In re County of Orange
| Decision Date | 08 March 1995 |
| Docket Number | Bankruptcy No. SA 94-22272 JR,SA 94-22273 JR. |
| Citation | 179 BR 185 |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re COUNTY OF ORANGE, a political subdivision of the State of California; Orange County Investment Pools, an instrumentality of the County of Orange, Debtors. ALLIANCE CAPITAL MANAGEMENT L.P. and Putnam Investment Management, Movants, v. COUNTY OF ORANGE, Orange County Investment Pools, Respondents. |
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Bruce Bennett, Stutman, Treister & Glatt, Los Angeles, CA, Sp. Reorganization Counsel, for debtors.
Robert Darby, Fulbright & Jaworski, and Clarisse W.J. Young, Paul Hastings Janofsky Walker, Los Angeles, CA, for movants.
On June 7, 1994, the County of Orange (the "County") issued bonds aggregating $169,000,000 pursuant to the "temporary borrowing" provisions of California Government Code §§ 53850-53858. Pursuant to § 53856, the County pledged certain future tax and other general revenues to pay the principal and interest on the notes.
Alliance Capital Management L.P. and Putnam Investment Management (the "Movants"), representing holders of notes totalling about $50 million, brought this motion for relief from stay (the "Motion") to have the stay terminated to allow the Movants to file a writ of mandate complaint in state court to force the County to set aside certain revenues for payment on the notes. The County objects, arguing that the noteholders have no interest in the County's revenues because § 552(a) of the Bankruptcy Code cuts off their lien rights as of the filing of the bankruptcy petition.
At a hearing on February 23, 1995, I took the matter under submission to determine whether the noteholders retain a post-petition lien on the County's revenues.
This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(a) (), 28 U.S.C. § 157(a) () and General Order No. 266, dated October 9, 1984 (referring all Title 11 cases and proceedings to the bankruptcy judges for the Central District of California). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G).
On June 7, 1994, the County's Board of Supervisors (the "Board") adopted Resolution No. 94-675 (the "Resolution"), whereby the Board authorized the County to borrow up to $200,000,000 pursuant to the temporary borrowing provisions of California Government Code (the "Government Code") §§ 53850-53858.1
Under the Resolution, the Board authorized the County to issue notes, designated as "County of Orange, 1994-95 Tax Anticipation Notes Series —" (the "TRANS"). In the Resolution, the Board also pledged certain tax and other unrestricted revenues as security for the TRANS.2
The Board also declared in the Resolution that all pledged monies, when received, must be set aside in a special fund (the "Set-Aside"). Moreover, if during any month the Set-Aside is insufficient to satisfy the TRANS requirements, the County is required to make up the difference from any generally available funds the County receives during fiscal year 1994-95.
On June 27, 1994, the County and the underwriter, PaineWebber, Inc. ("PaineWebber"), executed a Contract of Purchase (the "Contract") providing for the sale of the TRANS to PaineWebber in accordance with the terms set forth in the Resolution. On July 5, 1994, the transaction closed, and the County delivered the TRANS to PaineWebber.
In September, October and November of 1994, the County made each Set-Aside required under the Contract. The County invested the Set-Asides in the Orange County Investment Pools (the "Pool") as permitted under Government Code § 27000 et seq.3
On December 6, 1994, prior to making its December Set-Aside, the County and the Pool shocked the nation by filing Chapter 9 petitions in bankruptcy. The filings were caused by substantial losses in the Pool.4
On December 29, 1994, the County filed an ex parte motion for an order authorizing certain payments on bond obligations. In the motion, the County stated that it would not make its remaining Set-Aside payments. The County argued that its action was necessary and proper because under § 552(a) of the Bankruptcy Code (the "Code")5, the lien created by the Contract did not attach to post-petition revenues.
On January 4, 1995, I conducted a hearing on the County's ex parte motion. At the hearing, the County presented the testimony of Paul Sachs, a partner with Arthur Andersen & Company. Sachs presented projections of the County's General Fund cash flow for the remainder of the fiscal year ending June 30, 1995. These projections demonstrated that, based on pre-petition expenses, the County would have insufficient cash flow from its General Fund to meet both its operating expenses and its debt service (including the Set-Asides).
On January 10, 1995, the Movants filed the Motion to have the stay terminated to enable them to seek a writ of mandate in state court compelling the County to make the Set-Asides. The Movants contended that relief was necessary because (1) Movants' only recourse is to state court, (2) granting relief from stay will further Congressional policy of providing maximum flexibility to states in solving the debt problems of municipalities in Chapter 9 and (3) irreparable harm will occur to the TRANS holders from the County's failure to make the required Set-Asides.
As to the last contention, based on Sachs' projections, the Movants argued that unless the Set-Asides were made, the County would have insufficient revenues to pay the TRANS holders, including the Movants, on the July 1, 1995 maturity date. Moreover, because of certain California constitutional limitations, there was a substantial risk that the County would be unable to use revenues from subsequent years to satisfy the TRANS.6
Based on the evidence and the law, I treated the hearing as a preliminary hearing under Code § 362(e), found that the County would likely prevail at a final hearing, ordered the stay to continue in effect and set the matter for a final hearing.7
Under Code § 362(d), this Court may grant relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property of a party in interest." Movants contend that "cause" exists because the state court is the only forum that has the power to adequately protect its interest (i.e., the only forum that can compel the County to make the Set-Asides). Movants point out that Code § 904 limits the power of this court to order the County to make the Set-Asides.8 Movants are wrong for two reasons.
First, the County has consented to this court's jurisdiction to order, if necessary, adequate protection in connection with this proceeding.
Second, §§ 3619 and 362, which respectively define the concept of adequate protection and its application, are specifically incorporated into Chapter 9 through Code § 901.10 Congress obviously incorporated these specific sections into Chapter 9 to have purpose and effect. Because the court has the power to continue the stay in effect, it logically follows that the court must likewise have the power to order adequate protection as a condition for the continuance of the automatic stay. Otherwise, the application of § 362 in Chapter 9 would not make sense. The County has the choice of either complying with the court's order for adequate protection or having the stay lifted. This does not unduly encroach on the County's ability to conduct its affairs free from court interference. The County came into this court uninvited to obtain the benefit of the automatic stay. The price for retaining this benefit is the County's implied consent to this court's power to apply all of the provisions of § 362.
Moreover, § 904 is a general statute, whereas §§ 361 and 362 specifically address adequate protection. The general rule is that specific statutory provisions control. See, e.g., In re Khan, 172 B.R. 613, 624 (Bankr.D.Minn.1994) () (citations omitted); Trustees of Amalgamated Ins. v. Geltman Industries, 784 F.2d 926, 930 (9th Cir.1986) () (citations omitted).
Accordingly, both from the standpoint of the County's actual and implied consent to the application of § 362 in Chapter 9, this court has the power to order the County to provide the Movants with adequate protection as a condition for the continuance of the automatic stay. Appropriate relief is, therefore, not limited to the state court.
The next argument presented by the Movants is that granting relief from stay would further the Congressional policy of providing maximum flexibility to states in solving the debt problems of municipalities in Chapter 9. The Movants point out that Code 90311 is intended to maximize flexibility for the states in solving the debt problems of their municipalities.12 The Movants conclude from this that § 903 dictates that the state court is the appropriate forum for resolution of the issues relating to the County's compliance with its contractual obligations to the TRANS holders.
The problem with the Movants' argument is that if they are correct, no municipality would file Chapter 9 because the benefits of filing would disappear. California specifically authorized its municipalities to seek the protection of Chapter 9.13 The two main benefits of a Chapter 9 filing are (1) the...
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