PHOENIX - A U.S. Court of Appeals bankruptcy panel will hear arguments Thursday from Stockton, Calif. and creditor holdout Franklin Templeton Investments, which is appealing confirmation of the city's Chapter 9 bankruptcy plan of adjustment.
Three judges of the U.S. Bankruptcy Appellate Panel of the Ninth Circuit will convene in Sacramento to listen to attorneys for the city and for Franklin. The panel could confirm the plan of adjustment approved by U.S. Bankruptcy Judge Christopher Klein in October 2014, or could decide it has flaws and send it back to Klein to oversee corrections.
Franklin filed the appeal in November 2014 along with a request to Klein that he place a stay on Stockton's ability to exit bankruptcy pending the appeal. Klein denied the stay, deeming the company's chances with the Ninth Circuit slim, and Stockton emerged from bankruptcy in February. The company said in its filing that Klein erred in approving a plan that was "discriminatory and punitive" to Franklin, paying them roughly 1% on $35 million of bonds they held while leaving pensions untouched and paying other creditors who had settled previously 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.
In an October filing with the appellate panel, Stockton's attorneys dismissed Franklin's arguments as a series of "red herring issues;" any additional money paid to Franklin would have to be borne by the municipal workforce and residents "in the form of reduced services, infrastructure investment, and essential reserves," the city's attorneys argued.
"The city's return to full service solvency and the establishment of a fiscal safety net are as fundamental to the plan as are its compromises with creditors, and cannot be ignored," Stockton said in that filing.
The city has also argued that the appeal is moot because the plan is already consummated, but Franklin said precedent in the Ninth Circuit holds that an appeal is not moot if the claimant could receive even one additional dollar. A lawyer involved in the case said that the Ninth Circuit's bankruptcy panel generally works a bit faster than the normal appeals process, and that a ruling could come down as soon as early as the first quarter of 2016.
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.