rely on [the] final bankruptcy court order. The BAP analyze the four factors to determine if the appeal was equitably moot as set forth in In re Thorpe Insulation Co., 677 F.3d at 881.
Procedural context:
Franklin appealed the bankruptcy court's order confirming the City's plan. On appeal, the BAP addressed the following issues: 1. Is this appeal equitably moot insofar as Franklin seeks reversal of confirmation of the Plan? 2. Is it possible to provide a remedy to Franklin in terms of increasing the payout on its unsecured claim under the Plan? 3. Did the bankruptcy court err in concluding that the Plan was “proposed in good faith” for purposes of § 1129(a)(3)? 4. Did the bankruptcy court err in concluding that the classification of Franklin’s unsecured claim was not “unfairly discriminatory” for purposes of §§ 1122(a) and 1123(a)(4)? 5. Did the bankruptcy court err in concluding that the Plan satisfied the “best interests of creditors” test in § 943(b)(7)? 6. Did the bankruptcy court err in concluding that it was not required to discount the Retiree Health Benefit Claims to present value?
The City was was dramatically affected by the recession in 2007-2008; real and commercial real property values dropped approximately 50% and unemployment increased to approximately 22%. Due to the financial decline, the City declared a series of financial emergencies in 2008, cutting its workforce by 25% and reducing the compensation of the employees to City retain. The City also retained a neutral evaluator to that aided to reaching certain adjustments to unexpired collective bargaining agreements. However, no agreement could be reached with Franklin. On June 28, 2012, the City petitioned for relief under chapter 9. Post chapter 9 filing, the bankruptcy court appointed a mediator so negotiations between the City and interested parties could continue. Various compromises were reached as a result of the mediation, and the only major creditor wherein a resolution could not be reached was Franklin. The City filed its proposed plan, and a portion of Franklin's claim was classified as part of Class 12 that included general non-priority unsecured creditor claims. At the conclusion of a trial regarding Franklin's opposition to confirmation, the bankruptcy court determined that Franklin's security had an aggregate value of $4,052,000.00. As part of the plan, the City had to obtain, and did obtain the affirmative voter support to increase taxes to fund the plan. The bankruptcy court ultimately found that the City's plan was in the best interest of the creditors; therefore, denying Franklin's objection. Franklin filed a motion to amend / alter the bankruptcy court's ruling to confirm the plan; however, the bankruptcy court determined that Franklin's argument that the Retiree Health Benefit Claims should be discounted to present day value was denied. No prior objection was filed regarding the Retiree Health Benefit Claims; moreover, even if this claim was reduced to the amount asserted by Franklin, it would not alter the treatment of Franklin's portion of the Class 12 unsecured creditor claim.
Honorable DUNN, JURY AND FARIS, Bankruptcy Judges

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