The city of Stockton California is facing the possibility of bankruptcy, but may see a sign of relief as it enters civil mediation. The city has defaulted on approximately $2 million in debt, and does not have the resources to cover it by conventional means. Debtors include Assured Guaranty, Wells Fargo, HUD, and National Public Finance Guarantee Corp.

Mediation to be Facilitated by Retired Bankruptcy Judge

Facilitating this mediation will be Ralph Mabey, a former bankruptcy judge, founder of Dewey & LeBoeuf LLP, and current senior counsel with Stutman, Treister & Glatt. He served as a bankruptcy judge between 1979 and 1983 before founding LeBoeuf, Lamb, Green & MacRae, currently known as Dewey & LeBoeuf.

This mediation could last up to 90 days. If Stockton cannot get enough concessions from its debtors, it could be the largest city in the U.S. to go bankrupt.

Why Mediation Services Were Invoked

State law in California calls for cities to enter mediation if they enter severe financial distress. This was instated after Vallejo California went bankrupt in 2008. Last month, the Stockton city council pushed a financial restructuring plan, defaulting on $2 million in debt and calling for mediation services.

Even before reaching the breaking point, Stockton had a huge mountain of debt from 20 years of city officials mishandling the finances. The city manager specifically mentioned that they had overpaid and provided excessively generous benefits to city employees and retirees. On top of hundreds of millions of dollars in pre-existing debt, the city has to deal with a budget gap of between $20 million and $38 million due to an extreme housing slump.

Civil mediation in this case is the only chance for Stockton to find a way out of its debt and avoid bankruptcy. This is only possible if everyone cooperates to reach that result.