Calif. considers loan for troubled Modoc County

By CATHY BUSSEWITZ
The Associated Press
Friday, July 23, 2010; 12:43 AM

SACRAMENTO, Calif. -- California finance officials will consider Friday whether to loan as much as $12.5 million to Modoc County as the rural, cash-poor municipality prepares for the possibility of filing for bankruptcy protection.

Other California cities and counties have seen steep slides in tax revenue during the recession, but Modoc County's trouble stems largely from another problem: For more than a decade, the county has been funding its hospital using money that was intended for other purposes, such as education and transportation projects.

An audit last year by the state controller's office determined that the county was violating state law by shifting dollars away from their intended purpose, prompting the current financial crisis. The county has hired a bankruptcy attorney in case it needs to declare itself insolvent, said Dan Macsay, chairman of the Modoc County Board of Supervisors.

"We don't want to go bankrupt," he said Thursday. "It does nothing for us - it doesn't help the state, it doesn't help anybody. But what we're doing is preparing for the worst."

He said it's unclear whether Modoc County will have enough money to pay expenses for the current fiscal year that began July 1, considering it must repay millions in debt. The county borrowed $12.5 million from special funds to support the hospital for about 15 years, but never repaid the money.

Modoc County is in California's far northeastern corner, a sparsely populated region of forests and wind-swept plains that is tucked between the Oregon and Nevada borders. In January, the state listed its population at 9,777.

On Friday, the state treasurer, controller and others will discuss proposals to help the county stay afloat. The county has requested a loan from the state's Pooled Money Investment Board, which oversees a portfolio that was worth $69.4 billion as of June. But California has its own financial troubles and is facing a $19 billion deficit.

State officials say they also want Modoc County to avoid bankruptcy.

"When a local entity files for bankruptcy protection, it has a ripple effect on the reputation of the state," said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. "It creates headlines that do not serve the state well when it, for example, tries to sell bonds."

Municipal bankruptcies are rare in California. The most high-profile one was Orange County's bankruptcy filing in 1994; the San Francisco Bay area city of Vallejo filed for bankruptcy protection in 2008 amid a revenue crisis.

Yet helping Modoc County by providing a loan comes with its own dangers. If one financially strapped municipality gets a loan from the state, it could prompt other local officials to ask for handout, too. Dresslar said if the state does issue a loan, it would want to make clear that it's not setting a precedent.

Dresslar also said a loan would carry strict conditions, such as allowing the state to intercept other tax money destined for the county.

"We don't think any county will be chomping at the bit to place themselves under the scrutiny and conditions that this kind of loan would carry with it," Dresslar said.

One question that must be answered immediately is whether Modoc County can use the money it has to pay its bills or whether it is legally obligated to use that money to repay debts, said state Assemblyman Jim Nielsen, R-Yuba City, who represents the region. It remains unclear whether the county will be able to deliver the next paycheck to its employees until that is resolved, he said.

Meanwhile, Modoc Medical Center has had to stop offering services such as minor surgeries and delivering babies, said Macsay, the county supervisor.

The hospital used to deliver about 35 babies per year, he said, but could no longer do so because it can't afford to keep an anesthesiologist on staff.

"The fact is that they have a limited audience to capture," Macsay said. "They were offering services that they really couldn't afford."

Instead, Modoc County residents will have to drive more than two hours to hospitals in Redding or across the Oregon border to receive those services. Calif. considers loan for troubled Modoc County

House Probe Finds 153 VIP Loans Went to Fannie Employees - WSJ.com

By JOHN R. EMSHWILLER

Countrywide Financial Corp.'s controversial "VIP" mortgage program made 153 loans to employees of Fannie Mae, the giant federally backed financial institution that helped fuel Countrywide's growth, according to a letter released Tuesday by Rep. Darrell Issa.

Another 20 such VIP loans, which often provided mortgages on terms more favorable than those available to the general public, went to employees of Freddie Mac, another big government-backed buyer of mortgage loans, the Issa letter said.

While it has been reported that VIP loans went to some top Fannie Mae officials, the latest information indicates that the activity was more widespread.

In an interview Tuesday, Mr. Issa, of California, said the new information provides further evidence that Countrywide Financial was improperly trying to "curry favor and get an edge" by passing out financial favors. He says the dealings between Countrywide and Fannie Mae in particular contributed to the downfall of those firms and to the broader problems in the mortgage industry.

In 2008, Fannie Mae and Freddie Mac were taken over by the federal government, which has spent about $145 billion to keep them afloat. Also in 2008, Countrywide was purchased by Bank of America Corp. The House Oversight and Government Reform committee, on which Mr. Issa is the ranking Republican, last fall subpoenaed the records of the now-defunct VIP program.

Mr. Issa's letter went to the Federal Housing Finance Agency, or FHFA, which oversees Fannie Mae and Freddie Mac. It is the latest salvo in a two-year-old investigation of the VIP program spearheaded by Mr. Issa. Last week he released a letter saying that 30 VIP loans had gone to U.S. Senators or Senate employees. He says the investigation is ongoing and is also turning up information on loans to others in government.

A Fannie Mae spokesman declined to comment on the Issa letter. A Freddie Mac spokeswoman deferred comment to the FHFA. An FHFA spokesperson said the agency had received Mr. Issa's letter and "will respond to him promptly."

House investigators Tuesday also released an internal 2001 Countrywide email regarding a loan made to Daniel Mudd, who served as Fannie Mae's chief operating officer and later as its chief executive. The email spoke of the need to "understand the sensitivity of this deal. We already are taking a loss, it would be horrible to add a service complaint on top and lose any benefit we generate." While Mr. Mudd's refinancing of a home loan with Countrywide had been previously reported, the internal details from the company about it hadn't.

Mr. Mudd, now chief executive of Fortress Investment Group, New York, said Tuesday in a statement that he "did not seek any preferential treatment." He said that he had a financial adviser obtain loan quotes from several lenders and that Countrywide was offering "competitive" terms. Mr. Mudd said the loan was obtained through a local Countrywide retail branch.

Mr. Issa's letter to the FHFA said the subpoenaed Countrywide records show that the Mudd loan went through the VIP program. It didn't say whether Mr. Mudd knew which Countrywide unit was handling the matter.

The Issa letter said that a cluster of VIP loans to Fannie Mae employees came in 1998, a year before Fannie Mae agreed to buy billions of dollars of Countrywide loans. If Fannie Mae or Freddie Mac employees accepted discounted loans or other preferential treatment, they might have violated the enterprises' conflict-of-interest policies, Mr. Issa wrote.

The Issa letter listed loans to 42 individuals, but in most cases provided only job titles, including several directors and vice presidents as well as lower-level positions. The only names provided were those of a few former senior officials, such as Mr. Mudd, who had previously been identified publicly as Countrywide borrowers.

The number of individuals receiving VIP loans was less than the number of loans given, sinceSome people received more than one loan. For instance, if a person took out a Countrywide loan and later refinanced it, that would be counted as two loan transactions.

Retirees' Bankruptcy Protection Act Trumps ERISA, 3rd Circuit Rules

In a huge win for labor, a federal appeals court has ruled that a corporation in bankruptcy cannot terminate its retirees' health and life insurance benefits -- even if its ERISA plan explicitly reserved its right to unilaterally terminate such benefits -- unless it can show that doing so is a necessary part of its reorganization plan.

The 95-page decision from the 3rd U.S. Circuit Court of Appeals in In re Visteon Corp. promises to alter the playing field in big corporate bankruptcies by mandating compliance with Section 1114 of the Retiree Benefits Bankruptcy Protection Act without exception.

It marks the first time that any federal appeals court has squarely addressed the scope of Section 1114 and, by demanding a plain reading of the law, could reverse a strong trend among bankruptcy and district court judges to avoid the requirements of Section 1114 whenever the debtor corporation would have been free to terminate retiree benefits prior to the bankruptcy.

"We hold that Section 1114 is unambiguous and clearly applies to any and all retiree benefits," Chief U.S. Circuit Judge Theodore A. McKee wrote. The lower courts that have refused to apply Section 1114 broadly have reasoned that doing so would produce "absurd" results by giving retirees more rights in the bankruptcy context than they would have enjoyed before.

But McKee found that Congress was setting out to protect retirees during the high-pressure period of a bankruptcy reorganization and that the use of very broad language in the statutory test was designed to provide a wide umbrella of protection.

In Section 1114, Congress provided both procedural and substantive protections for retiree benefits during a Chapter 11 proceeding.

The law says that the bankruptcy trustee must attempt to reach an agreement with the retirees regarding modification of retiree benefits before it can ask the bankruptcy court to modify or terminate them. In doing so, the trustee must also provide the retirees with information about the company's financial situation to allow for informed evaluation of the proposal.

The law also says a bankruptcy court should grant a motion to modify retiree benefits only if it finds that doing so "is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor, and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities."

Section 1114 also provides additional protection for retiree benefits by giving them priority they would not otherwise have. Any payment for retiree benefits required to be made during a Chapter 11 proceeding has the status of an "allowed administrative expense" rather than the general unsecured status that would otherwise apply.

Visteon's lawyers successfully argued in both the bankruptcy and district courts that applying Section 1114 would make no sense since the company's ERISA plan gave it the power to terminate retiree benefits unilaterally. Giving retirees more rights in bankruptcy court would be absurd, they argued.

But the 3rd Circuit flatly rejected that argument.

"Despite arguments to the contrary, the plain language of Section 1114 produces a result which is neither at odds with legislative intent, nor absurd," McKee wrote in an opinion joined by Judges Marjorie O. Rendell and Walter K. Stapleton.

"Disregarding the text of that statute is tantamount to a judicial repeal of the very protections Congress intended to afford in these circumstances. We must, therefore, give effect to the statute as written," McKee wrote.

McKee said he recognized that "the majority of bankruptcy and district courts that have addressed this issue have concluded that Section 1114 does not limit a debtor's ability to terminate benefits during bankruptcy when it has reserved the right to do so in the applicable plan documents."

But that view is mistaken, McKee found, because Congress made room for no such exceptions.

"Section 1114 could hardly be clearer. It restricts a debtor's ability to modify any payments to any entity or person under any plan, fund, or program in existence when the debtor files for Chapter 11 bankruptcy, and it does so notwithstanding any other provision of the bankruptcy code. There is therefore no ambiguity as to whether Section 1114 applies," McKee wrote.

"By using the word 'any' three separate times, Congress ensured that the statute would apply to all benefits," McKee wrote. "We are, therefore, unpersuaded by the suggestion that failure to specifically address benefits that could be unilaterally terminated outside of bankruptcy somehow breathes ambiguity into the word 'any.'"

The ruling is a victory for attorneys Thomas M. Kennedy and Susan M. Jennik of Kennedy Jennik & Murray in New York, who filed the appeal on behalf of the Industrial Division of the Communications Workers of America.

About 2,100 retirees objected when auto parts supplier Visteon Corp. terminated their health and life insurance benefits without following the procedures set forth in Section 1114.

But U.S. Bankruptcy Judge Christopher Sontchi ruled in March that Visteon was free to do so, and the retirees lost their first round of appeals when U.S. District Judge Michael M. Baylson, on special assignment to the Delaware court, refused to disturb Sontchi's ruling.

An expedited appeal to the 3rd Circuit followed and the retirees have now emerged victorious with a ruling that breathes new life into Section 1114 by mandating that its protective provisions apply in every case where the debtor corporation seeks to terminate retiree benefits.

McKee's opinion includes a lengthy discussion of the law's legislative history, beginning with a highly controversial bankruptcy in which 78,000 retirees lost their benefits, and shows that Congress was setting out to establish a mechanism that must be followed in any bankruptcy to ensure fairness to workers who often agreed to forgo raises over decades in return for the promise of lifelong benefits.

The widespread trend to ignore Section 1114, McKee concluded, stemmed from misunderstandings of the law's purposes and mandates.

"Courts that have concluded it is absurd to apply Section 1114 to benefits that could be terminated outside of bankruptcy have often misinterpreted the rigidity of the section's protections, and therefore the extent to which the statute is in tension with ERISA," McKee wrote.

"Section 1114 does not prohibit the termination of benefits during a bankruptcy proceeding. Rather, it creates an equitable procedure through which the debtor can argue the economic necessity of doing so, and the retirees can counter with their own arguments about economics, fairness, and equity," McKee wrote.

For the most part, McKee said, "all Section 1114 guarantees retirees is a voice, and some minimal amount of leverage, in a process that could otherwise be nothing short of devastating to them and to their families and communities."

Visteon spokesman Jim Fisher declined to comment except to say that the company was "disappointed by the ruling" and is "assessing an appropriate course of action."