In re: City of Stockton, California

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 11, 2015
• Docket: EC-14-1550-DJuF
• Status: Published

Opinion

FILED DEC 11 2015 1 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. EC-14-1550-DJuF ) 6 CITY OF STOCKTON, CALIFORNIA, ) Bk. No. 12-32118-CMK ) 7 Debtor. ) ______________________________) 8 ) FRANKLIN HIGH YIELD TAX-FREE ) 9 INCOME FUND; FRANKLIN ) CALIFORNIA HIGH YIELD ) 10 MUNICIPAL FUND, ) ) 11 Appellants, ) ) 12 v. ) OPINION ) 13 ) CITY OF STOCKTON, CALIFORNIA, ) 14 ) Appellee. ) 15 ______________________________) 16 17 Argued and submitted on November 19, 2015 at Sacramento, California 18 Filed - December 11, 2015 19 Appeal from the United States Bankruptcy Court 20 for the Eastern District of California 21 Hon. Christopher M. Klein, Bankruptcy Judge, Presiding 22 23 Appearances: James C. Johnston, Jones Day, appeared and argued on behalf of Appellants Franklin High Yield Tax- 24 Free Income Fund and Franklin California High Yield Municipal Fund. 25 Marc A. Levinson, Orrick, Herrington & Sutcliffe 26 LLP, appeared and argued on behalf of the Appellee City of Stockton, California. 27 28 Before: DUNN, JURY AND FARIS, Bankruptcy Judges. 1 DUNN, Bankruptcy Judge: 2 3 Franklin High Yield Tax-Free Income Fund and Franklin 4 California High Yield Municipal Fund (collectively, “Franklin”) 5 appeal the bankruptcy court’s order (“Confirmation Order”) 6 confirming the City of Stockton, California’s (“City”) first 7 amended plan of adjustment (“Plan”) in chapter 9.1 We DISMISS, 8 as equitably moot, Franklin’s appeal of the Confirmation Order 9 generally and otherwise AFFIRM the Confirmation Order’s treatment 10 of Franklin’s general unsecured claim under the Plan. 11 I. FACTUAL BACKGROUND2 12 A. Events prior to bankruptcy 13 The financial problems that drove the City to seek chapter 9 14 relief did not arise overnight. The City was an epicenter of the 15 subprime mortgage default crisis that arose in conjunction with 16 17 1 Unless otherwise indicated, all chapter and section 18 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 19 all “Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. 20 2 Historical background facts are taken primarily from the 21 City’s modified disclosure statement, filed on November 21, 2013 22 (“Disclosure Statement”), and the bankruptcy court’s published opinion on the City’s eligibility for chapter 9 relief in In re 23 City of Stockton, California, 493 B.R. 772 (Bankr. E.D. Cal. 2013). Franklin only included portions of the Disclosure 24 Statement in their excerpts of record. We have exercised our 25 discretion to review the entire Disclosure Statement and certain other documents in the electronic record of the City’s main 26 chapter 9 case. See O’Rourke v. Seaboard Sur. Co. (In re E.R. 27 Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 28 (9th Cir. BAP 2003).

-2- 1 the recession that began in 2007-08. During this period, real 2 estate values, both commercial and residential, in the City 3 declined by around 50%, and unemployment grew to about 22%. The 4 median home price in the City dropped from $397,000 in 2006 to 5 $109,000 in 2012, a decline of 72%. Disclosure Statement, at 17. 6 The City had one of the highest foreclosure rates in the country. 7 Consequently, property tax, sales tax and other public revenues 8 declined precipitously. 9 Two self-inflicted factors worked to exacerbate 10 significantly the City’s financial problems: 1) As noted by the 11 bankruptcy court, 12 In better times, [the City] committed its general fund to back long-term bonds to finance development projects 13 based on an overly-sanguine “if-you-build-it-they-will- come” mentality. They did not come. Hence project 14 revenues were insufficient to pay project bills. 15 City of Stockton, 493 B.R. at 779. 16 2) In addition, the City had a history of compensating its 17 employees at above-market levels. 18 Among other things, the City paid for generous health care benefits to which employees did not contribute, 19 including lifetime health care regardless of length of service. It permitted, to an unusual degree, so-called 20 “add-pays” for tasks that allowed nominal salaries to be increased to totals greater than those prevailing 21 for other municipalities. And there were pre- determined automatic annual cost-of-living pay 22 increases not tied to the state of the economy or local finances. . . . Pensions were allowed to be based on 23 the final year of compensation, which compensation could include essentially-unlimited accrued vacation 24 and sick leave. This led to a phenomenon of so-called “pension-spiking” in which a pension could be 25 substantially greater than the retiree’s actual final salary. Nor were individual employees required to 26 contribute to their pensions. 27 Id. 28 The City’s financial problems were obscured by faulty

-3- 1 management and accounting practices. “City accounts were in such 2 disarray that it has taken literally years to unscramble them.” 3 Id. However, ultimately, the City’s fiscal excesses, 4 particularly in light of the recession, proved unsustainable. 5 Beginning in 2008, the City declared a series of financial 6 emergencies and took certain unilateral actions to try to get its 7 fiscal house in order. The City reduced its work force “by 25% 8 from 1,886 on July 1, 2008 to 1,420 on December 31, 2011.” Id. 9 at 780. “[S]worn police officers were cut by 25%, non-sworn 10 police staffing by 20%, fire staffing by 30%, and non-safety 11 staffing by 43%.” Disclosure Statement, at 9. Compensation to 12 City employees was reduced by $52 million, and staffing and 13 service levels were cut by $38 million, “for an overall General 14 Fund budget reduction of approximately $90 million during fiscal 15 years 2009-10, 2010-11, and 2012-13.” Id. Unfortunately, these 16 actions were not enough to solve the City’s fiscal problems. 17 As of June 30, 2012, the City’s general fund budget for the 18 2012-13 fiscal year was projected to be $25.9 million under 19 water, with funding potentially not available to cover July 2012 20 payroll, unless drastic action was taken. Id. Accordingly, the 21 City Manager and Stockton’s City Council took steps to initiate 22 the neutral evaluation process under California Government Code 23 (“Cal. Gov. Code”) § 53760 as a prelude to a chapter 9 filing. 24 City of Stockton, 493 B.R. at 780-81. 25 Former bankruptcy judge Ralph Mabey was selected as the 26 neutral evaluator. Thereafter, the neutral evaluation process 27 continued for ninety days, as authorized by Cal. Gov. Code 28 § 53760.3(r), and some positive results were achieved: Agreements

-4- 1 were negotiated to adjust all unexpired collective bargaining 2 agreements with City employees, and substantial progress was made 3 in negotiations with some other stake holders. Id. at 783. 4 However, no agreements were reached with any capital markets/bond 5 creditors, including Franklin. Id. at 782-83. 6 B. Chapter 9 filing and events prior to confirmation 7 The City filed its petition for relief under chapter 9 on 8 June 28, 2012. From the outset, proceedings in the City’s 9 bankruptcy case were contentious. The capital markets/bond 10 creditors contested eligibility, and “only after many months of 11 costly discovery, briefing, legal maneuvering, and ultimately a 12 trial” did the bankruptcy court determine that the City was 13 entitled to relief in chapter 9. The order for relief was 14 entered on April 1, 2013, and the bankruptcy court’s opinion 15 stating its findings and conclusions as to the City’s eligibility 16 for chapter 9 relief was entered on June 12, 2013. See City of 17 Stockton, 493 B.R. 776-98 (Bankr. E.D. Cal. 2013). The 18 bankruptcy court’s eligibility decision was not appealed and is 19 final. 20 In the meantime, the bankruptcy court had appointed Oregon 21 bankruptcy judge Elizabeth L. Perris as mediator on July 12, 22 2012, and negotiations continued between the City and interested 23 parties under her auspices, with the goal of reaching agreement 24 on the terms for a consensual plan of adjustment. These 25 negotiations were protracted and proceeded in fits and starts, 26 but over time, they were largely successful, with definitive 27 settlements reached with the following creditors and creditor 28 groups:

-5- 1 1) The Stockton Police Officers’ Association – the only 2 labor organization with which the City had not reached agreement 3 prepetition; 4 2) The Official Committee of Retirees – which represented 5 2,100 retirees with pension benefits, of which approximately 6 1,100 also claimed rights to lifetime health benefits (“Retiree 7 Health Benefit Claims”); 8 3) California Public Employees’ Retirement System 9 (“CalPERS”) – which administers the City’s pensions; 10 4) Assured Guaranty Corp. and Assured Guaranty Municipal 11 Corp. (collectively, “Assured”) – which insured the City’s 12 pension bonds; 13 5) National Public Finance Guarantee Corporation (“NPFG”) – 14 which insured an aggregate of approximately $93.8 million in 2004 15 and 2006 City bonds, secured in part by parking structures, among 16 other things. 17 6) Ambac Assurance Corporation (“Ambac”) – which insured 18 approximately $13.3 million in 2003 City certificates of 19 participation; and 20 7) Wells Fargo Bank (“Wells Fargo”) – which served as the 21 indenture trustee for a number of the City’s bond issues. 22 In fact, the only major creditor group with which no 23 settlement was negotiated was Franklin. 24 C. Plan provisions and confirmation proceedings 25 The Plan submitted by the City for confirmation classified 26 claims, incorporating the mediated settlements with creditor 27 constituencies, including the following: 28 1) Claims of CalPERS and pension plan participants (Class 15):

-6- 1 The claims of pension plan participants and CalPERS were treated 2 as unimpaired because the City settled with them on the basis 3 that it would remain bound to honor their legal, equitable and 4 contract rights unaltered. (The quid pro quo for the City’s 5 settlement was that it would be relieved of liability to pay 6 Retiree Health Benefit Claims, except for $5,100,000, to be paid 7 as provided for general unsecured claims in Class 12.) 8 2) Claims of Assured (Classes 5 and 6): Assured’s claims were 9 treated as impaired, entitling Assured to vote both as Class 5 10 and Class 6. Under the Plan, the City agreed to transfer fee 11 title to its interest in an office building located at 400 E. 12 Main Street in Stockton (“400 E. Main”), its planned replacement 13 for city hall, to Assured in exchange for the extinguishment of 14 the City’s obligations under 2007 lease obligation bonds. Lease 15 arrangements with respect to 400 E. Main were to be altered to 16 provide that the City would lease space in 400 E. Main from 17 Assured for eight years at below-market rates, with four one-year 18 options to renew. As part of their settlement, the City and 19 Assured agreed that the City’s obligations under pension bonds 20 would be reduced to 52%, but allowed for contingent full 21 repayment of the bond obligations if the City’s revenues out- 22 performed certain baseline projections. 23 3) Claims of NPFG (Classes 2, 3 and 4): NPFG’s 2004 parking 24 structure bonds were to be paid through a new Parking Authority, 25 to be created by the City, that would take ownership of all 26 downtown Stockton parking facilities. The payment obligation for 27 the bonds would be shifted from the General Fund to the Parking 28 Authority, removing the obligation from the General Fund ledger.

7 1 NPFG’s 2004 arena-related bonds were secured by both a lease of 2 the arena and a pledge of certain restricted tax revenues. The 3 bonds were to be restructured to provide debt service savings and 4 make it more likely that the restricted tax revenues would be 5 sufficient to service the debt. A ceiling on General Fund 6 liability was negotiated as part of this settlement. Finally, 7 NPFG’s 2006 bonds were secured by a lease on the Stewart 8 Eberhardt Building, which houses the City’s departments of Human 9 Resources, 911 Dispatch, Police Investigations and Crime Lab, and 10 Public Works. Because the Stewart Eberhardt Building was 11 constructed to meet California’s “essential services” building 12 standards, it would be very expensive to replace. Accordingly, 13 the settlement provided that the obligations of the City under 14 NPFG’s 2006 bonds would not be altered. NPFG’s claims in Classes 15 2, 3 and 4 were treated as impaired. 16 4) Claims of Ambac (Classes 1A and 1B): Ambac’s claims were 17 secured by leases of the City’s main police station, two fire 18 stations, and a library branch. The Plan did not purport to 19 alter the amounts due to holders of the 2003 City certificates of 20 participation, but the Plan provided for a reduction of the 21 General Fund’s liability with respect to Ambac’s claims and for 22 future flexibility to extend payments, if necessary, such that 23 Ambac would have rights to vote as “impaired” in both Classes 1A 24 and 1B under the Plan. 25 5) General Unsecured Claims (Class 12): Included in class 12 26 were “Golf Course/Park Unsecured Claim” (Franklin’s unsecured 27 claim); Retiree Health Benefit Claims; Leave Buyout Claims; the 28 claim filed by Michael A. Cobb; and miscellaneous Other

8 1 Postpetition Claims and General Unsecured Claims. The mediated 2 agreement with the Official Committee of Retirees provided that 3 the Retiree Health Benefit Claimants would receive an aggregate 4 payment of $5,100,000 in full satisfaction of their allowed 5 claims. All other creditors in Class 12 would receive a 6 percentage of the allowed amounts of their respective claims 7 equal to the percentage that the Retiree Health Benefit Claimants 8 would recover (based on the $5,100,000 payment). 9 As noted above, the City did not reach a settlement with 10 Franklin, but the City offered Franklin the opportunity to share 11 pro rata in contingent funds promised to Assured if a deal could 12 be made with respect to treatment of Franklin’s claims. 13 Franklin objected to confirmation of the Plan. Following 14 extensive pre-hearing briefing by the parties, the bankruptcy 15 court conducted a five-day trial of confirmation issues. At the 16 same time, the bankruptcy court heard evidence to determine the 17 amount of Franklin’s secured claim in a pending adversary 18 proceeding. The bankruptcy court received and considered 19 multiple post-hearing submissions and heard a day of post-hearing 20 argument. 21 At a hearing on July 8, 2014, the bankruptcy court announced 22 its findings as to the value of Franklin’s collateral, consisting 23 of two golf courses, a community center associated with one of 24 the golf courses, and an ice skating rink. The bankruptcy court 25 found the aggregate value of Franklin’s security to be 26 $4,052,000. Franklin has not appealed that finding. Thereafter, 27 the City amended the Plan to provide for treatment of Franklin’s 28 secured claim as Class 20, specifying that Franklin’s allowed

9 1 secured claim in the amount of $4,052,000 would be paid in full 2 on the effective date of the Plan. 3 At a hearing (“Hearing”) on October 30, 2014, the bankruptcy 4 court stated orally on the record its findings and conclusions 5 with respect to confirmation of the Plan. The first thing the 6 bankruptcy court did was incorporate the findings and conclusions 7 from its eligibility determination. See City of Stockton, 493 8 B.R. at 776-98. It noted the outstanding objections to 9 confirmation from Franklin, focusing on Franklin’s challenges to 10 the City’s good faith in proposing the Plan and its argument that 11 its claim should be separately classified from the general 12 unsecured class. The bankruptcy court further noted that one of 13 the requirements for implementation of the Plan was that the 14 City’s voters approve a tax increase to fund Plan obligations, 15 and the City’s voters had done so. 16 The bankruptcy court quoted § 1122(a)’s requirement that, 17 “[A] plan may place a claim or an interest in a particular class 18 only if such claim or interest is substantially similar to the 19 other claims or interests of such class.” It then observed that 20 bond claims, other than Franklin’s, were all separately 21 classified, “and that’s appropriate because each one has its own 22 legal rights and status.” 23 The bankruptcy court noted that § 1123(a)(4) “requires that 24 there be the same treatment of each claim or interest of a 25 particular class unless the holder of a claim or interest agrees 26 to less favorable treatment.” It then stated that it had 27 examined the treatment of all of the classes of claims in the 28 Plan, with particular focus on Class 12's treatment of general

10 1 unsecured claims, and found “there is equal treatment with 2 respect to all of the claims that are general unsecured claims.” 3 Accordingly, it concluded that the requirements of § 1123(a)(4) 4 had been satisfied. In addition, later on during the Hearing, 5 the bankruptcy court determined the aggregate amount of the 6 Retiree Health Benefit Claims to be $545 million. 7 The bankruptcy court further noted § 1129(a)(3)’s 8 requirement that “the Plan must have been proposed in good faith 9 and not by any means forbidden by law.” It considered Franklin’s 10 objection that it was unfairly discriminatory to treat Franklin’s 11 unsecured claim as provided for in Class 12 while not altering 12 the treatment of the City’s pension obligations. However, it 13 rejected Franklin’s argument. 14 The general reduction in compensation has an indirect effect on pensions. The reduction in . . . number of 15 employees has a significant effect to pensions. There are fewer people entitled to pensions in the first 16 place. Also, the City has a plan for new employees in which pensions are less generous than the existing 17 pensions, and those have all been approved and signed off in the collective bargaining agreements. 18 19 Hr’g Tr. Oct. 30, 2014, at 35:9-16. In addition, the bankruptcy 20 court pointed out that, “[O]ne of the features of the agreements 21 with other capital market creditors is a contingent fund that is 22 available in a number of years down the Plan that is designed to 23 provide for additional payment if the finances of the City 24 prosper and that . . . more than 20 percent of that was reserved 25 for Franklin Funds if it wished to take advantage of it before 26 the time of confirmation,” but Franklin elected not to accept 27 that option. Id. at 36:13-20. Based on those findings, the 28 bankruptcy court concluded that the Plan had been proposed in

11 1 good faith and not by any means forbidden by law. 2 The bankruptcy court, after reiterating its understanding 3 that Franklin had challenged the classification of its unsecured 4 claim under the Plan, noted that all impaired classes had voted 5 to accept the Plan, and, thus, the requirements of §§ 1129(a)(8) 6 and 1129(a)(10) were satisfied.3 7 The bankruptcy court then moved on to consider whether the 8 requirements for confirmation of a plan of adjustment in chapter 9 9 under § 943(b) were satisfied and so found. In particular, it 10 found that “[a]ll amounts to be paid by the debtor or any person 11 for services or expenses in the case or incident to the Plan have 12 been fully disclosed and are reasonable.” Accordingly, the 13 requirements of § 943(b)(3) were satisfied. 14 The bankruptcy court further found that, in light of the 15 City voters’ approval of the sales tax increase necessary to fund 16 the Plan, the requirements of § 943(b)(6) were satisfied. 17 Finally, the bankruptcy court considered § 943(b)(7), which 18 requires that the Plan be in the best interests of creditors and 19 be feasible. It noted that the “best interests” test in chapter 20 9 is necessarily different from the test in chapter 11, which 21 requires that creditors receive at least as much as they would 22 receive in a chapter 7 liquidation. “[I]t goes without saying 23 3 Toward the end of the hearing, counsel for the City 24 pointed out that one impaired class, Class 14, tort claimants 25 against the City, had voted in favor of the Plan in terms of the majority in amount required under the Bankruptcy Code, but not in 26 number. The bankruptcy court did not make further findings with 27 respect to Class 14 at the Hearing, but as no member of Class 14 has appealed the Confirmation Order, we do not consider this 28 matter further.

12 1 that a municipality cannot be liquidated, so it’s kind of hard to 2 figure out what a hypothetical liquidation would be.” Hr’g Tr. 3 Oct. 30, 2014, at 40: 20-23. 4 Having considered carefully the provisions of the Plan and 5 available alternatives, including starting over to construct a 6 new chapter 9 plan at great additional cost, the bankruptcy court 7 found that the Plan was “the best that can be done in terms of 8 the restructuring and adjustments of the debts of the City” and 9 concluded that the requirements of § 943(b)(7) were satisfied. 10 Accordingly, the Plan would be confirmed. 11 Franklin filed a motion to alter or amend findings of fact 12 and conclusions of law (“Motion to Amend Findings”), arguing that 13 the Retiree Health Benefit Claims should be discounted to present 14 value, which would reduce those claims below the $545 million 15 amount found by the bankruptcy court at the Hearing. The 16 bankruptcy court addressed the Motion to Amend Findings at a 17 hearing on December 10, 2014. It first noted that no 18 objection(s) had been filed to the Retiree Health Benefit Claims, 19 and accordingly, under § 925, they were deemed allowed. It then 20 noted that, even if it discounted the Retiree Health Benefit 21 Claims to present value, the lowest aggregate amount argued for 22 the claims was $261.9 million, as advocated by Franklin, and 23 using that number would not change the Class 12 voting outcome 24 for the Plan. 25 The bankruptcy court then discussed the parties’ 26 presentations as to appropriate discount rates, and after 27 analyzing their presentations and applicable authorities, 28 including § 502, it characterized the Retiree Health Benefit

13 1 Claims as an entirely unfunded benefit as of the filing date and 2 determined that it was not required to discount the Retiree 3 Health Benefit Claims to present value. Accordingly, the 4 bankruptcy court denied the Motion to Amend Findings. 5 Franklin filed a notice of appeal and a motion for stay 6 pending appeal (“Stay Motion”). After hearing argument from the 7 parties, the bankruptcy court announced its decision on the Stay 8 Motion at a hearing on January 20, 2015. Noting that the City’s 9 chapter 9 case had unfolded over a period of two and a half 10 years, the bankruptcy court went over its rationale for 11 confirming the Plan, enunciated in greater detail in its oral 12 findings and conclusions at the Hearing. It then addressed the 13 standards for the imposition of a stay pending appeal. 14 In light of the history of the case, the issues raised, and 15 the relatively deferential standard of review as to its fact 16 findings, the bankruptcy court concluded that Franklin’s 17 likelihood of success on the merits on appeal was low. Noting 18 that Franklin’s counsel stated in argument that “only money” was 19 at issue, and “I’m confident that the City is going to be around, 20 and it’s still going to have the citizenry of a couple hundred 21 thousand people,” the bankruptcy court did not see how 22 significant or irreparable harm would come to Franklin in the 23 absence of a stay. On the other hand, it found that imposing a 24 stay pending appeal would impose substantial harm on the City and 25 its other creditors, including retirees. Finally, 26 there is the public interest. And, of course, municipal insolvency is a very complicated issue of 27 great public interest, and the estate and municipality and just the overall system, capital market system, 28 really are served by some definitive resolution of

14 1 cases so that people understand the rules of the game and know exactly what they’re facing. . . . [T]he 2 public interest is served by actually being able to implement a plan on which people can rely. 3 4 Hr’g Tr. Jan. 20, 2015, at 23:2-8 and 16-18. Accordingly, the 5 public interest militated against imposing a stay. 6 Based on these findings and conclusions, the bankruptcy 7 court denied the Motion for Stay. 8 On February 27, 2015, the bankruptcy court issued an 9 “Amended Opinion Regarding Confirmation and Status of CalPERS” 10 (“Amended Opinion”), supplementing its oral findings and 11 conclusions at the Hearing. One of the purposes of the Amended 12 Opinion was to clarify the status and amounts of Franklin’s 13 secured and unsecured claims: 14 Franklin’s unsecured claim is $30,480,190.00. The judicially-determined secured claim is $4,052,000.00, 15 which is being paid in full. And, Franklin receives $2,071,435.15 from a “Reserve Fund” funded by bond 16 proceeds and held by the indenture trustee under section 5.05 of the bond indenture. While the parties 17 differ about how to characterize the Reserve Fund, they agree that Franklin ends up with $6,123,435.15 (secured 18 claim + Reserve Fund), plus nearly 1% on its $30,480,190.00 unsecured claim. Hence, Franklin’s 19 total recovery from all sources is about 17.5% (not 12%). 20 21 Amended Opinion, at 1 n.1. Otherwise, the Amended Opinion 22 focused on Franklin’s objection argument that the City’s pensions 23 could be modified and, in light of that premise, the Plan should 24 not be confirmed if they were not modified – a premise that the 25 bankruptcy court ultimately rejected. The bankruptcy court 26 reinforced its findings that City employees and retirees, the 27 beneficiaries of the City’s pension plans, “shared the pain” with 28 the capital markets/bond creditors. It reiterated that the City

15 1 terminated its lifetime retiree health benefits program through 2 the Plan and that City pension liabilities were indirectly but 3 substantially reduced “as a result of curtailed pay and curtailed 4 future pay increases in the renegotiated collective bargaining 5 agreements.” Amended Opinion, at 51. To fund the Plan, City 6 voters “approved a sales tax increase in the greatest amount and 7 for the longest period permitted by California law.” Id. at 53. 8 The bankruptcy court restated its conclusions that the standards 9 for confirmation of the Plan in chapter 9 had been met and that 10 the Plan would be confirmed. 11 On the same day, the bankruptcy court entered the 12 Confirmation Order. Franklin’s previously filed notice of appeal 13 is deemed timely under Rule 8002(a)(2). 14 During the briefing in this appeal, the City filed a motion 15 to dismiss the appeal as equitably moot (“Motion to Dismiss”). 16 Franklin filed an opposition to the Motion to Dismiss, to which 17 the City replied. By order entered on October 14, 2015, the 18 Motion to Dismiss was taken under advisement and referred to this 19 panel for decision in conjunction with its disposition of the 20 appeal. 21 II. JURISDICTION 22 The bankruptcy court had jurisdiction under 28 U.S.C. 23 §§ 1334 and 157(b)(2)(A), (B) and (L). Except as otherwise 24 stated below, we have jurisdiction under 28 U.S.C. § 158. 25 III. ISSUES 26 1. Is this appeal equitably moot insofar as Franklin seeks 27 reversal of confirmation of the Plan? 28 2. Is it possible to provide a remedy to Franklin in terms

16 1 of increasing the payout on its unsecured claim under the Plan? 2 3. Did the bankruptcy court err in concluding that the Plan 3 was “proposed in good faith” for purposes of § 1129(a)(3)? 4 4. Did the bankruptcy court err in concluding that the 5 classification of Franklin’s unsecured claim was not “unfairly 6 discriminatory” for purposes of §§ 1122(a) and 1123(a)(4)? 7 5. Did the bankruptcy court err in concluding that the Plan 8 satisfied the “best interests of creditors” test in § 943(b)(7)? 9 6. Did the bankruptcy court err in concluding that it was 10 not required to discount the Retiree Health Benefit Claims to 11 present value? 12 IV. STANDARDS OF REVIEW 13 We review our own jurisdiction, including questions of 14 equitable mootness, de novo. Ellis v. Yu (In re Ellis), 523 B.R. 15 673, 677 (9th Cir. BAP 2014). We review the bankruptcy court’s 16 decision to confirm the Plan for an abuse of discretion. 17 Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1045 (9th 18 Cir. 2013); Computer Task Group, Inc. v. Brotby (In re Brotby), 19 303 B.R. 177, 184 (9th Cir. BAP 2003) (“The ultimate decision to 20 confirm a reorganization plan is reviewed for an abuse of 21 discretion.”). We review the bankruptcy court’s findings of fact 22 for clear error and its conclusions of law de novo. Bronitsky v. 23 Bea (In re Bea), 533 B.R. 283, 285 (9th Cir. BAP 2015). De novo 24 means that we review a matter anew, as if no decision previously 25 had been rendered. Dawson v. Marshall, 561 F.3d 930, 933 (9th 26 Cir. 2009). 27 We must affirm the bankruptcy court’s fact findings unless 28 we determine that those findings are “(1) ‘illogical,’

17 1 (2) ‘implausible,’ or (3) without ‘support in inferences that may 2 be drawn from the facts in the record.’” United States v. 3 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 4 A bankruptcy court abuses its discretion if it applies an 5 incorrect legal standard or misapplies the correct legal 6 standard, or if its fact findings are illogical, implausible or 7 not supported by evidence in the record. TrafficSchool.com, Inc. 8 v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011). 9 We may affirm the decision of the bankruptcy court on any 10 basis supported by the record. See ASARCO, LLC v. Union Pac. 11 Co., 765 F.3d 999, 1004 (9th Cir. 2014); Shanks v. Dressel, 540 12 F.3d 1082, 1086 (9th Cir. 2008). 13 V. DISCUSSION 14 A. Equitable mootness 15 In the Motion to Dismiss, the City argues that we should 16 dismiss Franklin’s appeal as equitably moot. Franklin initially 17 responds that we should not even consider the Motion to Dismiss 18 for two reasons that we address in turn. 19 1. Waiver 20 First, Franklin argues that the City waived its equitable 21 mootness argument because it could and should have raised it 22 earlier. In support of its argument, it cites familiar authority 23 to the effect that an argument not made in a party’s opening 24 brief is deemed waived. See, e.g., Miller v. Fairchild Indus., 25 Inc., 797 F.2d 727, 738 (9th Cir. 1986) (“The Court of Appeals 26 will not ordinarily consider matters on appeal that are not 27 specifically and distinctly argued in the [party’s] opening 28 brief.”).

18 1 The City responds that it properly raised the equitable 2 mootness issue by motion. See Rule 8013(a)(1) (“A request for an 3 order or other relief is made by filing a motion . . . .”); Ninth 4 Circuit Rule 27-11; Rev Op Group v. ML Manager LLC (In re 5 Mortgages Ltd.) (“Mortgages I”), 771 F.3d 1211, 1214 (9th Cir. 6 2014) (“ML Manager is also entitled to move to dismiss in this 7 court based on equitable mootness, regardless of the decisions of 8 the courts being reviewed.”); Motor Vehicle Cas. Co. v. Thorpe 9 Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869, 879 10 n.3 (9th Cir. 2012) (“Appellees’ contention on equitable mootness 11 is not asserted within its appellate brief, but was the subject 12 of a separate motion to dismiss the appeal as moot . . . .”). 13 Franklin does not argue that it was prejudiced or harmed by 14 the City’s raising the equitable mootness issue in the Motion to 15 Dismiss, and we do not perceive any prejudice to Franklin. As 16 requested in the last section of Franklin’s opposition, we are 17 considering the Motion to Dismiss in conjunction with our overall 18 disposition of this appeal. Franklin and the City both have 19 taken the opportunity for extensive further exposition of their 20 arguments in the papers filed in support of and in opposition to 21 the Motion to Dismiss, thus supplementing the already substantial 22 papering of this appeal through the parties’ oversized briefs. 23 And, even if we believed that the City had waived the issue, we 24 note that equitable mootness raises jurisdictional questions that 25 we have an independent duty to consider sua sponte. See, e.g., 26 Sahagun v. Landmark Fence Co., Inc. (In re Landmark Fence Co., 27 Inc.), 801 F.3d 1099, 1102 (9th Cir. 2015); Hunt v. Imperial 28 Merchant Servs., Inc., 560 F.3d 1137, 1141 (9th Cir. 2009),

19 1 quoting Demery v. Arpaio, 378 F.3d 1020, 1025 (9th Cir. 2004). 2 In these circumstances, we are not persuaded that the City 3 waived equitable mootness as an issue by raising it through the 4 Motion to Dismiss rather than in its answering brief. 5 2. Application of equitable mootness in chapter 9 6 Franklin next argues that the equitable mootness doctrine 7 should not apply to appeals in chapter 9 cases because “[i]n the 8 event of reversal of confirmation, the City always will be able 9 to provide at least some ‘fractional’ relief without unduly or 10 inequitably impairing the rights of others.” Appellants’ 11 Objection to Motion to Dismiss the Appeal as Equitably Moot 12 (“Objection”), at 2. Thus, Franklin argues that equitable 13 mootness should not apply in chapter 9 appeals as a matter of 14 law, supporting its argument with a fact-based rationale, and 15 therein lies the rub. 16 In support of its argument, Franklin cites the opinion of 17 the district court for the Northern District of Alabama on appeal 18 in Bennett v. Jefferson County, Alabama, 518 B.R. 613 (N.D. Al. 19 2014). In Jefferson County, the court was concerned that “one of 20 the costs of finality [through application of equitable mootness] 21 is to allow a non-Article III court to decide important 22 constitutional questions that place substantial future 23 obligations on the citizens of Jefferson County without 24 representation.” Id. at 637. Undercutting its own rationale, 25 the court recognized and agreed “that some part or parts of the 26 Confirmation Order may be impossible to reverse,” but it 27 nevertheless concluded that the constitutional issues raised with 28 respect to the county’s ceding authority to set sewer rates could

20 1 not be cut off through the application of equitable mootness. 2 Id. Its ultimate conclusion was, “In light of the public and 3 political interests at stake in any Chapter 9 proceedings, the 4 court will deny the County’s appeals to equity to allow allegedly 5 unconstitutional provisions of the Confirmation Order to stand 6 without review.” Id. at 638. 7 The district court for the Eastern District of Michigan came 8 to exactly the opposite conclusion in the appeal in Darrah v. 9 City of Detroit, Michigan (In re City of Detroit, Michigan), 2015 10 WL 5697779 (E.D. Mich, S.D. Sept. 29, 2015). After surveying the 11 limited applicable authorities, the City of Detroit court 12 concluded: 13 [T]he [equitable mootness] doctrine is not concerned with the specific chapter under which the debtor’s case 14 was brought. Rather, what matters is whether hearing the bankruptcy appeal could unravel the debtor’s plan 15 and disturb the reliance interests created by it. Because the underlying equitable considerations of 16 promoting finality and good faith reliance on a judgment [apply] with equal force to a Chapter 9 17 bankruptcy appeal, the Court sees no reason why the doctrine should not be applied to avoid disturbing a 18 Chapter 9 plan of adjustment. 19 Id. at *4. It specifically considered and rejected the 20 conclusion of the Jefferson County court. 21 [T]he interests of the City [of Detroit], its over 100,000 creditors, and its nearly 700,000 residents in 22 relying on a final judgment cannot be marginalized and dismissed in the broad brush manner adopted by the 23 Jefferson County court. If the interests of finality and reliance are paramount to a Chapter 11 private 24 business entity with investors, shareholders, and employees, then these interests surely apply with 25 greater force to the City’s Chapter 9 Plan, which affects thousands of creditors and residents. 26 27 Id. at *5. 28 This panel and the Ninth Circuit applied equitable mootness

21 1 in a chapter 9 appeal in Lionel v. City of Vallejo, California 2 (In re City of Vallejo, California), 551 Fed. Appx. 339 (9th Cir. 3 Dec. 31, 2013). 4 We are persuaded by the reasoning of the court in City of 5 Detroit that equitable mootness has a legitimate role to play in 6 bankruptcy reorganization cases of all types, chapter 11, chapter 7 13 and chapter 9 and follow the course set in In re City of 8 Vallejo. This appeal arguably presents a paradigm case for 9 considering application of equitable mootness in a chapter 9 10 context because the constitutional and political concerns that 11 troubled the court in Jefferson County are not present: The 12 City’s voters approved the sales tax increase necessary to fund 13 the Plan in advance of confirmation. Those who voted for 14 approval of the tax increase did so in reliance on the City’s 15 efforts to confirm the Plan to safeguard the provision of future 16 municipal services. As the bankruptcy court noted in its Amended 17 Opinion: 18 By the time the [City’s chapter 9] case was filed, the City had been pared down to core functions and [had] 19 been reduced to a situation in which such essential services as police and fire were being operated below 20 sustainable standards. The murder rate had soared. Police responded only to crimes in progress. A wrecker 21 had to accompany fire engines on emergency calls. 22 Amended Opinion, at 51. Several hundred thousand residents 23 depend on the City to provide future services, including police 24 and fire protection. They have a legitimate concern for finality 25 that is served by appropriate application of equitable mootness. 26 And, we note that Franklin is raising no constitutional issues in 27 this appeal, such as bedeviled the court in Jefferson County. 28 For all of these reasons, we conclude, as a matter of law, that

22 1 the equitable mootness doctrine can appropriately be applied in 2 chapter 9 cases generally and in this appeal specifically. 3 3. Standards for application of equitable mootness 4 Fortunately, in considering the application of equitable 5 mootness, we benefit from the analysis in a number of recent 6 Ninth Circuit decisions. “An appeal is equitably moot if the 7 case presents ‘transactions that are so complex or difficult to 8 unwind’ that ‘debtors, creditors, and third parties are entitled 9 to rely on [the] final bankruptcy court order.’” Mortgages I, 10 771 F.3d at 1215, quoting In re Thorpe Insulation Co., 677 F.3d 11 at 880. Accordingly, the equitable mootness doctrine focuses on 12 the reliance and finality concerns of interested parties in a 13 bankruptcy appeal, whether participating in the appeal or not. 14 “Equitable mootness occurs when a ‘comprehensive change of 15 circumstances’ has occurred so ‘as to render it inequitable for 16 this court to consider the merits of the appeal.’” In re Thorpe 17 Insulation Co., 677 F.3d at 880, quoting Trone v. Roberts Farms, 18 Inc. (In re Roberts Farms, Inc.), 652 F.2d 793, 798 (9th Cir. 19 1981). “Unlike Article III mootness, which causes federal courts 20 to lack jurisdiction and so to have an inability to provide 21 relief, equitable mootness is a judge-created doctrine that 22 reflects an unwillingness to provide relief.” JPMCC 2007-C1 23 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re 24 Transwest Resort Props., Inc.), 801 F.3d 1161, 1167 (9th Cir. 25 2015) (emphasis in original). 26 The Ninth Circuit applies a four-factor test to determine 27 whether an appeal from the order confirming a plan is equitably 28 moot:

23 1 [1]We will look first at whether a stay was sought, for absent that a party has not fully pursued its rights. 2 [2]If a stay was sought and not gained, we then will look at whether substantial consummation of the plan 3 has occurred. [3]Next, we will look to the effect a remedy may have on third parties not before the court. 4 [4]Finally, we will look at whether the bankruptcy court can fashion effective relief without completely 5 knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy 6 court. 7 In re Thorpe Insulation Co., 677 F.3d at 881. We examine each of 8 those four factors as follows. 9 i) Seeking a stay 10 As noted above, Franklin filed its Stay Motion after the 11 bankruptcy court orally announced its findings and conclusion 12 that the Plan would be confirmed at the Hearing but before the 13 Confirmation Order was entered. The bankruptcy court held a 14 hearing on the Stay Motion and heard argument from counsel for 15 the parties. At a hearing on January 20, 2015, the bankruptcy 16 court stated detailed oral findings on the record addressing the 17 four factors for considering a stay pending appeal as discussed 18 in Nken v. Holder, 556 U.S. 418 (2009), and determined that 19 granting the Stay Motion was not warranted. In its reply in 20 support of the Stay Motion, Franklin conceded that “if no stay is 21 issued, Franklin will not be irreparably harmed.” (Emphasis in 22 original.) 23 Based on this record, whether Franklin has pursued “with 24 diligence all available remedies to obtain a stay” of the 25 Confirmation Order, In re Roberts Farms, Inc., 652 F.2d at 798, 26 is arguable, but at least, Franklin has not “flunked this first 27 step.” Id. 28

24 1 ii) Substantial consummation of the Plan 2 Section 1101(2) defines “substantial consummation” as: 3 (A) transfer of all or substantially all of the property proposed by the plan to be transferred; 4 (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the 5 management of all or substantially all of the property to be dealt with by the plan; and 6 (C) commencement of distribution under the plan.4 7 The City argues that there can be no dispute that the Plan 8 has been substantially consummated based on the following 9 actions: 1) The City has paid the $5.1 million required to be 10 paid on Retiree Health Benefit Claims, and all but one of the 11 payment checks had been cashed by retirees. 2) The new lease and 12 assignments between Assured and the City with respect to the 400 13 E. Main property have been implemented. 3) Agreements and 14 documentation to memorialize the settlements between the City and 15 NPFG have been finalized and signed. 4) The City and Ambac have 16 executed an amended and restated stipulation and settlement 17 agreement. 5) The City executed a new agreement with the 18 California Department of Boating and Waterways. 6) The City 19 executed new agreements with two minor league sports teams. The 20 City asserts that all mandated payments and transactions to 21 implement the Plan have been completed. 22 In its Objection, Franklin admits that, “The Plan became 23 effective and was consummated in February 2015.” 24 25 26 4 Although § 901 does not incorporate § 1101(2) for 27 chapter 9 cases, the definition still is useful in the equitable mootness analysis as no analogous definition is set forth in 28 § 902 “Definitions for this chapter.”

25 1 iii) The third and fourth factors 2 “The third consideration in the test for equitable mootness 3 is whether the relief sought would bear unduly on innocent third 4 parties.” In re Transwest Resort Props., Inc., 801 F.3d at 1169, 5 citing In re Thorpe Insulation Co., 677 F.3d at 882; and Rev Op 6 Group v. ML Manager LLC (In re Mortgages Ltd.) (“Mortgages II”), 7 771 F.3d 623, 629 (9th Cir. 2014). In analyzing this factor, we 8 must determine “whether it is possible to [alter the Plan] in a 9 way that does not affect third party interests to such an extent 10 that the change is inequitable.” In re Thorpe Insulation Co., 11 677 F.3d at 882. “The fourth, and most important, consideration 12 . . . is whether the bankruptcy court could fashion equitable 13 relief without completely undoing the plan.” In re Transwest 14 Resort Props., Inc., 801 F.3d at 1171. “Where equitable relief, 15 though incomplete, is available, the appeal is not moot.” In re 16 Thorpe Insulation Co., 677 F.3d at 883. 17 The City argues that reversal of the Confirmation Order 18 would undermine the settlements that were so painstakingly 19 negotiated over a period of years with the City’s labor unions, 20 CalPERS and the City’s pension plan participants and retirees, 21 and the other capital markets/bond creditors, frustrating the 22 expectations of creditor constituencies not participating in this 23 appeal and not before this panel. It further would require 24 revisiting the City’s Long Range Financial Plan (“LRFP”), which 25 provided substantial evidence to support the feasibility of the 26 Plan, consequently calling into question the “economic 27 underpinnings of the Plan” and, ultimately, jeopardizing the 28 City’s recovery. Motion to Dismiss, at 16. In other words,

26 1 reversal of the Confirmation Order would unleash chaos before the 2 bankruptcy court and make the process for reconstructing a 3 confirmable plan of adjustment for the City unmanageable. 4 In its Objection, Franklin assures us that “[t]he relief 5 that Franklin seeks on appeal – greater payment from the City [on 6 its unsecured claim] – would not impact any other constituency.” 7 Objection, at 12. “A fundamental premise of this appeal is that 8 the City can pay more to Franklin without altering recoveries of 9 other creditors or otherwise unraveling the Plan.” Objection, at 10 1. We take Franklin at its word. 11 The Ninth Circuit has repeatedly emphasized that where a 12 creditor is appealing confirmation of a plan, but is seeking 13 “only money” (as in this appeal), it is generally not impossible 14 to provide a remedy. See, e.g., In re Transwest Resort Props., 15 Inc., 801 F.3d at 1173 (“[W]e see no reason why, if the court 16 were to devise a remedy that required Reorganized Debtors to pay 17 Lender one dollar, for example, the plan would be undone.”); In 18 re Thorpe Insulation Co., 677 F.3d at 883; Platinum Capital, 19 Inc. v. Sylmar Plaza, L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 20 1070, 1074 (9th Cir. 2002) (“Even if the plan has been 21 substantially consummated, because Platinum’s claim is only for 22 monetary damages against solvent debtors, this is not a case in 23 which it would be impossible to fashion effective relief.”). 24 In its findings in support of its decision to deny the Stay 25 Motion, the bankruptcy court considered what remedies might be 26 available on remand in this case: 27 The question is, could an [appropriate] remedy be fashioned that would not require reeling back in, for 28 example, all the payments to retirees, and I have no

27 1 difficulty perceiving the possibility of any number of likely solutions . . . in the event of a reversal on 2 appeal. Those solutions . . . most certainly would involve more money for Franklin . . . . [W]ith its 3 finances on more stable footing, it’s conceivable that some additional funds could be made available to 4 Franklin if the appellate court put the matter back to me, and that could be done without disturbing in any 5 way the payments to retirees; that is, the payments to the other unsecured creditors. 6 7 Hr’g Tr. Jan. 20, 2015, at 20:14-18; 21:3-8. 8 Article XII, Section 3 of the Plan provides that the 9 bankruptcy court retains and has exclusive jurisdiction “to 10 determine any and all . . . contested or litigated matters . . . 11 that are instituted by any holder of a Claim before or after the 12 Effective Date concerning any matter based upon, arising out of, 13 or relating to the Chapter 9 case . . . .” Article XII, Section 14 8 of the Plan provides that the bankruptcy court retains and has 15 exclusive jurisdiction “to consider any modifications of this 16 Plan . . . .” Article XIV, Section B of the Plan provides: 17 If any term or provision of this Plan is held by the Bankruptcy Court or any other court having 18 jurisdiction, including on appeal, if applicable, to be invalid, void, or unenforceable, the Bankruptcy Court, 19 in each such case at the election of and with the consent of the City, shall have the power to alter and 20 interpret such term or provision to make it valid or enforceable to the maximum extent practicable, 21 consistent with the original purpose of the term or provision held to be invalid, void, or unenforceable, 22 and such term or provision shall then be applicable as altered or interpreted. Notwithstanding any such 23 holding, alteration, or interpretation, the remainder of the terms and provisions of this Plan shall remain 24 in full force and effect and shall in no way be affected, impaired, or invalidated by such holding, 25 alteration, or interpretation. 26 Plan, at 58, 59 and 62. The confirmed Plan gives the bankruptcy 27 court all of the tools it would need on remand to consider a 28 modification to the Plan to increase payments to Franklin on its

28 1 unsecured claim. 2 The City argues that those provisions of the confirmed Plan 3 are subject, among other things, to § 904, which provides that, 4 “Notwithstanding any power of the court, unless the debtor [i.e., 5 the City] consents, . . . the court may not, by any stay, order, 6 or decree, in the case or otherwise, interfere with – (1) any of 7 the political or governmental powers of the debtor; (2) any of 8 the property or revenues of the debtor; or (3) the debtor’s use 9 or enjoyment of any income-producing property.” In other words, 10 on remand, the bankruptcy court could not order the City to pay 11 any more money to Franklin without the City’s consent. 12 That is a given in light of § 904’s requirements. But § 904 13 applied throughout the process of negotiations between the City 14 and its creditors that resulted in the settlements incorporated 15 in the Plan that required the City to make multi-million dollar 16 payments to its creditors from its revenues. We do not perceive 17 that fundamental statutory limitation as precluding a remand to 18 provide equitable relief in terms of an adjustment of payments to 19 Franklin. The City could consent or not to such an adjustment(s) 20 at various points in further negotiations with Franklin as it 21 determined to be appropriate in the exercise of its sovereign 22 authority. 23 Based on our review of the record and the Motion to Dismiss, 24 the Objection and the City’s reply, we conclude that Franklin 25 attempted to obtain a stay of the Confirmation Order pending 26 appeal, but the Stay Motion was denied, and the Plan has been 27 substantially consummated. To reverse the Confirmation Order at 28 this point would have a potentially devastating impact on

29 1 creditor constituencies whose settlements with the City were 2 incorporated in the Plan and who are not appearing before us in 3 this appeal. Reversing the Confirmation Order would knock “the 4 props out from under the” Plan and would leave the bankruptcy 5 court with an unmanageable situation on remand. Accordingly, we 6 conclude that Franklin’s appeal of the Confirmation Order 7 generally is equitably moot and must be dismissed. 8 However, we further conclude that to the extent Franklin 9 seeks through its appeal only a greater payment on its unsecured 10 claim, as it concedes in the Objection, an effective remedy is 11 theoretically possible, and that claim is not equitably moot. 12 Accordingly, we will proceed to consider the issues that Franklin 13 raises with respect to the payout on its unsecured claim.5 14 B. The requirement that the Plan be proposed in “good faith” 15 Section 1129(a)(3), specifically incorporated for chapter 9 16 cases in § 901(a), requires that a plan of adjustment “has been 17 proposed in good faith and not by any means forbidden by law.” A 18 plan is proposed in good faith “where it achieves a result 19 consistent with the objectives and purposes of the [Bankruptcy] 20 Code.” In re Sylmar Plaza, L.P., 314 F.3d at 1074, citing Ryan 21 v. Loui (In re Corey), 892 F.2d 829, 835 (9th Cir. 1989); In re 22 23 5 We do not consider Franklin’s argument that the bankruptcy court erred in its forward looking interpretation of 24 § 943(b)(3), which provides that “all amounts to be paid by the 25 debtor or by any person for services or expenses in the case or incident to the plan have been fully disclosed and are 26 reasonable.” (Emphasis added.) That issue has nothing to do 27 with the payment on Franklin’s unsecured claim provided for in the Plan. 28

30 1 Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1994). 2 Whether the Plan was proposed in good faith is a fact finding in 3 the “totality of the circumstances” reviewed for clear error. 4 Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1046 (9th 5 Cir. 2013) (citations omitted); In re Sylmar Plaza, L.P., 314 6 F.3d at 1074; Stolrow v. Stolrow’s, Inc. (In re Stolrow’s, Inc.), 7 84 B.R. 167, 172 (9th Cir. BAP 1988). 8 At the outset, the record reflects that the Plan was the 9 product of extended negotiations over a period of years pre- and 10 postpetition resulting in multiple collective bargaining 11 agreements and settlements with creditor constituencies. 12 Franklin objected to confirmation on good faith grounds, arguing 13 that the Plan was not proposed in good faith based on the fact 14 that it was receiving essentially a 1% payout on its unsecured 15 claim when unsecured pension benefit claims were not being 16 altered. 17 The bankruptcy court began its good faith analysis with its 18 conclusion that Franklin’s objection was based on a faulty 19 premise: The Plan had a substantial indirect impact on pensions 20 in that 1) employee compensation on which pension benefits were 21 calculated had been reduced; 2) the reductions in numbers of City 22 employees had a significant effect on pensions, as there were 23 “fewer people entitled to pensions in the first place;” and 3) 24 pension benefits for new City employees had been reduced, with 25 those reductions incorporated in the City’s collective bargaining 26 agreements. 27 [T]he assertion that pensions are not affected by the [Plan] incorrectly suggests that employees and retirees 28 are not sharing the pain with capital markets

31 1 creditors. To the contrary, the reality is that the value of what employees and retirees lose under the 2 [Plan] is greater than what capital markets creditors lose. 3 4 Amended Opinion, at 50. It further took “particular note” of the 5 “obviously intensive arms-length negotiations” that occurred 6 during the case over a period in excess of two years to arrive at 7 material provisions of the Plan and reflected that “significant 8 concessions have been made by virtually all of the various 9 parties in interest, not only on the labor side but also on the 10 capital market side of the equation.” Hr’g Tr. Oct. 30, 2014, at 11 36:1-9. 12 The bankruptcy court also noted that “one of the features of 13 the agreements with other capital market creditors is a 14 contingent fund that is available in a number of years down the 15 Plan that is designed to provide for additional payment if the 16 finances of the City prosper and . . . more than 20 percent of 17 that was reserved for Franklin Funds if it wished to take 18 advantage of it before the time of confirmation. It elected not 19 to do that . . . .” Id. at 36:13-20 (emphasis added). Based on 20 those findings, the bankruptcy court found that the Plan had been 21 proposed in good faith and not by any means forbidden by law. 22 On appeal, Franklin argues that the treatment of its 23 unsecured claim was unfairly discriminatory, and the City 24 gerrymandered the Class 12 general unsecured class to minimize 25 Franklin’s vote against confirmation of the Plan. Section 26 1122(a) provides that “a plan may place a claim . . . in a 27 particular class only if such claim is substantially similar to 28 the other claims . . . of such class.” Franklin’s general

32 1 unsecured claim was placed in the class of general unsecured 2 claims, Class 12, consistent with the plain language of 3 § 1122(a), and the treatment of its claim was the same as the 4 treatment of the claims of all other creditors in Class 12. The 5 Ninth Circuit has concluded that, “[T]he fact that a debtor 6 proposes a plan in which it avails itself of an applicable 7 [Bankruptcy] Code provision does not constitute evidence of bad 8 faith.” In re Sylmar Plaza, L.P., 314 F.3d at 1075, quoting In 9 re PPI Enter. (U.S.), Inc., 228 B.R. 339, 347 (Bankr. D. Del. 10 1998). 11 Mindful that we must affirm the bankruptcy court’s fact 12 findings so long as any support for those findings can be found 13 in inferences that can be drawn from the record, we conclude that 14 the bankruptcy court did not clearly err in its finding that the 15 Plan was proposed in good faith and not by any means forbidden by 16 law. 17 C. Classification of claims 18 As noted above, § 1122(a) provides that claims can only be 19 included in a particular class in a reorganization plan if they 20 are “substantially similar” to the claims of other class members. 21 Section 1123(a)(4) provides that the treatment for each claim in 22 a particular class under a reorganization plan must be the same 23 “unless the holder of a particular . . . claim agrees to a less 24 favorable treatment.” As with § 1129(a)(3), § 901(a) 25 specifically incorporates §§ 1122 and 1123(a)(4) for chapter 9 26 cases. “The bankruptcy court’s finding that a claim is or is not 27 substantially similar to other claims, constitutes a finding of 28 fact reviewable under the clearly erroneous standard.” Barakat

33 1 v. Life Ins. Co. (In re Barakat), 99 F.3d 1520, 1523 (9th Cir. 2 1996), citing Steelcase Inc. v. Johnston (In re Johnston), 21 3 F.3d 323, 327 (9th Cir. 1994). 4 Franklin’s argument with respect to classification of its 5 unsecured claim starts from the proposition that a plan proponent 6 does not have unfettered discretion to classify similar claims 7 separately, recognizing that equality of treatment among like- 8 situated creditors is one of the primary objectives of the 9 Bankruptcy Code. See Begier v. Internal Revenue Service, 496 10 U.S. 53, 58 (1990) (“Equality of distribution among creditors is 11 a central policy of the Bankruptcy Code. According to that 12 policy, creditors of equal priority should receive pro rata 13 shares of the debtor’s property.”). Franklin cites to us 14 authorities finding error in the separate classification of 15 claims with similar liquidation priorities. See, e.g., In re 16 Barakat, 99 F.3d at 1526; Phoenix Mutual Life Ins. Co. v. 17 Greystone III Joint Venture (In re Greystone III Joint Venture), 18 995 F.2d 1274, 1279 (5th Cir. 1992) (“[T]hou shalt not classify 19 similar claims differently in order to gerrymander an affirmative 20 vote on a reorganization plan.”); Oxford Life Ins. Co. v. Tucson 21 Self-Storage, Inc. (In re Tucson Self-Storage, Inc.), 166 B.R. 22 892, 898 (9th Cir. BAP 1994). However, what Franklin finds 23 objectionable in this case is that its unsecured claim was not 24 separately classified but instead was included in a class of 25 general unsecured creditors where it was out-voted. 26 Contrary to Franklin’s argument that the bankruptcy court 27 “disregarded statutory protections” (Appellants’ Opening Brief, 28 at 1), the bankruptcy court began its analysis of Franklin’s

34 1 classification issues by quoting the language of § 1122(a). Hr’g 2 Tr. Oct. 30, 2014, at 31:11-13. “Generally, § 1122 allows plan 3 proponents broad discretion to classify claims and interests 4 according to the particular facts and circumstances of each 5 case.” In re City of Colo. Springs Spring Creek Gen. Improvement 6 Dist., 187 B.R. 683, 687 (Bankr. D. Colo. 1995). 7 The bankruptcy court found that the capital markets/bond 8 claims were all separately classified, and “that’s appropriate 9 because each one has its own unique legal rights and status.” 10 Hr’g Tr. Oct. 30, 2014, at 31:14-15. Franklin characterizes the 11 unsecured claims of other capital markets/bond creditors as 12 “similarly situated” (Appellants’ Opening Brief, at 64-65), but 13 its argument glosses over the facts that Assured, NPFG and Ambac 14 all had different collateral securing at least parts of the 15 City’s respective obligations to them, and the City ultimately 16 entered into global settlements with all three. “[A]s a general 17 rule each holder of an allowed claim secured by a security 18 interest in specific property of the debtor should be placed in a 19 separate class.” 7 Collier on Bankruptcy ¶ 1122.03[3][c] (Alan 20 N. Resnick & Henry J. Sommer eds., 16th ed.). By settling with 21 the capital markets/bond creditors other than Franklin, the City 22 avoided a number of potentially protracted, expensive and risky 23 valuation proceedings with respect to City properties that 24 presented problematic valuation issues, including the Stewart 25 Eberhardt Building, the City’s main police station, two fire 26 stations and a library branch. Through a combination of 27 different disposition arrangements for their collateral and 28 different payment terms for the secured and unsecured portions of

35 1 the City’s debts to each bond creditor, including different 2 percentage recoveries, separate classification of the bond 3 creditor claims made legitimate business and economic sense. See 4 In re Barakat, 99 F.3d at 1526. The bankruptcy court did not 5 clearly err in so finding. 6 The bankruptcy court further found that general unsecured 7 claims, including not only the Retiree Health Benefit Claims and 8 Franklin’s unsecured claim but also leave buyout claims, the 9 claim of Michael A. Cobb and other miscellaneous unsecured 10 claims, “were all in the same spot” and were properly included in 11 Class 12.6 Franklin grudgingly admits that “the Plan’s treatment 12 of Class 12 claims superficially is the same [for all class 13 members] – a meager payment of less than one penny on the 14 dollar,” but argues that treatment of Retiree Health Benefit 15 Claims under Class 12 cannot be analyzed separately from the 16 treatment of CalPERS and pension plan participants (unimpaired, 17 100% payment) in Class 15. We disagree for the following 18 6 19 Franklin argues that because its unsecured claim could have been paid “at least in part from restricted PFF’s,” its 20 unsecured claim is not “substantially similar” to the Retiree Health Benefit Claims for § 1122(a) purposes. “PFF’s” are 21 charges levied on new developments to defray a portion of 22 infrastructure expenses. See Cal. Gov’t Code §§ 66000 et seq. While the City potentially could have used PFF’s to pay debt 23 service to Franklin, it had no legal obligation to use PFF’s to pay Franklin, which Franklin does not contest. Accordingly, 24 Franklin’s citations to Wells Fargo Bank, N.A. v. Loop 76, LLC 25 (In re Loop 76, LLC), 465 B.R. 525 (9th Cir. BAP 2012) (where the subject creditor had a third party guarantee source of recovery 26 for its unsecured claim), and Steelcase, Inc. v. Johnston (In re 27 Johnston), 140 B.R. 526 (9th Cir. BAP 1992) (where the subject creditor had a secured claim against the assets of another entity 28 to pay its unsecured claim in the debtor’s case), are inapposite.

36 1 reasons. 2 First, the group of Retiree Health Benefit Claimants and the 3 entire group of the city’s pension plan participants are not the 4 same. The 1,100 fully retired City employees with Retiree Health 5 Benefit Claims were represented in the City’s chapter 9 case by 6 the Official Committee of Retirees. Current City employees were 7 represented by their respective unions to negotiate or 8 renegotiate collective bargaining agreements. CalPERS 9 administered the City’s pension plans. While the interests of 10 all of these parties converged with respect to the treatment of 11 the City’s pensions, the group with Retiree Health Benefit Claims 12 in Class 12 was not congruent with the larger group of claimants 13 in Class 15. 14 Second, while the City’s obligations to 1) pay its current 15 employees; 2) provide health care benefits to current and retired 16 employees; and 3) provide pension benefits to its current and 17 retired employees may have arisen under the same contracts, the 18 Plan negotiations dealt with all such issues on related but 19 separate tracks. In considering Franklin’s objections to Plan 20 confirmation based on the difference between the treatment of its 21 unsecured claim and the treatment of pension benefits, the 22 bankruptcy court made the following findings: 23 I know that in those collective bargaining agreements there were considerable changes and concessions that 24 the unions made regarding compensation and conditions of employment in terms of matters relating to 25 retirement. There was a new retirement plan agreed to for new employees. There was – the employees’ portion, 26 the contributions to retirement plans which the City had previously been picking up and paying in excess of 27 six percent, was shifted back to the employees. 28 Hr’g Tr. Oct. 30, 2014, at 13:18-25.

37 1 One of the major financial problems of the City was the Retiree Health Plan. The City’s plan beforehand was a 2 “pay as you go” plan, in which the City paid 100 percent of health benefits for retirees and their 3 dependents. This, through the years, started to hemorrhage funds. The City imposed right at the outset 4 of the case a new Retiree Health Plan that came in . . . several segments, but the net result is that there is 5 now a much less generous Retiree Health Plan, and the retirees are required to contribute funds to pay a 6 portion of the expense of that plan. 7 Id., at 14:12-21. 8 [T]he City has declined to reject the [CalPERS] contract, saying it exercises its business judgment to 9 conclude that the pension contract – that CalPERS is, in effect, the low cost provider of the City’s 10 pensions, and that it would, under any theory, cost more to use some other pension provider . . . . 11 12 Id., at 18:10-15. 13 I have collective bargaining agreements that cover most of the employees that have been hammered out in part 14 through this – well, hammered out over time and then reworked as part of this Chapter 9 case, and it has 15 been made clear that the negotiations in those particular contractual negotiations were on a basis of 16 the employees and their representatives saying, all right, we will give up certain aspects of our basic 17 compensation, but we do not want any of the pensions touched. So all of the concessions that were made – 18 and there are quite substantial concessions – were made on the income side, the direct income side, not on the 19 pension side. 20 Id., at 21:11-22. 21 Consistent with those findings, the record reflects that the 22 City had to take into account a number of legitimate business and 23 economic considerations in negotiating the differential Plan 24 arrangements for dealing with pensions, employee compensation and 25 health care benefits for its current employees and retirees. 26 Based on those considerations, we conclude that the bankruptcy 27 court did not clearly err in finding that the Plan satisfied the 28 requirements of § 1122(a) in its classification scheme.

38 1 Within Class 12 itself, all creditors received the same 2 percentage payout on their allowed unsecured claims as $5,100,000 3 represented to the allowed aggregate amount of the Retiree Health 4 Benefit Claims. The bankruptcy court found that “there is equal 5 treatment with respect to all of the claims that are general 6 unsecured claims” included in Class 12 and accordingly concluded 7 that the requirements of § 1123(a)(4) had been satisfied. Again, 8 we perceive no clear error in the fact findings that supported 9 that conclusion. 10 The bankruptcy court noted Franklin’s contrary vote but 11 found that the general unsecured creditor class, Class 12, voted 12 in favor of the Plan. Franklin is merely a dissenting creditor 13 in the accepting class of general unsecured creditors. In these 14 circumstances, “cramdown” analysis under § 1129(b) is not 15 required, and we do not consider further Franklin’s “unfair 16 discrimination” argument based on § 1129(b). See, e.g., In re 17 City of Colo. Springs Spring Creek Gen. Improvement Dist., 187 18 B.R. at 690. 19 D. Best interests of creditors 20 Franklin argues that the bankruptcy court misapplied the 21 “best interests of creditors” test in this case because it 22 applied that test collectively, rather than individually and 23 particularly with respect to Franklin’s unsecured claim. 24 Analyzing this issue requires consideration of the differences 25 between chapters 9 and 11, both in terms of specific Bankruptcy 26 Code provisions and the very different nature of the entities 27 that seek to reorganize their affairs under each chapter. 28 Section 1129(a)(7)(A)(ii) provides that

39 1 With respect to each impaired class of claims . . . 2 (A) each holder of a claim . . . of such class – . . . 3 (ii) will receive . . . under the plan on account of such claim . . . property of a value, as of the 4 effective date of the plan, that is not less than the amount that such holder would so receive . . . if the 5 debtor were liquidated under chapter 7 of this title on such date.7 6 7 (Emphasis added.) Under § 901, § 1129(a)(7) does not apply to 8 chapter 9 cases. Instead, chapter 9 includes its own “best 9 interests” test in § 943(b)(7): “The court shall confirm the plan 10 if – (7) the plan is in the best interests of creditors and is 11 feasible.” (Emphasis added.) 12 By their terms, the “best interests” tests in chapters 9 and 13 11 are different, and only in chapter 11 is particular 14 consideration of the best interests of individual creditors 15 specified. By its terms, the “best interests” test in chapter 9 16 is collective rather than individualized, and that interpretation 17 is supported by the very context of chapter 9. 18 Franklin cites two decisions of the Supreme Court, American 19 United Mutual Life Ins. Co. v. City of Avon Park, Florida, 311 20 U.S. 138 (1940), and Kelley v. Everglades Drainage Dist., 319 21 U.S. 415 (1943), and one Ninth Circuit decision, Fano v. Newport 22 Heights Irr. Dist., 114 F.2d 563 (9th Cir. 1940), under the 23 former Bankruptcy Act in support of its “best interests of 24 25 7 Although this chapter 11 provision does not contain the 26 phrase “best interests of creditors,” it is colloquially known as the “best interests” test. See, e.g., Bank of Am. Nat’l Tr. & 27 Sav. Assn. v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 441 n.13 (1999); Sec. Farms v. Gen. Teamsters, Warehousemen & Helpers 28 Union, Local 890 (In re Gen. Teamsters, Warehousemen & Helpers Union, Local 890), 265 F.3d 869, 877 (9th Cir. 2001).

40 1 creditors” arguments. The relevant provision of the Bankruptcy 2 Act, § 83(e), 11 U.S.C. § 403(e), provided that a required 3 finding to support the approval of a plan of composition for a 4 municipal authority was that the plan was “fair, equitable, and 5 for the best interests of the creditors and does not discriminate 6 unfairly in favor of any creditor or class of creditors.” 7 (Emphasis added.) In other words, § 83(e) of the Bankruptcy Act 8 included a provision which, by its terms, protected the rights of 9 individual creditors, i.e., the prohibition against unfair 10 discrimination “in favor of any creditor . . . .” But this does 11 not mean that all of the provisions of § 83(e) protected 12 individual creditors rather than creditors collectively. None of 13 the cited Bankruptcy Act decisions held that the “best interests” 14 test under the Bankruptcy Act protected individual creditor 15 rights. 16 The Supreme Court did state in Avon Park that, “The fact 17 that the vast majority of security holders may have approved a 18 plan is not the test of whether that plan satisfies the statutory 19 standard. The former is not the substitute for the latter. They 20 are independent.” 311 U.S. at 148. However, that principle is 21 reflected in the separate requirements in chapter 9 of the 22 Bankruptcy Code with respect to class voting and acceptance in 23 §§ 1126(c) and 1129(a)(8), both incorporated under § 901(a), and 24 the “best interests of creditors” test in § 943(b)(7). 25 The concerns that caused the Supreme Court to grant 26 certiorari in Avon Park regarding administration of the municipal 27 reorganization process in light of the city’s fiscal agent 28 participating as a creditor in the case and purchasing other

41 1 creditors’ claims at a discount to insure the required majority 2 votes for approval of the plan are not present in this case. The 3 “best interests of creditors” test is neither discussed nor 4 analyzed in Avon Park. 5 Kelley was decided per curiam based on the Supreme Court’s 6 determination that inadequate findings supported approval of the 7 subject plan. In Fano, the Ninth Circuit concluded that the 8 district court clearly erred in determining that the irrigation 9 district was insolvent “in the bankruptcy sense.” Fano, 114 F.2d 10 at 565-66. We do not find any of the decisions in Avon Park, 11 Kelley or Fano dispositive or particularly persuasive in 12 resolving the “best interests of creditors” questions presented 13 in this appeal. 14 As noted by the bankruptcy court in its oral findings, 15 applying the chapter 11 concept of “best interests” in chapter 9 16 is problematic “because it goes without saying that a 17 municipality cannot be liquidated.” Hr’g Tr. Oct. 30, 2014, at 18 40:20-21. Franklin recognizes in its reply brief that “a city 19 cannot go out of business” but argues that the Plan betrayed the 20 purpose of a chapter 9 plan of adjustment “to preserve the 21 municipality so that it can generate revenues for future services 22 and payment of creditor claims.” Appellants’ Reply Brief, at 10 23 (emphasis in original). 24 The bankruptcy court’s determination that the Plan satisfied 25 the “best interests of creditors” test is a finding of fact that 26 is reviewed for clear error. United States v. Arnold and Baker 27 Farms (In re Arnold and Baker Farms), 177 B.R. 648, 653 (9th Cir. 28 BAP 1994), citing Kane v. Johns-Manville Corp., 843 F.2d 636, 649

42 1 (2d Cir. 1988). 2 Recognizing that “[a] municipality cannot be liquidated, its 3 assets sold, and the proceeds used to pay its creditors,” Collier 4 suggests the “best interests of creditors” test in chapter 9 5 “should be interpreted to mean that the plan must be better than 6 the alternative the creditors have. . . . Creditors cannot 7 expect that all excess cash go to the payment of their claims. 8 The debtor must retain sufficient funds with which to operate and 9 to make necessary improvements in and to maintain its facilities. 10 [Courts] must apply the test to require reasonable effort by the 11 municipal debtor that is a better alternative to its creditors 12 than dismissal of the case.” 6 Collier on Bankruptcy ¶ 13 943.03[7][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.), 14 citing In re City of Detroit, Michigan, Case No. 13-53846, “Oral 15 Opinion on the Record,” at 22-25 (Bankr. E.D. Mich. Nov. 7, 16 2014). The bankruptcy court in the City of Detroit case 17 similarly described the chapter 9 “best interests of creditors” 18 standard in its written opinion on confirmation issues: “Courts 19 generally agree that the best interests of creditors test in 20 § 943(b)(7) requires ‘that a proposed plan provide a better 21 alternative for creditors than what they already have.’” In re 22 City of Detroit, 524 B.R. 147, 213 (Bankr. E.D. Mich. 2014), 23 quoting In re Pierce County Housing Auth., 414 B.R. 702, 718 24 (Bankr. W.D. Wa. 2009), and In re Mount Carbon Metro. Dist., 242 25 B.R. 18, 34 (Bankr. D. Colo. 1999). As noted by the bankruptcy 26 court in In re Mount Carbon Metro. Dist.: 27 This is often easy to establish. Since creditors cannot propose a plan; cannot convert to Chapter 7; 28 cannot have a trustee appointed; and cannot force sale

43 1 of municipal assets under state law, their only alternative to a debtor’s plan is dismissal. 2 3 242 B.R. at 34. 4 In this case, the bankruptcy court clearly wrestled with 5 these concepts in its oral findings at the Hearing: 6 The case law that is involved says, in effect, that [the Plan] must be the best possible plan under the 7 circumstances and must be doing the best that is available under the circumstances. So I have looked 8 long and hard at the history of this case and the responses that have been made and considered the 9 alternatives, including the alternative of putting the whole situation back to square one, which is what would 10 be required [if confirmation of the Plan were denied], and . . . running up many more millions of dollars in 11 terms of expenses for the City for what I view as probably not likely very much difference, and that’s 12 because this Plan, I’m persuaded, is about the best that can be done – or is the best that can be done in 13 terms of the restructuring and adjustments of the debts of the City . . . . 14 15 Hr’g Tr. Oct. 30, 2014, at 40:24-25; 41:1-11. Accordingly, the 16 bankruptcy court concluded that the “best interests of creditors” 17 test in § 943(b)(7) was satisfied. 18 Franklin argues that the bankruptcy court erred in its “best 19 interests” determination essentially on two grounds. First, 20 Franklin argues, how can the Plan serve the “best interests of 21 creditors” when it receives an approximate 1% distribution on its 22 unsecured claim and other creditors receive higher percentages on 23 their claims? Franklin’s argument ignores the 100% payout it 24 received on its allowed secured claim on the effective date of 25 the Plan and the approximately $2 million distribution it is 26 entitled to receive from the Reserve Fund held by its bond 27 indenture trustee. The bottom line is Franklin received the same 28 payment treatment on its unsecured claim afforded to all of the

44 1 other general unsecured claimants in Class 12. The bankruptcy 2 court found that Franklin’s “17.5 percent overall return is not 3 so paltry or unfair as to undermine the legitimacy of 4 classification in the [Plan] or the good faith of the plan 5 proponent.” Amended Opinion, at 54. Franklin’s complaints 6 about the asserted better treatment afforded to creditors in 7 other classes under the Plan invite us to make the apples to 8 oranges to lemons to kumquats comparisons of Franklin’s treatment 9 to the treatments of creditors with widely varying security 10 interests and settlement arrangements with the City. We decline 11 the invitation. 12 Second, Franklin complains about implications from the 13 evidence presented to the bankruptcy court in terms of future 14 projections as to the City’s evolving financial situation, 15 focusing on the LTFP. In particular, Franklin questions the 16 necessity for subsidies for “entertainment venues” and the 17 enhanced reserves under the LTFP “for the proverbial ‘rainy day’ 18 or ‘prolonged downturn.’” Appellants’ Reply Brief, at 13-14. 19 “The [LTFP] increases the City’s general fund cash reserve from 20 its 5% historical average and 10% official policy to 16.67% of 21 its budgeted annual expenses and then layers on a duplicative $2 22 million annual ‘contingency.’” Id. at 14. Of course, the City’s 23 pre- and postpetition history, as reflected in the record in this 24 case, confirms that whatever historical or aspirational reserves 25 the City maintained in past budgets were not enough to protect 26 the City from the fiscal ravages it experienced since the 27 inception of the recession in 2007. 28 Ultimately, the question as to whether the Plan was the

45 1 “best” available proposal for the City to pay its creditors while 2 maintaining its capacity over time to provide essential services 3 to its citizens as opposed to any alternative, including 4 dismissal of the chapter 9 case, was a factual finding for the 5 bankruptcy court to make in light of the evidence before it. The 6 bankruptcy court, after considering the evidence presented by the 7 City and Franklin, determined that the Plan before it was “the 8 best that can be done.” We conclude that the “best interests” 9 test in chapter 9 considers the collective interests of all 10 concerned creditors in a municipal plan of adjustment rather than 11 focusing on the claims of individual creditors. In light of that 12 conclusion, we do not perceive any clear error in the bankruptcy 13 court’s determination that the City satisfied the “best interests 14 of creditors” test under § 943(b)(7). 15 E. Not discounting Retiree Health Benefit Claims to present 16 value 17 Franklin asserts that the bankruptcy court erred in not 18 discounting the Retiree Health Benefit Claims in Class 12 to 19 present value. The City argued that the Retiree Health Benefit 20 Claims should be allowed in the aggregate amount of $545 million, 21 as determined by the Segal Company (“Segal”), “a nationally- 22 recognized actuarial and consulting firm with expertise in public 23 sector benefits.” Appellee’s Brief, at 17. Franklin argues that 24 Segal arrived at that number postpetition by “changing its 25 methodology during the bankruptcy case only because the City 26 instructed it to do so.” Appellants’ Reply Brief, at 35. 27 Franklin has advocated for an aggregate amount for the Retiree 28 Health Benefit Claims of $261.9 million, based again on Segal’s

46 1 calculations and included in the City’s audited financial 2 statements.8 3 At the Hearing, the bankruptcy court determined the amount 4 of the Retiree Health Benefit Claims as $545 million but stated, 5 “[i]t’s fair game for a Rule 52(b) Motion to try to get me to 6 adjust that number.” Hr’g Tr. Oct. 30, 2014, at 47: 22-24. 7 Franklin accordingly filed the Motion to Amend Findings that the 8 bankruptcy court addressed at its hearing on December 10, 2014. 9 At the hearing, the bankruptcy court first noted that the 10 amount to be paid to the retiree health benefit claimants under 11 the Plan was fixed and that no objection to the Retiree Health 12 Benefit Claims had been made, so they were deemed allowed. It 13 further noted that even if it accepted the $261.9 million number 14 suggested by Franklin, Class 12 acceptance of the Plan would not 15 be altered. 16 In analyzing the discounting issue, the bankruptcy court 17 characterized the Retiree Health Benefit Claims as “an entirely 18 unfunded benefit” because there were no funds available to pay 19 them. It recognized that in applying a discount rate, “the lower 20 the discount rate, the bigger the claim” and that determining an 21 appropriate discount rate was a matter of much debate among 22 economists. However, in reviewing case authorities and the 23 language of § 502 “in the context of Chapter 9,” the bankruptcy 24 25 8 We have done the math. Substituting $261.9 million for 26 $545 million as the allowed aggregate of Retiree Health Benefit 27 Claims would increase Franklin’s distribution on its Class 12 unsecured claim from approximately $285,000 (0.93578%) to 28 approximately $593,540 (1.9473%).

47 1 court concluded that the Bankruptcy Code did not require it to 2 discount the Retiree Health Benefit Claims to present value. 3 Accordingly, it denied the Motion to Amend Findings and stood pat 4 with its finding that the aggregate amount of the Retiree Health 5 Benefit Claims was $545 million. 6 Section 502(b) provides that if an objection to a claim is 7 made, “the [bankruptcy] court shall determine the amount of such 8 claim . . . as of the date of the filing of the petition 9 . . . .”9 The question for us to determine is, did the 10 bankruptcy court err as a matter of law in interpreting § 502(b) 11 as not requiring it to discount the Retiree Health Benefit Claims 12 to present value? 13 Franklin cites a number of decisions in support of its 14 argument that § 502(b) plainly requires that claims with future 15 payouts, like the Retiree Health Benefit Claims, be discounted to 16 present value. See, e.g., Pension Benefit Guar. Corp. v. 17 Belfance (In re CSC Indus., Inc.), 232 F.3d 505 (6th Cir. 2000); 18 Pension Benefit Guar. Corp. v. CF&I Fabricators of Utah, Inc. (In 19 re CF&I Fabricators of Utah, Inc.), 150 F.3d 1293 (10th Cir. 20 1998); Gas Power Machinery Co. V. Wisconsin Trust Co. (In re 21 9 22 Technically, Franklin objected to the amount of the Retiree Health Benefit Claims proposed by the City, rather than 23 directly to any claims filed by Retiree Health Benefit Claimants. However, at the Hearing, counsel for the City advised the 24 bankruptcy court that Franklin, the City and the Official 25 Committee of Retirees had agreed that “rather than force Franklin to file 1100 objections to claim, [the issue] would be handled as 26 a matter of pure law as part of the confirmation process.” Hr’g 27 Tr. Oct. 30, 2014, at 46:14-16. We are comfortable in these circumstances that § 502(b) applies. 28

48 1 Wisconsin Engine Co.), 234 F. 281 (7th Cir. 1916) (pre-Bankruptcy 2 Code decision); Pereira v. Nelson (In re Trace Int’l Holdings, 3 Inc.), 284 B.R. 32 (Bankr. S.D.N.Y. 2002); In re Loewen Group 4 Int’l, Inc., 274 B.R. 427 (Bankr. D. Del. 2002); Kucin v. Devan, 5 251 B.R. 269 (D. Md. 2000); In re Thomson McKinnon Sec., Inc., 6 149 B.R. 61 (Bankr. S.D.N.Y. 1992); LTV Corp. v. Pension Benefit 7 Guar. Corp. (In re Chateaugay Corp.), 115 B.R. 760 (Bankr. 8 S.D.N.Y. 1990); and In re O.P.M. Leasing Serv., Inc., 79 B.R. 161 9 (S.D.N.Y. 1987). 10 The City counters that some of the authorities cited by 11 Franklin (In re CSC Indus., Inc., CF&I Fabricators of Utah, Inc., 12 and In re Chateaugay Corp.) are neither helpful nor persuasive 13 because they involve ERISA claims, and “ERISA, unlike the 14 Bankruptcy Code, explicitly requires discounting to present 15 value.” Appellee’s Brief, at 96. Some of the authorities 16 Franklin cites are no longer viable, i.e., In re Loewen Group 17 Int’l, Inc. (overruled); In re Chateaugay Corp. (vacated). In 18 addition, the City argues that Franklin and many of the 19 authorities it cites ignore the distinction in the Bankruptcy 20 Code that where a present value determination is required, the 21 term “value” rather than “amount” is used. See, e.g., 22 §§ 1129(a)(7), (9) and (15); 1129(b)(2); 1173(a)(2); 1225(a)(4) 23 and (5); 1325(a)(4) and (5); and 1328(b)(2). Congress’ use of 24 the different term “amount” in § 502(b) does not entail a 25 discount to present value overlay. 26 Both parties cite the decision of the Third Circuit in In re 27 Oakwood Homes Corp., 449 F.3d 588 (3d Cir. 2006), in support of 28 their arguments. In Oakwood Homes, the question presented was

49 1 whether the bankruptcy court properly discounted the principal 2 amounts of promissory note claims to present value after it 3 already had discounted the claims for unmatured interest, as 4 provided for in § 502(b)(2). The Third Circuit held that such 5 further discounting was not appropriate based on its 6 interpretation of the language of § 502(b): 7 Stated simply, 11 U.S.C. § 502(b) speaks in terms of determining the “amount” of a claim “as of” the 8 petition date. However, given that the remainder of the Bankruptcy Code uses the term “value, as of” to 9 signify discounting to present value, and “amount” and “value” are not synonymous, we cannot say that § 502(b) 10 clearly and unambiguously requires discounting to present value in all situations. 11 12 Id. at 595. The Third Circuit noted that neither “amount” nor 13 “value” are defined in the Bankruptcy Code and focused on 14 appellee’s concession at oral argument that those terms do not 15 “mean the same thing.” Id. at 597. 16 “Amount” is defined by one dictionary as “the total number or quantity; a principal sum and the interest on 17 it.” Webster’s Third New Int’l Dictionary (unabr. 1965). “Value,” in contrast, is defined as “the 18 monetary worth or price of something; the amount of goods, services, or money that something will command 19 in an exchange.” Black’s Law Dictionary (8th ed. 2004). 20 21 Id. at 597 n.8. But, “[w]here the [Bankruptcy] Code speaks of 22 discounting cash streams to present value, it speaks in terms of 23 ‘value, as of’ a certain date. It does not use ‘amount . . . as 24 of.’” Id. at 598. The Third Circuit ultimately concluded, 25 “Viewing the Bankruptcy Code holistically, we cannot say that the 26 language of 11 U.S.C. § 502(b) clearly and unambiguously requires 27 the same discounting to present value as is required in other 28 sections of the [Bankruptcy] Code.” Id.

50 1 We realize from the cases cited to us that there is a line 2 of authority to the effect that if an interested party objects to 3 a claim, the bankruptcy court is to determine the amount of the 4 claim “as of the petition date,” and, accordingly, “[a]ny portion 5 of the claim that is unmatured as of the petition date must, 6 therefore, be discounted to its value as of the petition date.” 7 In re Trace Int’l Holdings, Inc., 284 B.R. at 38. See, e.g., In 8 re O.P.M. Leasing Serv., Inc., 79 B.R. at 164-65. However, 9 contrary authority also exists that interprets § 502(b)’s 10 requirement that the amount of a claim be determined “as of the 11 date of the filing of the petition” as making clear that § 502 12 only applies to prepetition claims. See 4 Collier on Bankruptcy 13 ¶ 502.03[1][b] (Alan N. Resnick and Henry J. Sommer eds., 16th 14 ed.). 15 We are persuaded by the Third Circuit’s careful analysis and 16 interpretation of § 502(b) in Oakwood Homes and conclude that the 17 bankruptcy court did not err as a matter of law in determining 18 that the Bankruptcy Code did not require it to discount the 19 Retiree Health Benefit Claims to present value. 20 CONCLUSION 21 For the foregoing reasons, we DISMISS Franklin’s appeal of 22 the Confirmation Order generally as equitably moot and otherwise 23 AFFIRM the bankruptcy court’s decisions with respect to the 24 treatment of Franklin’s unsecured claim under the Plan. 25 26 27 28