Stockton, Calif. creditors to vote on bankruptcy exit in February

SACRAMENTO, Calif. Mon Nov 18, 2013 6:40pm EST

SACRAMENTO, Calif. Nov 18 (Reuters) - The judge hearing Stockton, California's bankruptcy case scheduled a vote on Monday by the city's creditors on its plan to exit bankruptcy for February after approving its notice of deals it has struck with nearly all of them.

The only major creditors continuing to contest Stockton's plan are the Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund, and they will be able to contest it after the vote in a trial in March, which will also serve as the hearing to confirm the city's plan, U.S. Bankruptcy Judge Christopher Klein said.

Franklin holds $35 million in bonds issued by Stockton, which wants to pay $95,000 on the debt as part of its plan to exit bankruptcy.

During a hearing in which the lawyer for Franklin funds pressed the city for more information on its deals and settlements with its creditors, Klein set the vote by Stockton's creditors for Feb. 10, 2014. It will be followed by a trial and confirmation hearing over the Stockton's plan to exit bankruptcy beginning on March 5, 2014.

Stockton will begin circulating the plan among its creditors next month.

Klein said Stockton should include in its disclosure of the deals with creditors and other moves it has made while in bankruptcy the risk that a tax increase approved by city voters earlier this month may not be renewed after 10 years.

The sales-tax increase is a key part of Stockton's plan to return to solvency. The plan includes savings from scrapping subsidies for health insurance for some 1,100 retirees, various concessions from employees and settlements with its bond insurers to help reduce debt payments.

A city of about 300,000 in California's Central Valley, Stockton filed for bankruptcy last year after struggling with a severe revenue slump.

Stockton's two biggest bond insurers had contested the city's bankruptcy, arguing it would never be able to repair its finances without tackling its pension liability. The city, supported by its pension fund, the California Public Employees' Retirement System ruled that out. The bond insurers recently agreed to settlements with the city and dropped demands that it impair its pensions.

Stockton was the biggest U.S. city to file for bankruptcy protection from its creditors until Detroit filed earlier this year.