California's Stockton can pay claim opposed by bond insurers

SACRAMENTO, Calif. Wed Jan 30, 2013 7:35pm EST

SACRAMENTO, Calif. Jan 30 (Reuters) - The U.S. judge hearing the bankruptcy case of Stockton, California ruled on Wednesday the city does not need court approval to settle a $55,000 claim, a plan contested by capital market creditors and backed by the state's pension fund.

Chief Bankruptcy Judge Christopher Klein said the federal Chapter 9 municipal bankruptcy code does not allow courts to tell cities seeking protection from their creditors how to use their property and revenues.

Klein said Stockton maintains financial independence, which includes opting to pay to settle a claim against its police department, a blow to creditors seeking his help to influence the broke city's financial choices.

Stockton, a city of nearly 300,000 in an agricultural region east of the San Francisco Bay area, last year became the biggest U.S. city to file for bankruptcy.

The move triggered a lengthy and testy fight with Stockton's financial markets creditors. The U.S. bankruptcy court must still determine whether Stockton is eligible for Chapter 9 bankruptcy protection before the city may restructure its finances under court supervision.

Bond insurers with more than $350 million of exposure to Stockton's debt have been contesting the city's regular payments to the state pension fund, the California Public Employees' Retirement System, best known as CalPERS. In the meantime, Stockton halted halting payments to some bondholders.

CalPERS General Counsel Peter Mixon said he was pleased with Klein's ruling but declined to elaborate.

CalPERS in December suffered a setback in court in Southern California when a U.S. bankruptcy judge ruled against its attempt to bypass the bankruptcy court and collect overdue pension payments from the city of San Bernardino, which also filed for Chapter 9 bankruptcy protection in 2012.

Attorneys for Stockton's capital markets creditors, which include Assured Guaranty Corp and its Assured Guaranty Municipal Corp unit and MBIA unit National Public Finance Guaranty Corp, are contesting the city's Chapter 9 filing in U.S. Bankruptcy Court for the Eastern District of California in Sacramento.

The Stockton case number is: 2012-32118

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