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The judge overseeing the bankruptcy of San Bernardino, Calif., yesterday disqualified a law firm from representing a major bond insurer in the case, because she said some of its lawyers had "switched sides," Reuters reported yesterday Bankruptcy Judge Meredith Jury said the law firm of Winston & Strawn can no longer represent one of the city's creditors, bond insurer National Public Finance Guarantee Corp. She ruled that because Winston recently hired attorneys who had worked on the case for CalPERS—the state pension fund and a direct adversary of National in the proceedings—the entire firm of Winston & Strawn should be disqualified. CalPERS, America's biggest pension fund and San Bernardino's biggest creditor, had asked the judge to ban Winston & Strawn after it hired several attorneys who had been working for CalPERS in the bankruptcies of San Bernardino and Stockton, another California city seeking chapter 9 protection.

Bankrupt Stockton, Calif., will pay a $5.1 million settlement to retired employees losing health benefits as part of its plan to restructure its finances while maintaining their pensions, which the city's creditors say need to be impaired, Reuters reported yesterday. Lawyers for Stockton and representatives of the retirees announced the settlement yesterday during a hearing on how the city's bankruptcy case is proceeding. The settlement amounts to only 2 percent of the value of the health benefits the retirees are losing but it leaves intact their pensions, said Steven Felderstein, a lawyer representing a group for retired city employees. The retirees must still vote on the settlement, which would go into effect when Stockton's plan to adjust its debts is approved.

As Detroit prepares to discuss with creditors how to avoid bankruptcy, Standard and Poor's Ratings Services yesterday lowered the city's credit rating by four notches to CCC minus, Reuters reported yesterday. The downgrade from B, which affects both general obligation bonds and pension obligation certificates, is based on recent announcements from the city's emergency financial manager "that Detroit may take steps to adjust payments to bondholders," said Standard & Poor's credit analyst Jane Hudson Ridley in a statement. The outlook is negative, reflecting expectations that within a year further downgrades are possible. "Should Detroit move to restructure its debt with principal reductions or other changes that negatively affect the full or timely payment to bondholders" or broker any other deal under which investors will get less than originally promised "we would view this as a selective default," the rating agency said. Kevyn Orr, a bankruptcy lawyer who was appointed as Detroit's emergency financial manager in March, is scheduled to meet with the city's creditors on Friday.

Three banks that were forced to buy some of Jefferson County, Alabama's sewer bonds during the financial crisis want to push forward on an appeals-court dispute—a development that threatens the $1.9 billion sewer-debt deal that county officials are relying on to get the struggling municipality out of bankruptcy, Dow Jones Daily Bankruptcy Review reported today. Unable to reach their own debt-payback deal with the county, State Street Bank and Trust Co., Bank of Nova Scotia and Bank of New York Mellon are encouraging a panel of appeals-court judges to keep a hearing date on the calendar next month. On July 24, county officials and other Wall Street firms behind the county's $3.1 billion sewer system are scheduled to argue how the county's sewer system should be managed during its bankruptcy case.

Jefferson County, Ala., officials and municipal bondholders want to halt their dispute over how the county's sewer system should be managed during the county's bankruptcy case—a dispute that was scheduled to unfold before a panel of appeals judges but will die under a recent debt-cutting deal, Dow Jones Daily Bankruptcy Review reported today. Attorneys for Jefferson County and for bondholders that extended $3.6 billion to fix the county's sewer system said on Monday that they wanted to postpone July 24 arguments on the appeals dispute until next year, according to papers filed in the 11th U.S. Circuit Court of Appeals.

Vallejo, Calif., which emerged from bankruptcy two years ago, is trying a novel approach to setting part of its budget: having the public decide, the Associated Press reported yesterday. The city of Vallejo let residents over the age of 16 vote in May on how to spend about $3.2 million. Taxpayers were allowed to pick from 33 projects, with the top 12 sharing the money. The winners included pothole and street repair, community gardens and streetlights.

In his first public meeting, Detroit Emergency Manager Kevyn Orr said yesterday that the city has a 50/50 chance of filing for bankruptcy, Reuters reported yesterday. Speaking to an audience at Wayne State University, Orr delivered a message of fiscal discipline but offered few details of his plan for negotiating with Detroit's creditors, public employees or retirees. Detroit is believed to owe about $17 billion in debt and other liabilities. When he released his first official report on Detroit's finances last month, Orr said the city will have enough cash on hand to meet its existing obligations through at least the fourth quarter.

Detroit’s attempt to avoid bankruptcy will hit a critical stage this week as emergency manager Kevyn Orr brings together dozens of creditors to present a stark offer: less than 10 cents on the dollar for the loans, bonds, retiree obligations and other debts that have been strangling the city for years, the Detroit Free Press reported on Saturday. Orr is expected to meet this week with as many as 150 representatives of the city’s major creditors, from big national banks that hold the city’s bonds and insurers who guarantee them, to unions and pensioners who rely on the city for retirement income and health care. If Orr can’t win a deal with creditors, the fate of benefits for 30,000 current and retired municipal workers and the city’s ability to fund its basic services would likely move into a federal court in proceedings some bankruptcy lawyers fear could stretch out for years. Orr said that he remains optimistic a consensual deal can be brokered outside court, and if not, that a chapter 9 bankruptcy could be done in relatively quick fashion.

The city of Detroit bears the scars of its 60-year population decline—more than 80,000 abandoned houses, factories and businesses—and a slice of a new $100 million fund could help salve some of those open wounds, Reuters reported yesterday. Pledging to "aggressively address blight" in a state slammed by the ailing auto industry, Michigan Governor Rick Snyder yesterday announced plans to finance large-scale demolitions in Detroit and four other struggling cities with $100 million in unused federal funds originally intended to prevent foreclosures. The U.S. Department of the Treasury approved the proposal yesterday. The Michigan State Housing Development Authority estimates the project will finance the demolition of about 4,000 structures in Detroit and four other faded industrial cities: Flint, Grand Rapids, Pontiac and Saginaw. Michigan was among 18 states to share in $7.6 billion as part of the so-called Hardest Hit Fund, which helped with mortgage modifications and payments. But Michigan has spent less than $100 million of the $500 million since 2010, according to the Michigan State Housing Development Authority.

The bankruptcy of the most populous county in Alabama moved closer to resolution this week with an agreement providing that investors will lose 20 percent of the money they invested in bonds that were rated AAA, according to a commentary in the New York Times today. The big loser financially is JPMorgan Chase, which underwrote many of the securities—and paid bribes to get the business, according to the commentary. The Jefferson County bankruptcy may serve as a precedent for forcing bondholders to take losses in bankruptcy. Jefferson County’s problems involve corrupt politicians and bad luck, but they also include a longstanding unwillingness to face facts about the county’s sewer system—and a bond market that kept lending money to the county long after it was prudent to do so, according to the commentary.