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Stockton and Creditors Chart Bankruptcy Case

SACRAMENTO — Attorneys for Stockton. Calif. and its creditors hammered out a schedule and tipped their hats Thursday to the fight ahead during the first hearing on the city's bankruptcy case.

The two sides agreed during a status hearing with Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California on a calendar of deadlines for discovery and objections starting in the fall and ending on Jan. 8 — the next hearing on the status of the case.

Starting next week both sides will also start mediations with U.S. Bankruptcy Judge Elizabeth Perris, who helped Mammoth Lakes this week reach a settlement with its largest creditor during its bankruptcy case.

"Our hope is we will be able through the mediation process to avoid [a fight over eligibility]," said Marc Levinson, the city's lead bankruptcy attorney with Orrick, Herrington & Sutcliffe, after the hearing.

Levinson said "the stakes are higher" compared to Vallejo's bankruptcy case, which he also litigated, because of the several large creditors.

Lawyers for the top creditors including bond insurers Assured Guaranty Ltd. and National Public Finance Guarantee Corp., Franklin Advisors and Wells Fargo N.A. as the trustee for several of the city's bond issues, gave a few signs of the battle to come.

James Johnston, the attorney with Jones Day representing Franklin Advisors, discussed concerns about the city's initial restructuring plan being introduced ahead of the litigation over the eligibility, calling it potentially "the cart before the horse."

"The one thing that I can assure, I will not deal with a plan of adjustment in a precipitous manner," Judge Klein said.

Stockton's bondholders and insurer creditors, especially Assured and National, which insure much of the city's debt, will challenge the city's eligibility to enter bankruptcy protection.

Stockton's proposed plan to slash debt payments by more than $350 million gained no ground with bond creditors during failed negotiations as part of a requirement under California law to try to prevent bankruptcy. Experts have said this would be an unprecedented haircut for bondholders in a Chapter 9 case.

Several series of bonds would be restructured under the Stockton proposal, while the city permanently would cease making payments from the general fund toward $124 million in outstanding Assured Guaranty insured pension obligation bonds.

Creditors worry this is a sign of what is to come when the city introduces how it plans to restructure its finances to the court, if the judge finds the city eligible for bankruptcy protection.

The two insurers have also contended that bondholders should not be lower in seniority to pension liabilities. Stockton has listed the California Public Employees' Retirement System as its largest creditor.

Assured said in a filing that bondholders, whose claims represent only 8% of the city's general fund budget, are expected to account for 42% of the city's proposed savings, while current employees make up 51% of the general fund budget yet only contribute 19% of savings.

Some creditors are also questioning whether Stockton is really insolvent, saying it has not done everything possible to shore up its budget.

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