CORRECTED-UPDATE 1-U.S. judge in Stockton bankruptcy case extends trial to June

Fri May 16, 2014 12:01am EDT

(Corrects to show the golf courses are collateral for, not built with proceeds from, Franklin's bonds in paragraph 7)

By Robin Respaut

SACRAMENTO May 15 (Reuters) - The judge in the bankruptcy case for the city of Stockton, California, on Thursday extended the trial into June, after granting one more day to hear arguments.

U.S. Bankruptcy Judge Christopher Klein proposed a fifth and final day of trial for June 4, rescheduled from May 29 that he had proposed earlier on Thursday.

Klein made the decision on what initially was scheduled as the final day of a four-day trial to determine whether the northern California city is ready to exit Chapter 9 bankruptcy protection.

The judge is poised to determine if Stockton's proposed debt adjustment plan, a blueprint at the center of its municipal bankruptcy case, is fair and feasible.

Stockton has attracted the attention of the $3.7 trillion municipal bond market for its treatment of major creditors and pension obligations.

To date the trial has focused mainly on a single holdout creditor, two funds managed by Franklin Templeton Investments, which the city has proposed to pay less than a penny on the dollar.

On Thursday, proceedings centered on how to properly value two golf courses that are collateral for Franklin's bonds.

Earlier this week, Klein announced he would decide if the country's largest pension fund, Calpers, could share losses similar to other creditors in Chapter 9.

Of particular interested to those following the case is whether Klein rules that the California Public Employees' Retirement System can be impaired in Chapter 9.

"The judge is doing the prudent thing by requiring the pension impairment to be considered," said David Tawil, president of Maglan Capital, a hedge fund that focuses on distressed situations. "Calpers may not like it, however the Pandora's box was opened in Detroit's case."

In December, U.S. Bankruptcy Court Judge Steven Rhodes ruled Detroit may legally reduce public pension benefits, despite Michigan's constitutional protection. (Reporting by Robin Respaut; Editing by Lisa Shumaker and Cynthia Osterman)

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