December 12, 2015 / 1:10 AM / 2 years ago

U.S. court tosses Franklin's appeal of Stockton bankruptcy plan

LOS ANGELES (Reuters) - A U.S. court on Friday dismissed an appeal filed by a holdout creditor over the plan that enabled the city of Stockton, California, to exit bankruptcy.

Stockton’s holdout creditor, two funds managed by Franklin Templeton, filed the appeal earlier this year after the city had received the green light to exit Chapter 9.

But an appellate panel of the U.S. Ninth Circuit Bankruptcy Court dismissed the case as equitably moot, saying that the bankruptcy court had not clearly erred in its decision.

Franklin had argued that “no bondholder has ever received so little in the history of municipal bankruptcy.”

Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund loaned $35 million to Stockton in 2009. After the bankruptcy, Franklin ended up with over $6 million.

The city contended that it was not “awash in loose cash” and could not boost Franklin’s payments without “eroding the underpinnings of the plan.”

The appellate panel agreed with the city.

In its order, the court wrote that to “reverse the confirmation order at this point would have a potentially devastating impact on creditor constituencies.”

To exit bankruptcy, Stockton created a plan that lowered pensions for new employees and eliminated up to $550 million in unfunded health benefits. These concessions were accepted by employees in exchange for preserving pensions.

The Northern California city of about 300,000 filed for bankruptcy in 2012 and got approval to exit Chapter 9 last fall in a case that was closely watched in the $3.6 trillion U.S. municipal debt market.

The case is in re City of Stockton, California, U.S. Bankruptcy Appellate Panel of the 9th Circuit, No. EC-14-1550.

Reporting by Robin Respaut; Additional reporting by Jim Christie; Editing by Lisa Shumaker and Tom Brown

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