Does Stockton, Calif., merit bankruptcy?

March 25, 2013 at 3:00 AM
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SACRAMENTO, March 25 (UPI) -- A bond insurer asked a federal judge to throw out a Chapter 9 bankruptcy filing by Stockton, Calif., as a trial on the bankruptcy was to begin.

"The agenda is clear," 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.

"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," he wrote.

Bjork called Stockton's July 2012 declaration of Chapter 9 bankruptcy an improper use of the U.S. Bankruptcy Code and asked U.S. Bankruptcy Judge Christopher M. Klein in Sacramento to throw out Stockton's case, arguing the city of 300,000 is solvent.

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 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 was never seen before in a municipal bankruptcy.

But it has refused to touch current workers' pension accruals or cut benefits retirees now receive.

That is why the mutual funds that hold the threatened bonds, and insurers that guarantee them, are suing, the Times said.

They cite a bankruptcy principle that says similar classes of creditors must be treated the same way, so workers' pensions should also be affected by the bankruptcy filing.

One of the first questions Klein must answer is whether Stockton qualifies for Chapter 9 at all, the Times said.

The trial is scheduled to begin Monday.

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