Ron Oliner, who represents the San Bernardino police officers' union, thanked U.S. Bankruptcy Judge Meredith Jury for holding the city to a deadline.

RIVERSIDE, Calif. — San Bernardino bondholders suffered a key bankruptcy court defeat this week as the city's bankruptcy exit plan advances.

The San Bernardino City Council will hear the city's proposed bankruptcy plan of adjustment Thursday.

The council will vote on the plan of adjustment then, which is not expected to interfere with the city's ability to present the plan of adjustment to the bankruptcy court judge on May 30, an attorney for the city said at a bankruptcy hearing Monday afternoon.

"The city hopes it can reach an agreement by the plan filing deadline with the unions," said Paul Glassman, chair of the bankruptcy and restructuring practice at Stradling. "The city also has begun negotiations with other non-safety unions — and hopes to reach agreements with whatever groups it can before the plan filing deadline."

Monday's status hearing delivered a defeat to holders of San Bernardino pension obligation bonds.

U.S. Bankruptcy Judge Meredith Jury ruled against their argument that the pension obligation bonds should be treated on the same level as the city's obligations to the California Public Employees' Retirement System, which San Bernardino plans to honor.

Erste Europaische Pfandbrief- und Kommunalkreditbank AG and Ambac Assurance Corporation had filed a complaint Jan. 7 seeking equal treatment with the state's largest pension fund.

The POB attorneys pointed to a court validation ruling the city obtained prior to issuing the pension bonds in 2005.

The 2005 validation was based on the city's argument that the pension bonds represented simply a refinancing of its unfunded liability to CalPERS; as a result, it was not new debt and did not require voter approval, the argument went.

Any payment of San Bernardino's obligations to CalPERS requires equivalent payment to the pension obligation bonds, law firms Ballard Spahr LLP representing EEPK and Arent Fox LLP argued in a brief on behalf of Ambac.

"The bondholder pension obligation portion and the CalPERS pension obligation portion are separate portions of a single indivisible pension obligation owed by the debtor under the retirement law and CalPERS contract," the brief said.

Judge Jury Monday said that she does not think the bonds and payments to CalPERS are a single obligation that should be treated the same in bankruptcy.

"Although maybe it is a concept I don't fully understand," Jury said. "It does seem the retirement law is a source granting the city the right to issue POBs."

Jury said she was wrestling with the awareness that, if POBs are not treated on par with pensions and bondholders take a haircut, the city may not be able to issue bonds to protect retirees in the future.

"The city wants the opportunity to protect against uncertain fluctuations with CalPERS by issuing bonds," Jury said. "Both sides wanted this transaction, so it could happen."

But Jury said the central issue is if the pension payments and bond payments are a single obligation — and she decided they are not.

"It is important that the remedies (for curing default) are different," Jury said. "That is enough for the court to be satisfied that it can't be considered the same obligation."

She added that she does understand the importance of her ruling and the impact on the bond market in California, but she granted the motion to dismiss without leave.

The $50 million of 2005 pension obligation bonds were later refunded, which muddied the waters.

The fact the bonds were refunded means they bargained for different rights, said attorney Steven Jay Katzman, who is representing San Bernardino retirees in the case. He is a partner San Clemente-based Bienert, Miller & Katzman

"They got different rights; and I am not sure whether the obligation to CalPERS would even be considered a debt," Katzman said.

Glassman, the city's attorney, asked that a post-plan status hearing be scheduled for June 17.

"I like everything the city has done so far today," said Ron Oliner, who represents the San Bernardino police officers' union.

The mediation process headed by U.S. Bankruptcy Judge Gregg Zive is bearing fruit, Oliner said.

"Judge Zive is very much involved," he said. "We have been on the phone with Judge Zive twice today. He will be reaching out to you at the appropriate time. It has been a long road. There are many reasons on the city's part and sworn officers' part to make a deal."

Oliner added: "We have a deadline, thank you for that — we will know where the city is at after the plan is filed."

When Jury set the deadline for the plan of adjustment, she was adamant that the city not ask for a postponement.

The city filed for bankruptcy on July 31, 2012, and has been on the slow road to exiting bankruptcy compared to other cities in Chapter 9, such as Stockton, Calif. and Detroit, Mich., both of which resolved their bankruptcy cases during 2014.

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.