SAN FRANCISCO — Vallejo retirees have fired another salvo in a battle for scarce funds in the California city’s proposed plan to exit bankruptcy, including conflict of interest accusations against the city’s mayor and law firm.

The assertions by the retiree committee, which represents 800 retired city workers in the court battle, are part of a long list of objections filed in court last month to Vallejo’s legal exit plan.

The legal gripes are a reaction to the city’s proposal to pay retirees and other unsecured creditors only 5% to 20% of their claims out of a $6 million pool over two years, though some would be paid more through insurance.

Vallejo has received more than a thousand claims, both secured and unsecured, worth almost $500 million.

Union workers also plan to join the legal battle over the slashed payments.

The fight over city coffers is set to continues on Monday before Judge Michael McManus in U.S. Bankruptcy Court for the Eastern District in Sacramento.

The exit plan is based on a five-year road map approved by 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.

In the recent court filing, attorneys for the retirees accused Vallejo Mayor Osby Davis — who had served as a disclosure counsel for the city — of conflicts of interest. They also accused the city’s law firm — Orrick, Herrington & Sutcliffe LLP — of similar conflicts.

“Mayor Davis’s role in the [certificates of participation] transactions, his duty of loyalty to his clients, and his untenable conflict of interest in participating in any discussion or decisions regarding the plan and disclosure statement must be resolved,” lawyers from Downy Brand LLP said in court documents filed on Feb. 23. “Orrick, Herrington & Sutcliff suffers similar conflicts that must be disclosed.”

Davis served as disclosure counsel for the city’s five series of COPs — issued in 1999, 2000, 2001, 2002 and 2003. Orrick served as bond counsel in April 2006 in relation to a letter-of-credit deal for 2001 COPs.

The lawyers for the retirees said creditors could sue Davis and the law firm because of their role in the COP transactions and thus their interest to make sure the certificates’ creditors were paid.

Orrick as Vallejo’s law firm pulled no punches in response to the accusations.

“Accusing Mayor Osby Davis and Orrick of breaches of loyalty to the city only reveals that the committee’s true aim in the objection, if not in this case generally, is to be obstructive rather than constructive,” Orrick said in its response filed on Feb. 28. “Such accusations also reveal the committee’s misapprehension of the role of disclosure counsel and tax counsel in public finance transactions.”

Vallejo, a 50-square mile city in the Bay Area with a population of around 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.

The retiree committee also challenged the city’s proposed deal with Union Bank, under which it would pay the bank through leases on city property, but with a 40% haircut. The city owes the bank $45 million and a settlement has been reached that is awaiting court approval.

“With $45 million at stake the creditors have a right to know the economics of lease rejection,” the committee said. “Indeed, rejection will save the city millions of dollars.”

But Orrick said Union Bank has maintained that rejecting the leases that back the COPs would give it a right to seize property.

It said the city has struck a proper balance in the compromise with the bank when considering the likelihood of success and the result of failure if it litigated the matter.

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