U.S. Bankruptcy Judge Christopher Klein said Monday objecting creditors acted in bad faith, the Los Angeles Times reported.
A bond insurer last week called Stockton's declaration of Chapter 9 bankruptcy an improper use of the U.S. Bankruptcy Code and asked Klein to throw out a Chapter 9 bankruptcy filing by the city of 300,000.
"The city hopes to use the Chapter 9 plan process to impose permanent impairment, and to cram down a non-consensual plan, on capital-market creditors," lawyer Jeffrey Bjork wrote on behalf of the Assured Guaranty Ltd. bond insurer, one of the largest creditors that helped the city refinance pension debt.
Other creditors making similar arguments include two mutual funds managed by Franklin Advisers Inc., bond trustee Wells Fargo Bank NA and bond insurer National Public Finance Guarantee Corp.
Chapter 9 lets municipalities restructure their debts, the way Chapter 11 does for businesses.
Stockton in June 2012 became the largest U.S. city to file for the protection after suffering one of the nation's biggest hits when the mortgage bubble burst five years ago.
It has since slashed tens of millions of dollars in city services -- including firefighters and programs for at-risk children -- and said it would cut its municipal bond repayments to a level The New York Times said has never been before in a municipal bankruptcy.
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