## Facts

- The City of Stockton, California faced severe fiscal distress and filed for Chapter 9 relief on June 28, 2012.
- To adopt a balanced budget for the fiscal year beginning July 1, 2012, the City unilaterally reduced its payments for retiree health benefits, shifting additional costs to retirees during the bankruptcy case.
- The Association of Retired Employees of the City of Stockton and eight retired employees filed an adversary proceeding styled as a class action on behalf of similarly situated retirees.
- Retirees sought a temporary restraining order and preliminary injunction (or, alternatively, relief from the automatic stay), a declaration that the reductions were unlawful, an order requiring continued full payment of benefits during the case, and attorney’s fees.
- Retirees argued the health benefits were vested contractual rights protected by the U.S. Constitution’s Contracts Clause and state law, and that the City could not impair those rights outside a confirmed Chapter 9 plan.
- The City opposed injunctive relief, contending the court lacked authority to direct municipal spending during Chapter 9 due to statutory limits on judicial interference with municipal property and revenues.

## Issues

1. Whether 11 U.S.C. § 904 barred the bankruptcy court from issuing injunctive or declaratory relief that would require Stockton to continue funding retiree health benefits during the Chapter 9 case.
2. Whether the City’s unilateral interim reduction of retiree health benefits violated the Contracts Clause or unlawfully impaired vested rights, and whether such rights could be enforced through ongoing-payment orders during Chapter 9.
3. Whether the bankruptcy court should abstain in favor of state-court adjudication of retirees’ contractual and state-law claims.
4. Whether, assuming retirees held enforceable rights, any federal remedy existed in Chapter 9 to compel municipal performance during the case rather than through plan treatment.

## Decision

- The court denied the application for a temporary restraining order and preliminary injunction.
- The court dismissed the adversary proceeding, concluding the requested relief was not legally available in light of § 904’s noninterference mandate.
- The court held it had bankruptcy jurisdiction and treated the matter as a core “arising in” proceeding, but declined to abstain.
- The court concluded § 904 prevented an order directing the City’s use of property or revenues to maintain benefit payments during the case.
- The court rejected the Contracts Clause theory as a basis for compelling interim payments in Chapter 9; any relief would occur through claim treatment in a plan of adjustment rather than court-ordered expenditures.

## Legal Principles

- In Chapter 9, 11 U.S.C. § 904 prohibits the court from interfering with a municipal debtor’s political or governmental powers and with its property or revenues, absent debtor consent or specific statutory authorization.
- An injunction requiring a municipality to continue paying retiree health benefits during Chapter 9 constitutes prohibited interference with municipal property or revenues under § 904.
- The bankruptcy court may have jurisdiction to determine the scope of its authority in Chapter 9, but its remedial power is sharply limited by § 904 and federalism constraints reflected in Chapter 9’s structure.
- Retiree benefit obligations that are reduced during the case may give rise to claims, but the typical remedy is participation as creditors whose rights are addressed through a Chapter 9 plan of adjustment, not interim specific performance compelled by court order.
- Contracts Clause arguments do not supply a basis for compelling municipal spending during Chapter 9 where the requested remedy would contravene § 904’s bar on judicial interference.

## Conclusion

The court held that § 904 barred any order compelling Stockton to spend municipal revenues to maintain retiree health benefits during its Chapter 9 case, denied injunctive relief, and dismissed the adversary, leaving retirees to pursue relief through the plan-of-adjustment process rather than court-directed payments.


Ass’n of Retired Emps. of Stockton v. City of Stockton (In re City of Stockton), 478 B.R. 8 (Bankr. E.D. Cal. 2012)