Sep. 13, 2012
Karol K. Denniston
See more on Karol K. DennistonSchiff Hardin LLP San Francisco Bankruptcy Specialty: municipal restructurings
A few years ago, Denniston recalled how she kept seeing media reports from all over the country citing the desperate efforts of cash-strapped municipalities struggling to make ends meet.
"Cities were trying to reduce their costs by turning off the street lights, not paving the street, cutting back on safety and welfare, all in an effort to balance their budgets," she said.
Denniston said she knew from experience that when infrastructure breaks down, people leave for greener pastures.
"You can't cost-cut your way to solvency," she said. "To the extent that you keep cutting costs, you choke the city and you won't have enough critical mass of residents to make it work."
Then it occurred to her that she could combine her skills as a bankruptcy lawyer and her experience in dispute resolutions to find a better way to help cities trying to stay afloat.
"I thought that we could come up with a process to teach the municipal bond markets about cities going through the restructuring process," Denniston said. "Let's have this exchange of information and make the process more efficient."
Last year, she played a key role in the drafting and passage of Assembly Bill 506 that requires California municipalities to participate in a neutral evaluation process before filing for bankruptcy unless they can demonstrate a fiscal emergency.
The city of Vallejo, which exited a Chapter 9 bankruptcy last year, served as a catalyst for the bill, Denniston said.
Vallejo spent more than three years in bankruptcy, as well as $13 million to reduce liabilities of about $34 million, she said, but the city most likely could have negotiated recoveries before a filing.
"We learned a lot of things from Vallejo," she said.
Meanwhile, Denniston said that she has been getting phone calls from all over the country inquiring about the new neutral process in California.
"People are recognizing what a neutral process can provide for an exchange of information," she said. "It's a very practical approach."
With all of the players on a level playing field, Denniston added, "Everyone will have the same information and people will be motivated to come up with better solutions than a court could impose."
- PAT BRODERICK
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