Exclusive: Bankrupt San Bernardino has paid $6 million legal fees, millions more expected

Reuters News
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Posted: Dec 03, 2014 10:43 AM

By Tim Reid

LOS ANGELES (Reuters) - San Bernardino, California, has run up legal costs of over $6 million since it declared bankruptcy in 2012, according to a senior city official. Millions more in fees are expected before it exits Chapter 9 protection, underscoring the huge cost cities face when opting to resolve their debts through bankruptcy, experts say.

San Bernardino, a city of 205,000 65 miles (105 km) east of Los Angeles, declared bankruptcy in August 2012 with a $45 million budget deficit. Gary Saenz, the city attorney, told Reuters that so far the city has paid $6.16 million to its bankruptcy lawyers, the Santa Monica firm of Stradling, Yocca, Carlson & Rauth.

The case has many more months to run, and experts believe the final legal fees could easily exceed $10 million. Last month, the judge overseeing the case set a May deadline for the city to produce a bankruptcy plan.

News of San Bernardino's legal costs comes as court-ordered mediation sessions are expected this week in Detroit to resolve more than $140 million in professional fees billed to the Michigan city in its historic Chapter 9 case. Detroit city officials are dismayed at the huge legal tab connected with its bankruptcy.

In October, the federal judge overseeing the bankruptcy of Stockton, California, warned about the high cost of municipal bankruptcy as he ruled the city could exit bankruptcy. To date, Stockton has run up $14 million in legal fees. In 2011, Vallejo, California exited bankruptcy after spending $12 million on lawyers to resolve an $18 million deficit.

U.S. Bankruptcy Judge Christopher Klein, in ruling that Stockton could exit bankruptcy, said: "This is a very expensive case, and probably should be an object lesson why the Chapter 9 process is not to be lightly entered into."

Klein added: "Nobody should think a Chapter 9 is an easy or inexpensive process."

Michael Sweet, a municipal bankruptcy attorney in San Francisco not involved with the Stockton or San Bernardino cases, said: "It's expensive to be broke. Sometimes there is no other option, but there are so many reasons where trying to do a restructuring outside of bankruptcy makes sense for a city, from the costs, the public nature of it, the time it takes and the stigma."

(Reporting by Tim Reid; Editing by Jonathan Oatis)