* First step in a complex legal proceeding
* Lifting protection would leave the city without cash flow-
* $2 million cashout paid to employees "preferential" -
By Jonathan Weber and Tim Reid
RIVERSIDE, Calif., Dec 21 A U.S. bankruptcy
judge ruled on Friday against an attempt by the California
Public Employees Retirement System to bypass the bankruptcy
court and collect overdue pension payments from the bankrupt
city of San Bernardino.
The decision, while only one step in a highly complex legal
proceeding, was a blow to Calpers' argument that pension
payments and California law should take precedence in a
Calpers, the largest U.S. pension fund with $241 billion in
assets, had been seeking to lift the automatic bar on
payment collections that comes with a bankruptcy filing.
Calpers is concerned that if San Bernardino - a city of
210,000 east of Los Angeles - continues to withhold payments it
could encourage other debt-strapped California cities to follow
Calpers has long argued that under California state law the
contract between Calpers and debtor cities is inviolate and the
pension fund should be paid in full, even in a bankruptcy.
Two other California cities - Vallejo, which emerged from
bankruptcy last year, and Stockton, which filed for bankruptcy
protection this year - continued to make payments in full to
Calpers. San Bernardino is the first city to halt payments to
the pension fund and thus the first to potentially challenge
Calpers' historic primacy as a creditor.
The motion by Calpers was denied without prejudice, Judge
Meredith Jury said. While Jury said the bankruptcy court clearly
had jurisdiction, a Calpers attorney said the pension fund may
nonetheless ask a state court to intervene in the matter.
San Bernardino has not made its $1.2 million twice monthly
payments to Calpers since it filed for bankruptcy in August. It
now owes at least $8 million to the pension system in addition
to a long term debt that the city pegs at $143 million.
"Unless I have been misled the city has limited funds on a
daily and monthly basis, it is using the limited funds to
pay salaries," Jury said in her opening remarks. She based her
ruling largely on the potentially disastrous impact a state
collection action could have on the struggling city.
Lifting the protection would leave the city without the cash
flow to run daily operations, she said.
Calpers has also made a broader argument that San Bernardino
should not be eligible for bankruptcy and that state law should
prevail when it comes to pension payments.
Calpers officials have said that they are willing to argue a
wider Constitutional point - the state law defending their right
to be paid versus the federal municipal bankruptcy law - all the
way to the U.S. Supreme Court.
The court decision may favor bondholders who sided with the
city against Calpers.
Ralph Taylor, an attorney representing the holders of $50
million pension bond holders said they agreed with the judges'
comments and "it was in the best interests of the city for the
stay to remain in place".
If Calpers were allowed to sue the city and collect its
payments, it would likely be "devastating on the city, its
workforce...and other creditors because Calpers will take it
all" he said.
San Bernardino has issued $50 million of pension obligation
bonds to pay down part of its debt with Calpers.
At the Friday hearing, attorneys also argued about whether
Calpers and other creditors should be entitled to extensive
discovery as part the proceeding to determine whether the city
is eligible for bankruptcy.
One reason for denying bankruptcy protection would be a
finding that the city had not acted in good faith --and Calpers
attorneys said the lack of information from the city and other
factors suggested a lack of good faith.
Michael Lubic, an attorney with K&L gates representing San
Bernardino, cited a Reuters article about $2 million in
cash-outs of sick and vacation time to employees that were paid
immediately prior to the bankruptcy filing.
Calling those payments "clearly preferential" and thus
improper in a bankruptcy, Lubic argued that they showed the city
was not acting in good faith in claiming that it had no money to
pay its bills.
City lawyers said the city was required to make the
payments, and chided union representatives for objecting to the
cash-outs at the hearing even though many employees had demanded
the payments. Jury expressed great surprise that the parties
would learn about such payments from a news article.
Jury ultimately agreed that in light of the many unanswered
questions about the current state of the city's finances, some
discovery would be warranted. She had initially said she hoped
to avoid a time-consuming and expensive discovery process.