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Stockton Chapter 9 Eligibility Trial Set

SACRAMENTO – Stockton, Calif.’s unhappy bond market creditors will have their day in court next month to challenge the city’s eligibility for Chapter 9 bankruptcy protection.

U.S. Bankruptcy Court Judge Christopher Klein set a March 25 date for a four-day trial.

“I think we need to have a trial, and I think we need to have a trial soon,” Klein told the lawyers for city, represented by Orrick, Herrington & Sutcliffe LLP and the group of seven bond market credit attorneys during a hearing in Sacramento Tuesday. “And a trial that will not be very long.”

Klein said he expected the main issue that will be debated during the trial will be the city’s insolvency, and he said he expected any decision would be appealed.

The consortium of bond market creditors is made up of bond insurers Assured Guaranty Corp. and National Public Finance Guarantee, investor Franklin Advisors, and trustee Wells Fargo NA. The main thrust of their various objections is that Stockton has failed to show it is insolvent and never negotiated in “good faith” as required by federal bankruptcy law.

During 90 days of mediation with creditors before it filed the bankruptcy petition, Stockton proposed slashing debt payments by more than $350 million, including permanently ceasing payments from the general fund toward $124 million in outstanding Assured Guaranty insured pension obligation bonds.

Bond creditors have also pointed out that Stockton has refused to try to reduce its employee pension payments to the California Public Employees’ Retirement System, its largest creditor as outlined in court documents.

San Bernardino, the other California city petitioning for bankruptcy protection, has cut its pension payments to CalPERS, which wants to sue the city.

Before Tuesday’s hearing, Stockton announced a settlement agreement with one of its capital markets creditors, Ambac Assurance, which has a smaller exposure to Stockton’s debt than Assured or NPFG.

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