RIVERSIDE, Calif. — U.S. Bankruptcy Judge Meredith Jury Friday denied the California Public Employees' Retirement System's request to be allowed to sue San Bernardino in California state court over $6.9 million in missed pension payments.

Jury opened the hearing with a 30-minute string of arguments outlining why she was unlikely to lift the automatic stay granted to San Bernardino when it filed for Chapter 9 bankruptcy.

"I think the impact on San Bernardino of lifting the automatic stay would be astronomical," Jury said. "As a result the bar is really high. I would have to find amazing harm would immediately happen to the creditor to do so."

San Bernardino bondholders and bond insurers have challenged CalPERS' request, saying it would unjustifiably place the giant pension fund ahead of all other creditors.

Jury said that what CalPERS is seeking to do would have an immediate impact on San Bernardino that would make it impossible for the city to survive Chapter 9.

Once CalPERS filed its relief from automatic stay "it became a bit of a pile-on with San Bernardino County also requesting relief from the automatic stay" to sue the city over unpaid bills in state court, Jury said.

The county's relief from automatic stay will be decided at a hearing in January, she said.

"Even though the argument has been made that the city isn't as broke as it says it is, I don't think there is really anyone in the room that doesn't think city is broke," Jury said.

Michael Lubic, CalPERS' attorney, argued in support of the pension fund's relief of stay that the city's plans to "defer" payments to the pension fund could result in San Bernardino owing between $13 million and $20 million to the $241 billion pension fund that the city may never be able to pay.

Jury said while she is concerned about the city racking up debts, she nevertheless denied the pension fund's relief from stay after hearing the arguments.

Jury did not make a ruling on the city's eligibility to be in bankruptcy, postponing that decision for a later date.

During the status hearing that began after Jury made her ruling on the relief of stay, creditors argued that the city has not been cooperative in its efforts to get documents they need to make their case.

"Trying to get information from the city is like trying to drain a swimming pool with a straw," Lubic said.

Lubic argued that a Reuters article shows that the city paid an unheard of $2 million to employees who quit their jobs within 90 days before the city filed bankruptcy.

An attorney representing the city argued that the city is required by law to make those payouts when employees quit and many employees made the decision to leave after learning of the city's financial troubles.

While Jury didn't think the city had done anything illegal in cashing out the employees, who later returned to work for the city, she said it was a problem that creditors found out about that through the wire service and not through a review of financial documents released to them by the city.

The city announced that "despite severe financial constraints, the city is going to hire five or six additional employees" so it can respond to discovery and work on a line-item budget plan to help it recover from its financial distress.

Jury agreed to set up a discovery schedule and trial dates that don't overwhelm San Bernardino's resources.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.