PHOENIX – Stockton, Calif. has notched another legal win for its bankruptcy exit plan.
That doesn't mean the fight is over.
The Bankruptcy Appellate Panel of the U.S. Ninth Circuit Court of Appeals dismissed fund manager Franklin Templeton's appeal of the city's plan.
Marc Levinson, a partner in the Sacramento office of Orrick Herrington & Sutcliffe who argued the appeal for Stockton, said the panel's ruling Friday was a win for the city but might not be the end of the legal wrangling surrounding its plan of adjustment, which was approved more than a year ago.
"We're pleased," Levinson said. "Going forward, really the ball is in Franklin's court. I believed that the city ought to win the appeal, and it did. But it's not over yet if they decide to take the appeal to the Ninth Circuit."
The three judges of the panel, who heard arguments from Stockton and Templeton in Sacramento in November, ruled in the city's favor when it found that Franklin's appeal was "equitably moot."
Stockton's attorneys had argued in their briefs that the panel should rule that way because the plan, approved by U.S. Bankruptcy Judge Christopher Klein in October 2014, is already consummated.
Franklin argued unsuccessfully that the city should have raised that argument earlier and that a Chapter 9 plan shouldn't be subject to mootness because it would be possible for the court to grant Franklin further relief without damaging the rights of others.
The court found that to reverse the plan now would have a "potentially devastating impact" on other creditors who achieved closure through the plan of adjustment and who were not part of the appeal.
The company said in its filing that the bankruptcy court erred in approving a plan that was "discriminatory and punitive" to Franklin, paying it roughly 1% on $35 million of bonds while leaving pensions untouched and paying other creditors who had settled with the city earlier between 52% and 100%. Stockton's attorneys said in their own filing that Franklin's total recovery rate on secured and unsecured claims is roughly 17.5%.
Franklin said in its appeal that the city can pay more without undoing the whole plan of adjustment, but the city has disputed and continues to dispute that claim.
The city, which declared bankruptcy in July 2012, has developed a long-range financial plan for the duration of the agreements in the plan of adjustment, some of which extend out to 2053, according to the city.
As of last year, the city had already spent some $13 million in legal fees related to the bankruptcy. Franklin had requested that the bankruptcy court place a stay on the plan of adjustment, but the court declined to do so.
Franklin could still ask the regular circuit judges to overrule that plan of adjustment. If the company does that, Levinson said, it could be up to two years before the issue is finally settled.
Franklin did not respond to a request for comment on the decision or its future plans for the case.
