ALAMEDA, Calif. — National Public Finance Guarantee Corp. this week asked the judge handling the Vallejo bankruptcy case to order the resumption of state intercept payments that back one of the California city’s debt issues.
Vallejo filed for bankruptcy under Chapter 9 in May 2008, saying it had unsustainable labor contracts that rendered it unable to meet its obligations.
The bankruptcy filing affected $53 million of general-fund backed debt, including the bond issue in question — $4.8 million of certificates of participation sold in 1999. The deal carried insurance by MBIA, now operating as National Public Finance Guarantee, as well as a debt-service reserve surety bond from the insurer.
The COPs were secured by vehicle license fee and successor taxes that the state distributes to Vallejo. In connection with the 1999 bond issue, the city agreed to allow the state controller to intercept VLF payments to the city and remit them to the bond trustee in the event of non-payment.
NPFG,
The city disagrees.
“National has been advised by counsel to the city that any diversion of VLFs pursuant to the Intercept Act will violate the automatic stay” imposed by the bankruptcy judge after Vallejo’s Chapter 9 filing, according to the insurer’s brief.
NPFG is asking the judge, Michael McManus, to issue an order affirming that the bankruptcy stay does not extend to the VLF payments, or to modify the stay to direct trustee Wells Fargo to ask the state controller’s office to implement the VLF intercept under state law.
The 1999 bonds appear to be singled out for non-payment.
Vallejo began making reduced installment interest deposits on the 1999 COPs in fiscal 2010, according to a disclosure notice that trustee Wells Fargo
“The debt service was being paid at first, then it was reduced, and now they are proposing to stop it altogether,” said Kevin Brown, a spokesman for NPFG.
Vallejo’s tentative workout plan anticipates that payments will continue on all 12 other bond and certificate issues for which Wells Fargo is trustee, the disclosure said. Those bonds are being paid as “special revenues” not sourced from the city’s general fund, according to the trustee.
NPFG is also getting frustrated with the amount of time it is taking to resolve the bankruptcy.
“At a hearing on Aug. 9, 2010, counsel to the city informed this court that they were not remotely close to filing a plan,” according to a footnote from the National brief. “At the insistence of creditors, including National, and over the objection of the city, this court set a plan filing deadline of Jan. 18, 2011. Even if the city meets this filing deadline, it is likely that confirmation of a plan will not occur until mid-2011 at the earliest.”
A hearing on the NPFG motion is scheduled for Sept. 16.
