Exclusive: San Bernardino paid $2 million in cash-outs before bankruptcy filing

Thu Dec 20, 2012 6:12pm EST
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By Tim Reid and Cezary Podkul and Ryan McNeill

LOS ANGELES (Reuters) - The California city of San Bernardino paid $2 million in cash-outs to employees for unused vacation and sick time in the three months before declaring bankruptcy on August 1, data reviewed by Reuters show.

City officials chalked up the payment spurt to coincidence and other factors. Still, the payments may run afoul of a core provision of the bankruptcy code that imposes strict rules on the types of payments that can be made immediately prior to a bankruptcy, according to bankruptcy lawyers who are not involved in the case.

In a court hearing scheduled for Friday, the city is expected to argue that it is so penniless that it needs bankruptcy protection and relief from payments owed to the California Public Employees Retirement System and other creditors.

Yet in July alone, the city paid $1.2 million to 33 employees for unused sick and vacation time, with more than half of that paid out the day before the bankruptcy filing. The next highest similar total for a recent July was $471,149, in 2010. Reuters analyzed city data from 2008 to this year obtained through a public-records request.

In the three months before the bankruptcy, 51 city workers received sick and vacation time payouts totaling $2 million. Most of the workers received the payments as part of their retirement, as provided for in union contracts, city officials said.

Rhonda Haynes, the city's acting human-resources director, said the timing of the payouts was a coincidence. July 31 is the normal cash-out payment date for employees who retired and received their final wage check on July 15, she said. Other city officials also suggested that general anxiety among older workers over the city's finances led to a blip in retirements.

Legal analysts said the cash-outs immediately prior to bankruptcy filing were troubling and could be a breach of the federal bankruptcy code. Payments made by a debtor 90 days prior to a filing can be subject to clawback if they are found to be "preferential." Preference payments violate the bankruptcy code, a civil statute that does not provide for criminal sanctions.

"It looks really bad and it needs to be investigated," said Karol Denniston, an expert in municipal bankruptcy at Schiff Hardin law firm in San Francisco who is not involved in the San Bernardino case.   Continued...