Judge approves California city bankruptcy petition

By Jim Christie

SAN FRANCISCO, Sept 5 (Reuters) - A U.S. judge ruled on Friday that Vallejo, California, was insolvent when it filed a bankruptcy petition in May, siding with the city's bid to seek protection from creditors while aiming to restructure its debts in bankruptcy court.

"This gives us the opportunity to negotiate with our creditors and to emerge from bankruptcy and become solvent over the long term," Marc Levinson, a partner at Orrick, Herrington & Sutcliffe who represents Vallejo, said shortly after the ruling was signed.

"We are legitimately in bankruptcy, which is what we always said we were and the unions, who said we had buckets of money to tap, were wrong," Levinson added, referring to the legal challenge by city employees against the bankruptcy petition.

An appeal of the decision by Sacramento-based U.S. Bankruptcy Court Chief Judge Michael McManus may be in store, said Dean Gloster, a partner with Farella Braun + Martell, the law firm which represented Vallejo employees seeking a dismissal of the bankruptcy petition.

"We're going to evaluate if there are grounds for appeal," Gloster told Reuters by phone. "The labor organizations have never disputed that Vallejo was in deep financial trouble but only questioned if bankruptcy (court) was the best place to solve its problems."

Vallejo, with more than 100,000 residents, made its Chapter 9 bankruptcy filing, intended for municipalities, as it faced the prospect of running out of money.

The filing made the blue-collar, former Navy town in the San Francisco Bay Area the first sizable California city to file for bankruptcy.

The state's last governmental bankruptcy filing was in 1994 when Orange County's finances ran aground on soured investments linked to derivatives.

By contrast, Vallejo's main financial difficulty has been its high spending on public safety employees, whose costs account for three-quarters of the city's general fund, amid sliding revenues linked to the housing slump.

Without reserves and a budget shortfall that may be as big as $17 million, Vallejo does not have sufficient available funds and cash flow to pay its debts as they become due, McManus said in his decision.

Vallejo is about $55 million in debt, Levinson said. (Editing by Braden Reddall)