Vallejo, California, population 117,000, has a lot of things going for it. The city is just a short ferry ride from San Francisco, close to Napa’s wineries, and offers cheaper housing than Berkeley without the blight of Oakland. There’s just one problem: It’s bankrupt.

With housing prices and tax revenues declining rapidly beginning in 2007, Vallejo found itself struggling to meet its payroll-particularly the generous salaries it paid to police and firefighters. In May 2008, hoping to win relief from bondholders and force renegotiations of its contracts with city employees, Vallejo became the largest U.S. municipality to seek bankruptcy protection since Orange County, California, in 1994. The city turned to Marc Levinson for help.

Levinson faced immediate opposition from the city’s police, fire, electrical, and managerial employee unions. The unions fought hard to stop the bankruptcy, but in September 2008, following an eight-day trial in Sacramento, U.S. bankruptcy court judge Michael McManus granted protection under Chapter 9 of the bankruptcy code. In February, Levinson argued against the unions’ appeal of the judge’s decision before the U.S. Court of Appeals for the Ninth Circuit. A decision is pending.

With the threat of new court-imposed contracts hanging over the unions, Levinson has negotiated new terms with Vallejo’s police and managerial unions. At press time he was still negotiating with the firefighters.

For a bankruptcy lawyer accustomed to representing corporations in Chapter 11 proceedings, Levinson says representing a city takes getting used to. For one thing, final deliberations over major decisions are open to the public. The hearings that Vallejo’s city council held over whether to file for bankruptcy protection drew hundreds of people and lasted well past midnight. Levinson remembers one woman shouting that God didn’t want the city to file.

Levinson says he understands the emotions that the case ignites. “We’re fighting for the survival of a city,” he says. “In 35 years of doing bankruptcy law, I’ve never worried about a case like I worry about this one.”

See all 25 of our Dealmakers of the Year, from the April 2009 issue of The American Lawyer.

Photo by Paul Godwin