SACRAMENTO — At least another month will pass before a judge decides if Stockton, Calif. can exit Chapter 9 bankruptcy.
What was supposed to be the final day of Stockton's bankruptcy confirmation hearing wrapped up Wednesday without finality.
U.S. Bankruptcy Judge Christopher Klein set another hearing for July 8, in order to get more clarity on collateral at stake.
Wednesday's hearing was not originally scheduled, but got tacked on to the four day of trial in May that lasted longer than expected.
Wednesday's proceedings focused mainly on Franklin Advisors, Inc., the only creditor with which Stockton has not reached an agreement. Under the reorganization plan, the city plans to repay the investment firm $350,000 for a $35 million loan, which amounts to less than a penny on the dollar.
Franklin's attorney, James Johnston of Jones Day, told the judge he should not confirm the plan because it does not pass the series of hurdles that he had said it must pass in order to exit bankruptcy.
He also noted that Judge Klein previously said an exit plan wouldn't work if it involves a "hardball cramdown."
"This is as hardball as it gets," Johnston said. "I think it's crystal clear the plan does not work. It fails miserably."
One of Johnston's main arguments is that the plan unfairly discriminates against Franklin because the city is treating other creditors more favorably.
Specifically, Franklin argues that if Stockton can continue meeting its pension obligations — which remain unimpaired under the plan — then it should be able to pay Franklin more than a penny on the dollar.
When asked by Judge Klein what can be done about the pension situation, Johnston said the city has two options. It can impair its pension liabilities to the California Public Employees' Retirement System, or it could continue to make these obligations, and at the same time, give Franklin its "fair share."
When asked whether CalPERS pensions should be impaired, Johnston said he thought they should be.
How Judge Klein handles the treatment of Stockton's pension obligations has become a central focus of the bankruptcy case, as the issue not really been addressed in California.
Michael Gearin, an attorney for CalPERS, said a city of Stockton's size has never ended a contract with CalPERS.
During closing arguments on Wednesday, he asked the judge to approve Stockton's plan and that any expression of opinion on the pension issue would most certainly result in continued litigation.
Stockton has argued that impairment of CalPERS obligations would not only result in a massive termination fee of $1.6 billion, but it would also make it very difficult to attract or retain public workers going forward.
"The city leaders have to run a city in which people want to live," said Stockton's attorney, Marc Levinson of Orrick, Herrington & Sutcliffe LLP.
After both sides made their closing arguments, Judge Klein said he would need to know the valuation of the collateral for Franklin's bonds, which includes two golf courses and a public park, before giving his decision.
The city has argued that the collateral is worthless because the golf courses have been losing money over the past few years and require costly repairs. Franklin, however, has argued that the golf courses could be sold at a profit.
Both sides agreed that a valuation of the assets would be helpful, and could lead to an agreement on a means of payment to Franklin.
"We actually might be able to pay Franklin more than a cent on the dollar," Levinson said. "I don't think we should, but we might."
The hearing to determine valuation of collateral is set for July 8 at 1:30pm, after which the judge could give an oral ruling. At the very least, it would put the court in a position to wrap things up by the end of July, Judge Klein said.
