* Bondholders ready to defend their rights, up to the Supreme Court
* Under federal law, Calpers should not have any primacy - bondholders
* First direct confrontation between the two groups
By Tim Reid
LOS ANGELES, Dec 11 (Reuters) - Wall Street bondholders have thrown down the gauntlet to America's biggest public pension fund, demanding similar rights as creditors in bankrupt San Bernardino, California - and they say they could take the fight all the way to the U.S. Supreme Court.
A group of bondholders and bond insurers on Monday filed a 114-page objection to arguments by the California Public Employees' Retirement System (Calpers) that it should enjoy its historical primacy as a municipal bankruptcy creditor.
A person familiar with the bondholders' case told Reuters they would vigorously argue that Wall Street creditors have the same rights as Calpers, and are probably in the proceeding for the long haul, if that is what it takes.
"We view these issues as extremely important and the precedent that could be set as extremely important," he said. "It may be the kind of thing that gets litigated for years, all the way to the U.S. Supreme Court."
The San Bernardino case is moving ahead swiftly since the city of 210,000 about 60 miles east of Los Angeles filed for bankruptcy protection on Aug. 1. It has triggered a high-stakes battle between Wall Street and state pension funds over how they are treated when cities run out of money.
The bondholders and bond insurers argue that under federal law, Calpers should be treated as any other creditor and its claims to supremacy under state law are void.
Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco who is not currently representing any party in the San Bernardino case, said: "This is definitely the first direct confrontation between two groups that are hugely invested in what is going on in San Bernardino.
"This is game on," Sweet added.
Calpers is San Bernardino's biggest creditor. The city, which has a nearly $46 million deficit for the current fiscal year, lists its unfunded pension obligations to Calpers at $143.3 million.
Calpers says if it halted its relationship with the city immediately and it had to pay all current and future obligations to Calpers today, that figure would climb to $319.5 million.
The city's pension bondholders are the city's second-biggest creditor. Among them, they own nearly $50 million in bonds the city issued in 2005 to reduce its debt to Calpers.
Among the bondholders and bond insurers challenging Calpers are bond insurer National Public Finance Guarantee Corporation, a unit of MBIA. National insures three series of development bonds issued in the 1990s.
Another party, Ambac Assurance Company, insured the $50 million of pension bonds. Wells Fargo Bank, trustee for the pension bonds, and Erste Europaische Pfandbrief-und Kommunalkreditbank AG, the pension bondholder, are also challenging Calpers.
On Nov. 28, Calpers, which manages $241 billion in assets, moved aggressively against the city, declaring its intention to sue San Bernardino for millions of dollars in pensions arrears.
Since Aug. 1 the city has failed to make its biweekly $1.2 million payment to Calpers.
Calpers argues that under California state law its pension contributions cannot be touched or reduced, even in a bankruptcy. In its Nov. 28 filing the pension fund said it was "concerned about inappropriate preferential treatment that might be given to other creditors" in the San Bernardino case.
SAN BERNARDINO FIRST MAJOR CHALLENGE TO CALPERS
Until the San Bernardino case, Calpers' stance of supremacy had remained unchallenged. The California city of Stockton, also seeking bankruptcy protection, decided to keep current on all payments to Calpers, as did the city of Vallejo, which emerged from bankruptcy in 2011.
The group of bondholders argues in its motion to the San Bernardino bankruptcy court that Calpers' claims under California state law are trumped by federal law and federal court precedent. All bankruptcy proceedings are heard in federal courts.
"Calpers distorts the fundamental principles of bankruptcy law and omits or ignores governing constitutional, statutory and judicial authority establishing that the Bankruptcy Code pre-empts and supersedes inconsistent state law," the bondholders and insurers argue in their court filing.
The next hearing in the bankruptcy case will be held on Dec. 21.