Stockton, Calif. and its bond market creditors will battle over whether the city should be allowed to enter bankruptcy protection during a four-day trial next week.
The trial will be heard by U.S. bankruptcy judge Christopher Klein in Sacramento starting on Monday and is scheduled to run through Thursday.
The main issue expected to be debated during the trial will be the city's insolvency.
The consortium of creditors is made up of bond insurers Assured Guaranty Corp. and National Public Finance Guarantee, investor Franklin Advisors, and trustee Wells Fargo NA.
The various objections by the creditors to the city's petition to file for Chapter 9 protection is that Stockton has failed to show it is insolvent and never negotiated in "good faith" as required by federal bankruptcy law.
During 90 days of mediation with creditors before it filed the bankruptcy petition, Stockton proposed slashing debt payments by more than $350 million, including permanently ceasing payments from the general fund toward $124 million in outstanding Assured Guaranty insured pension obligation bonds.
Bond creditors have also pointed out that Stockton has refused to try to reduce its employee pension payments to the California Public Employees' Retirement System, its largest creditor as outlined in court documents.
San Bernardino, the other California city petitioning for bankruptcy protection, has cut its pension payments to CalPERS, which wants to sue the city.
Stockton has settled with one of its capital markets creditors, Ambac Assurance, which has a smaller exposure to Stockton's debt than Assured or NPFG.