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A high-stakes legal battle has intensified as the largest U.S. pension fund filed court papers denouncing the financially troubled city of San Bernardino for what it called a "sham" bankruptcy and accused the city of "criminal behavior" in withholding payments to the pension plan, Reuters reported Sunday. The filing on Friday by the California Public Employees' Retirement System, or CalPERS, came 10 days after San Bernardino officials traveled to Sacramento to plead with top CalPERS executives for more time to make payments. CalPERS, which manages $241 billion in assets and serves many California cities and counties, said in its legal filing that San Bernardino appears to have been operating for more than a decade without necessary financial controls and lacks even basic mechanisms such as monthly cash-flow reports. San Bernardino is broke and can barely make payroll, city officials have said. It has not made its $1.2 million biweekly payments to CalPERS since the bankruptcy filing and now owes at least $8 million, in addition to a long-term debt to the fund that the city pegs at $143 million.

The California Public Employees' Retirement System is trying to rewrite the rules for bankrupt cities, claiming that it should get paid before almost everyone else, including bondholders, Bloomberg News reported yesterday. The biggest U.S. public pension fund would set a legal precedent should courts adopt Calpers's position that, as an arm of the state, it is exempt from rules that apply to other creditors in the chapter 9 bankruptcy cases of San Bernardino and Stockton. A Calpers victory would threaten public services in a city trying to reorganize in bankruptcy, or in an extreme case, cause a city to disincorporate, said attorney James E. Spiotto. "Chapter 9 was never intended to cause the liquidation of a municipality or the reduction of services," said Spiotto. "What Calpers is doing is threatening the basic tenet of Chapter 9." Pension costs for retired public employees are straining local governments from California to Rhode Island. In the private sector, when bankrupt corporations fall behind on such payments, the shortfall is considered an unsecured debt owed to the pension fund. Calpers is arguing that all of its debt should be treated as an administrative claim, which means only a handful of creditors would be paid first, such as the lawyers and financial advisers working on the bankruptcy case. "What Calpers is trying to do is rewrite the priorities of the Bankruptcy Code," said Kenneth N. Klee, a professor at UCLA School of Law who helped revise chapter 9 of the U.S. Bankruptcy Code in the 1970s as a lawyer working for Congress. "The city's failure to make these contributions is a violation of state law," Calpers said in court papers. However, San Bernardino officials counter that if the city is forced to pay Calpers, "the city's ability to continue to function would be seriously threatened."

Vallejo's first contract negotiated since the city left chapter 9 bankruptcy in November 2011 will take longer than expected to complete, city officials said this week, The (Vallejo) Times-Herald reported today. Contract talks that began in June, however, will continue, and an impasse is not on the horizon, city and unions officials said. The International Brotherhood of Electrical Workers contract expires at the end of December. City Manager said current contract provisions will be extended after the expiration, and talks are scheduled to continue into next year, City Manager Dan Keen said. "The city is hopeful that the parties will reach an agreement in early 2013," said Keen, adding that although the city's five-year post-bankruptcy plan does call for concessions from all labor groups, Vallejo's fiscal year budget does not contemplate any more savings from the IBEW contract negotiation. The year's contract talks appear to be in marked contrast to the contentious battle between IBEW and the city three years ago. Ultimately, a federal bankruptcy judge had to order IBEW to renegotiate its contract after approving the city's plan to throw out the existing contract. Later, when talks continued to stall, the council considered imposing a one-year contract on the union if it could not come up with more than $3.4 million in spending cut recommendations. IBEW ultimately presented a plan that the Vallejo City Council adopted in late 2009.

Hostess Brands Inc. said that it used wages that were supposed to help fund employee pensions for the company's operations as it sank toward bankruptcy, the Wall Street Journal reported Sunday. It isn't clear how many of the Irving, Texas, company's workers were affected by the move or how much money never wound up in their pension plans as promised. After the company said in August 2011 that it would stop making pension contributions, the foregone wages weren't put toward the pension fund. Nor were they restored. The maker of Twinkies, Ho-Hos and Wonder Bread filed for bankruptcy protection in January and shut down last month following a strike by one of the unions representing Hostess workers. A judge is overseeing the sale of company assets. Hostess hasn't previously acknowledged that the foregone wages went toward its operations. The maneuver probably doesn't violate federal law because the money Hostess failed to put into the pension fund didn't come directly from employees, experts said. The decision to cease pension contributions angered many employees. After the bankruptcy filing, Hostess tangled with the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco and Grain Millers International Union to renegotiate labor contracts. Halted pension contributions were a major factor in the bakers union's refusal to make a deal with the company. After a U.S. bankruptcy judge granted Hostess's request to impose a new contract, the union's employees went on strike. Hostess then moved to liquidate the company.

American Airlines pilots approved its first new contract in more than nine years, helping the carrier secure $1.06 billion in annual labor cost cuts as parent AMR Corp. restructures in bankruptcy, Bloomberg News reported Friday. The accord was approved by 74 percent of those voting, according to the Allied Pilots Association. The six-year contract will give pilots a 13.5 percent stake in the post-bankruptcy company and annual pay raises while freezing their pensions and requiring longer work hours. Pilots are the last work group to accept pay, benefit and work-rule changes, a step toward AMR's completion of its reorganization plan. Creditors have been awaiting a resolution on labor costs to allow a comparison of the Fort Worth, Texas-based carrier's stand-alone plan for leaving bankruptcy with a merger bid by US Airways Group Inc. "This ratified agreement should not in any way be viewed as support for the American stand-alone plan or for this current management team," said Dennis Tajer, a union spokesman. "We continue to support an American-US Airways merger as the best way to strengthen our airline and enhance our pilots' long-term career prospects." The airline's 8,000 pilots rejected a previous tentative agreement with 61 percent of the vote, prompting American to throw out the existing contract and begin imposing changes to lower spending. American and its pilots last agreed on a contract in 2003, and talks on a new deal began in 2006. The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court (S.D.N.Y.) (Manhattan).

The lawyer for AMR Corp. (AAMRQ)'s unsecured creditors' committee warned American Airlines pilots of the risks of rejecting a tentative contract that would allow the carrier's post-bankruptcy plan to be weighed against a US Airways Group Inc. (LCC) merger, Bloomberg News reported today. Jack Butler of Skadden, Arps, Slate, Meagher & Flom LLP told members of the Allied Pilots Association that pilots would lose a 13.5 percent stake in a restructured AMR if the deal isn't approved. A successful vote would help the creditors' committee evaluate AMR's preferred strategy to leave bankruptcy on its own and US Airways' takeover push. Fort Worth, Texas-based AMR needs a contract with the pilots, the only union without a new accord, to determine its future costs. Negotiations have ground on since 2006 without a final agreement, even as AMR warned of bankruptcy before filing for court protection on Nov. 29, 2011. A tentative accord calling for union concessions failed in August when 61 percent of pilots voted it down, prompting American to throw out their existing contract and begin imposing terms to lower costs.

American Airlines passenger service agents, the only major employee group at the carrier not unionized, began voting yesterday on whether to be represented by the Communications Workers of America union, Reuters reported yesterday. About 9,700 airport agents and reservations representatives are eligible to cast ballots in a vote being conducted by the National Mediation Board (NMB), said Chuck Porcari, a CWA spokesman. Voting ends Jan. 15. The U.S. Supreme Court cleared the way for the vote last week when it denied American's request for a stay of an earlier ruling that upheld the election.

Rhode Island, the site of a sweeping pension overhaul last year, has brought in a prominent New York lawyer to litigate the question of whether a judge ruled impartially on pension cuts when her mother, her son, her uncle and even she herself all have a stake in preserving the status quo, the New York Times reported today. David Boies, perhaps best known for representing Al Gore in the fight over the 2000 presidential election and for waging an antitrust battle against Microsoft on behalf of the government in the 1990s, has been hired in the case. Rhode Island’s dispute is being closely watched as a first major test of whether, and how, financially strained states and cities can cut the benefits of their workers and retirees. Several public employee unions have sued Gov. Lincoln Chafee and other Rhode Island officials, accusing them of acting illegally when they pushed through a package of money-saving pension cuts last year, including suspending annual cost-of-living increases for most retirees. The unions want the richer benefits restored. Their five pension lawsuits were assigned to Judge Sarah Taft-Carter of the state Superior Court, who has handled public pension cases before and handed a big victory to the unions in one recent case. Boies, who at $50 an hour is working for a small fraction of his ordinary fee, is seeking a less conflicted judge, and could even ask to move the case into federal court.

Members of ABI's Chapter 11 Reform Commission said yesterday pointed to labor and benefits being key issues likely to surface during a host of public hearings beginning early next year, Reuters reported. "We'll be hearing from both labor and management about the way the bankruptcy code treats collective bargaining agreements, pension issues and the like," said Commission Co-Chair Robert Keach Bernstein Shur Sawyer & Nelson on an ABI media teleconference. In the handful of hearings so far, the commission has heard largely from lenders, many of whom have expressed concern that the commission would look to limit the use of secured credit. Commission members have said they are not looking to curb the use of secured credit so much as improve its transparency. The commission will also consider changes to rules that exempt derivatives contracts from certain bankruptcy rules and the effects on bankrupt retailers of a 2005 law that changed rules on treatment of leases in bankruptcy. About six or seven hearings will be held throughout the country next year. Read more: http://www.reuters.com/article/2012/12/03/bankruptcy-commission-idUSL1E…

To listen to the ABI media teleconference, please click here:
http://news.abi.org/educatonal-brief/teleconference-to-look-at-chapter-…

American Airlines' bankrupt parent has asked a judge to extend by six weeks, through March 11, the period in which it has the exclusive right to propose a plan to exit bankruptcy, Reuters reported on Friday. The current exclusive window is set to end on Jan. 28. AMR Corp filed for bankruptcy a year ago in hopes of reducing labor costs and returning to profitability. Its smaller competitor, US Airways Group Inc, is making a push to acquire it out of bankruptcy. AMR said earlier this year it would prefer to exit as a standalone company, but is discussing merger options, including with US Airways.