LOS ANGELES — Franklin Advisors, the holdout creditor in the Stockton bankruptcy, has filed an appeal challenging U.S. Bankruptcy Judge Christopher Klein's confirmation of the city's plan of adjustment.
Franklin had objected to taking a significant loss on the $35 million of bonds it holds — a recovery rate it estimated amounts to about 1% — when the California Public Employees' Retirement System remained untouched. Other major creditors settled with the city ahead of the bankruptcy confirmation.
CalPERs Chief Executive Officer Anne Stausboll lauded the judge's decision in an emailed response on the appeal: "The judge rightfully confirmed Stockton's carefully negotiated plan of adjustment, which protected the pension promises made to its public employees and allows the city and its employees to finally move forward in serving and protecting the people of Stockton."
Klein, however, said during the Oct. 30 confirmation hearing that after taking into account a $4 million payment from the city on a secured claim, Franklin's recovery rate would be closer to 12%.
"Our focus always has been and continues to be on doing what is in the best interest of the investors in the Franklin funds holding the Stockton debt at issue," said Stacey Coleman, a Franklin spokesman, in a statement. "Many of those investors are individuals and retirees who rely on us to protect the value of their investments and provide retirement income."
Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund loaned $35 million to Stockton in 2009. Stockton defaulted in repayment of that loan.
Klein confirmed Stockton's plan "over our objection," Coleman said. "We are disappointed by the Bankruptcy Court's ruling and believe that the Bankruptcy Court made many factual and legal errors in concluding that the Stockton plan satisfies the applicable requirements of the Bankruptcy Code. "
The appeal, which was filed Nov. 12 but was first reported Friday, seeks to "review and correct those errors, and we intend to continue to fight for a fair and equitable recovery for our fund investors," Coleman said.
Franklin's attorneys contended in court documents that the court failed to show that the plan was in the best interest of creditors — namely Franklin.
The attorneys claim in the appeal that the city could pay Franklin far more than it did from future revenues.
"Indeed, there are no facts establishing that a one-cent recovery for Franklin is "all that could reasonably be expected" or that the amount of the city's probable future revenues devoted to the payment of Franklin's claim under the Plan — i.e., $0 — is "fair," attorneys argued in court documents.
Franklin's attorneys contend tht the city's initial "ask" proposed future payments representing a present value recovery of more than 50% to Franklin, and that the future payments to be received by all other material creditors under the plan have a present value exceeding 50%.
Franklin is the "only material creditor in this case — or to Franklin's knowledge, any other successful Chapter 9 case — to receive no meaningful recovery at all," its attorneys argued.
Franklin's attorneys alluded to the larger issuer of whether pension funds should be impaired in Chapter 9 bankruptcy, arguing it is in the interest of California municipalities, and municipal bondholders everywhere, for Franklin's appeal to be heard. Those arguments came in a motion for a stay on the confirmation order pending the appeal filed simultaneously.
"The appeal raises important questions regarding the nature, extent and scope of a municipality's ability to impose an adjustment of bond debt upon a dissenting creditor in a Chapter 9 proceeding, while at the same time leaving vastly-larger liabilities for unfunded pensions untouched and unadjusted," Franklin's attorneys argued.
If the confirmation order is allowed to stand without any review by an appellate court, those important questions will remain unanswered, Franklin's attorneys argued in court documents.
"The potential consequences of this are unpredictable, but potentially significant," Franklin's attorneys said in court documents. "It is well worth the wait of a few additional months to ensure that whatever those consequences may be, they are the result of a legally sound decision regarding confirmation of the plan."