SACRAMENTO – A ruling in the bankruptcy court trial over Stockton, Calif.’s eligibility to enter bankruptcy protection is expected Monday.
U.S. bankruptcy Judge Christopher Klein said he will need time to wade through the massive amounts of evidence filed in the case that pits bond market creditors against the city. Klein said he would likely make an oral ruling on the case Monday. He reserved the right to write out his opinion.
Both sides were scheduled to present closing arguments Wednesday afternoon. The trial had previously been expected to finish Thursday. The city filed much of its testimony as written declarations, cutting the trial time.
Those testifying in person during the trial included Stockton City Manager Bob Deis, Deputy City Manager Laurie Montes, Chief Financial Officer Vannessa Burke, and Dave Millican, Management Partners, a consultant for the City of Stockton, and city council member Kathy Miller.
Lawyers for the city’s bond insurers, bond investors and bond trustee have argued in court that Stockton never negotiated in “good faith” as defined in the federal bankruptcy code or met the definition of insolvency, meaning cash poor.
The city has countered that it is insolvent: it doesn’t have the cash to pay its bills, and that its laborious negotiations with creditors during the state directed Assembly Bill 506 mediation process proved it negotiated in good faith.
The bond market creditors emphasized that Stockton decided not to ask for concessions from the California Public Employees’ Retirement System, which has been listed as its largest creditor, and instead put the burden on bond investors and their guarantors.
The capital market lawyers said the city could have reduced expenses and enhanced revenues — such as by asking voters to approve higher taxes — to solve its cash flow problems without jeopardizing public safety, which the city has put front and center as a reason to refrain from further cuts.
The bond creditor lawyers also said the city’s “ask” presented during mediation negotiations was unfair. It would have had bond firms take a $350 million hit, around 44% of concessions, despite the related debt service being only 7.5% of base line expenditures.
Experts say that if, during bankruptcy, the city is able to force bond firms to take such haircuts, it would be unprecedented.
The consortium of creditors is made up of bond insurers Assured Guaranty Corp. and National Public Finance Guarantee, investor Franklin Advisors, and trustee Wells Fargo N.A.
Klein said at the start of the trial that the burden is on the city to prove its eligibility.
