Judge: Stockton Entitled to Pursue Bankruptcy

Stockton City Hall (via Tourist Bureau)

[UPDATED] The city of Stockton was insolvent and entitled to pursue bankruptcy protection, according to Monday’s decision by bankruptcy Judge Christopher Klein. Klein made the ruling in court at the conclusion of a four-day court trial in Sacramento, according to reports from the Sacramento Bee and LA Times.

Stockton, at ground zero in the housing mortgage crisis, became the largest U.S. city, with a population of 290,000, to file for bankruptcy in 2012. It was preceded by much smaller Vallejo and the city of San Bernardino, 200,000 followed Stockton.

Bondholders and bond insurers challenged Stockton’s “good faith” efforts to avoid bankruptcy and its failure to rope in the state’s employee pension fund, CalPERS, as a potential creditor that should also face a cut in expected payments.

Klein pointed out Stockton had met the requirements to file Chapter 9 and pursue reorganization, according to the news accounts.

He also criticized the Wall Street bondholders, Assured Guaranty Corp. and National Public Finance Guaranty Corp., for refusing to negotiate the city’s bond debt unless CalPERS also took a cut from employee pension obligations.

[UPDATE] Assured Guaranty issued a statement saying it disagreed with Klein’s opinion.  The company said it believes everyone in the case will benefit from a consensual approach “that truly resolves the city’s financial predicament.”

In addition, the bond company pointed out that Klein considered the four-day trial the preliminary round in the dispute and that the fairness of the city’s plan to get out of bankruptcy will be determined in a longer fairness hearing.

Case: City of Stockton, No. 12-32118

 

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