| SACRAMENTO, Calif., March 26
SACRAMENTO, Calif., March 26 A federal court
trial set to rule whether Stockton, California, is eligible for
bankruptcy is nearing an end with closing arguments scheduled
for Wednesday, a day earlier than expected.
Judge Christopher Klein in U.S. bankruptcy court in
Sacramento, California, gave no indication on when he would
rule. But observers said a decision could come sooner rather
than later in a case closely watched for its broad implications
for other struggling municipalities considering bankruptcy.
At issue is whether bondholders and bond insurers can be
forced to swallow losses while leaving pensions of workers and
Bondholders in major municipal bankruptcies consistently
have been repaid their entire principal since at least the 1930s
but Stockton is expected - along with Jefferson County in
Alabama and San Bernardino in California - to break that streak,
said lawyers familiar with the case.
Bondholders and bond insurers, which will have to repay
investors for capital losses, argue that Stockton's decision to
maintain payments to the California Public Employees' Retirement
System shows a lack of good faith - a reason to block its
request for eligibility for bankruptcy protection under federal
Bond insurers contesting Stockton's eligibility for
bankruptcy have more than $300 million of exposure to the city's
debt. Assured Guaranty Corp, Assured Guaranty Municipal Corp and
National Public Finance Guarantee Corp are joined by Wells Fargo
Bank, the Franklin California High Yield Municipal Fund and
Franklin High Yield Tax-Free Income Fund in objecting to the
city's bid to adjust its debt under bankruptcy court protection.
Stockton pays a yearly contribution of about $30 million to
the $254 billion California Public Employees' Retirement System,
best known as Calpers. It is the largest U.S. public pension and
manages pension accounts for the city's employees and retired
The creditors told Klein that Stockton was not insolvent at
the time it filed for bankruptcy last summer, saying the city
could have imposed deeper spending cuts or proposed tax
Stockton officials say deeper cuts would endanger public
safety, following $90 million in cuts over three years and a
sharp decline in payroll, in their crime-plagued city. The
officials also say they must keep paying Calpers to be able to
retain and recruit employees, especially police officers.
If Klein finds Stockton is eligible for creditor protection
under Chapter 9 of the U.S. bankruptcy code, the city could
begin drafting a so-called plan of adjustment for its debts
right away, said Karol Denniston, an attorney with the Schiff
Hardin law firm in San Francisco who helped draft California's
law guiding municipal bankruptcies.
Denniston said that the process will require some time. In
Alabama, Jefferson County filed in November 2011 and has not yet
filed a workout plan for the country's largest municipal
bankruptcy. And any plan would eventually require a court
finding that it is fair and equitable to all creditors.
Denniston noted that a workout plan could put the matter of
impairing payments to Calpers back in play.
Creditors will also be able to appeal a finding of
eligibility to U.S. District Court or a bankruptcy appellate
panel, Denniston said.
If Klein instead finds Stockton is not eligible for
bankruptcy protection, the city could operate under its current
spending plan while implementing concessions it has won from its
employees and negotiating concessions from other creditors.
Creditors would be able to press their respective claims
against the city in state or federal court, Denniston said. But
in that case, the creditors would not be able try to impair
Stockton's payments to Calpers, Denniston said.
Denniston expects Klein to decide Stockton's eligibility
quickly, noting he prides himself on clearing his desk of cases
before him by the end of the workweek.