SACRAMENTO — A federal bankruptcy judge said he will set a date in June for the final showdown with creditors on Vallejo, Calif.’s plan to try and rid itself of debt.
U.S. Bankruptcy Judge Michael McManus said a confirmation hearing, which sets the stage for approval of Vallejo’s bankruptcy exit plan, would start in late May or early June at the latest.
“I am going to push this,” McManus told a lawyer representing a city union who was asking for more time.
McManus is also expected to rule by Wednesday on several objections to the plan filed by a group of city retirees, specifically the disclosure statement proposal that gives a simple explanation of the proposal.
When the disclosure statement is approved, it will be sent to creditors, who will vote on the plan. Vallejo is slated to file an amended statement before the end of the month.
The exit plan is based on a five-year road map approved by the City Council that tackles $195 million in unfunded pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions for current workers, and creates a rainy-day fund.
The retiree objections include accusations of conflicts of interest against the city’s mayor, Osby Davis, and its law firm, Orrick, Herrington & Sutcliffe LLP.
Davis was disclosure counsel for the city’s five series of certificates of participation debt issued in 1999, 2000, 2001, 2002, and 2003. Orrick was bond counsel in April 2006 in relation to a letter-of-credit deal for 2001 COPs.
During the hearing Monday, R. Dale Ginter, the retirees’ lawyer from Downey Brand LLP, claimed that the entire exit plan could be void because Davis voted for it.
Ginter said debt holders could sue Davis and the law firm because of their role in the COP transactions and thus their interest to make sure the owners of the certificates were paid.
But Marc Levinson, the city’s bankruptcy lawyer from Orrick, termed the accusations “mudslinging.”
Levinson said the allegations are wrong because they mischaracterize the role of a disclosure counsel and tax counsel. He added that all of the debt involved has already been bought out by Union Bank.
A lawyer representing the bank during the hearing said the bank had no interest in suing Orrick or Davis.
The retirees have also questioned the plan to repay Union Bank with lease revenues, saying it could save the city millions to cancel the leases.
Levinson said in court that Vallejo is unwilling to get into a legal fight that would also likely cost millions of dollars but that it might not win.
The city has said Union Bank has maintained that rejecting the leases that back the COPs would give it a right to seize property.
The retirees’ objections are a reaction to the city’s proposal to pay them and other unsecured creditors only 5% to 20% of their claims out of a $6 million pool over two years.
Vallejo has received more than a thousand claims, both secured and unsecured, worth almost $500 million, according to city officials.
Union workers also plan to join the legal battle over the slashed payments.
Vallejo, a 50-square mile city in the Bay Area with a population of 120,000, filed for bankruptcy in May 2008 in response to what it called unsustainable labor contracts and dwindling tax collections. The filing represents the largest municipal bankruptcy in California since Orange County in 1994.
