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Friday, Oct. 23, 2009 | John Ryan was out of town and took a call from his boss after he had heard that Orange County had filed for Chapter 9 municipal bankruptcy in December 1994. Ryan, a bankruptcy judge, asked who was going to be handling the case.

You, Ryan’s boss said.

Ryan told that story Thursday morning as one of three panelists on a municipal bankruptcy forum sponsored by the San Diego County Taxpayers Association. Ryan, now retired and living in Escondido, presided over Orange County’s case, which was the largest municipal bankruptcy case in history. It was resolved in a speedy 18 months.

With recessions and budget busting deficits, talk of municipal bankruptcy has been heating up all over the state. The city of Vallejo in the Bay Area is already there.

After Thursday morning’s panel, I talked with Ryan about his experience in Orange County, the difference in negotiating inside and outside of bankruptcy and when municipal bankruptcy becomes an option.

What are the lessons we can take from the Orange County bankruptcy?

I think it shows that under the right circumstances with the right attorneys that a reorganization under Chapter 9 need not take a long time. In other words, you can get the various creditor groups to come together fairly quickly, understand the circumstances, understand their risks and work out consensually a plan that can be confirmed in a rather short period of time.

One of the panelists this morning compared the judge’s role in a bankruptcy proceeding to a symphony conductor. Is that an apt metaphor?

I think it might be, although I indicated under Chapter 9 in particular the bankruptcy judge is somewhat restricted in what he or she can do with respect to the debt of a municipality. The tendency is for the municipality to want to have the bankruptcy court approve what it is doing during the bankruptcy. In that way the bankruptcy judge has a lot more influence based on what one might expect by looking at the statute. Additionally, the automatic stay is a very powerful provision in bankruptcy. It stops all creditors from doing anything to try to collect on any obligation that the creditor has with respect to the municipality. That aspect of the bankruptcy laws allows the judge to sort of control the tempo.

What are the differences between negotiations with creditor and employee groups outside of bankruptcy and inside a bankruptcy setting? Can you address the amount of “pain” that everyone feels in bankruptcy proceedings?

Outside of bankruptcy certain creditor groups can take a hard-line position that they’re not going to give anything where other creditor groups may agree to reduce their requests conditional that everybody has to take on some pain. In bankruptcy, once there’s a bankruptcy filing, everybody is in a situation where there is a strong likelihood that the pain is going to be distributed to everybody if a successful plan is going to result and the debtor is going to get out of bankruptcy. The reason for that is that the debtor has certain leverage rights in bankruptcy that it doesn’t have outside of bankruptcy.

An example is that the debtor, if it can get 2/3rds in amount and a majority in number of creditors in that group to agree, it can bind all the other creditors in that group.

So whatever classification a certain creditor would be in, a decision could be binding over them with or without their agreement?

Every creditor in that group. There’s an incentive there to negotiate rather than to be at the mercy of that particular rule in bankruptcy.

This morning you talked about how bankruptcy proceedings bring a certain “reality” to a municipality’s financial situation. I was hoping you could expand on that.

The word bankruptcy can be thrown around loosely as it somewhat has been used with respect to the city of San Diego. I was on a panel about this issue four years ago and the conversation continues. Some might say it’s like calling out wolf over a number of times and not listening when the wolf comes to the door. In that sense I don’t think that bankruptcy has been used effectively.

Can you expand on what you mean by “crying wolf” with respect to San Diego?

I don’t know that anybody is “crying wolf” with respect to bankruptcy. It’s just that people have talked about bankruptcy over a number of years as a potential solution. I don’t think that that has much impact until it becomes quite clear in terms of the position of the city that unless it gets certain relief it will file bankruptcy.

Is there anything else that would be good to know or that you want to emphasize?

It’s key that everybody understand that this is a last resort situation where the municipality has done everything that one reasonably could expect of the municipality outside of bankruptcy to resolve its problems. That should be the proper perspective. The view that bankruptcy can be used without going through those steps is really a misperception and a misunderstanding as to the purpose of bankruptcy. The other I would emphasize is that there are risks going into bankruptcy. There’s no guarantee of a successful outcome.

— Interview conducted and edited by LIAM DILLON

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