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CHARACTERISTICS OF “NEUTRAL EVALUATORS”: THE CALIFORNIA EXPERIENCE TO DATE
By: Deborah Schrier-Rape
In October 2011, California passed AB 506 which established prerequisites before a municipality is eligible to file for protection
under Chapter 9 of the United States Bankruptcy Code. Under AB 506, any entity seeking to file under Chapter 9 must first
engage a mediator to negotiate with creditors for a 60-day neutral evaluation process, unless it declares that a “fiscal emergency”
prohibits engaging in such a process.
Mammoth Lakes and Stockton are the first instances in which this mediator process has been put into practice. Both cases offer
insight into the type of individuals likely to be chosen as neutral evaluators, how these neutral evaluators function and the efficacy
of the AB 506 process.
Mammoth Lakes
Once it became clear that Mammoth Lakes would be unable to satisfy its outstanding debts, it sent a letter to interested parties
requesting their participation in the neutral evaluation process. About half of the interested parties agreed to participate, although
Mammoth Lakes Land Acquisition LLC (MLLA), Mammoth Lakes’ single largest creditor, chose to abstain. District Court Judge
David Coar was selected as the neutral evaluator.
Judge Coar has had a multi-faceted legal career as an associate professor and associate dean of DePaul University College of
Law; a U.S. Trustee; a Bankruptcy Judge; and a District Court Judge for the District Court for the Northern District of Illinois.
The 60-day neutral evaluation period concluded without resolution, but the town was able to establish a framework for a potential
plan of reorganization.
When Mammoth Lakes entered Chapter 9, the presiding bankruptcy court judge appointed Judge Elizabeth Perris, Chief Judge of
the Bankruptcy Court for the District of Oregon, to serve as judicial mediator to continue the pre-petition mediation process in
parallel to the bankruptcy proceeding. Within a month of filing, the mediation process resulted in a settlement between Mammoth
Lakes and MLLA. Because MLLA chose not to participate in the AB 506 process, it is unclear whether the pre-bankruptcy
negotiations played any critical role in the settlement.
Stockton
Nearly all of the invited interested parties agreed to participate in Stockton’s neutral evaluation process and selected Judge Ralph
Mabey to serve as mediator. Like Judge Coar, Judge Mabey has had an accomplished and varied legal career. In addition to
serving as a United States Bankruptcy Judge, Judge Mabey is a professor at the Reuben Clark Law School, Brigham Young
University and has served as Chair of the American College of Bankruptcy.
Like Mammoth Lakes, Stockton’s neutral evaluation process ended with a Chapter 9 filing, but this does not mean that the process
was a failure. It may have set the groundwork for a more efficient bankruptcy process, providing an opportunity for the parties to
clarify their positions and discover potential common ground. Whether the pre-bankruptcy negotiations were effective in shortening
the Chapter 9 process remains to be seen.
Judge Mabey has also appointed Judge Perris to be the judicial mediator in the Stockton bankruptcy case. Like Mammoth Lakes,
the mediation will run in parallel to the Chapter 9 bankruptcy proceeding.
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