Bankruptcy Judge: California City May Proceed with Chapter 9 Bankruptcy

Bankruptcy Judge: California City May Proceed with Chapter 9 Bankruptcy

SACRAMENTO, Calif. - (Mealey's) A federal bankruptcy judge in California on April 1 ruled that the City of Stockton, Calif., which had filed for Chapter 9 bankruptcy in June, was eligible to seek bankruptcy because the city did not file its petition in bad faith and was indeed insolvent at the time it sought bankruptcy.  The bankruptcy judge's decision makes Stockton the largest municipality in the country to file for bankruptcy (In Re:  City of Stockton, California, No. 12-32118, Chapter 9, E.D. Calif. Bkcy.).

Bankruptcy Judge Christopher Klein issued a one-sentence order affirming the city's right to file for bankruptcy.

Bankruptcy Filed

The city initially filed for Chapter 9 bankruptcy in the U.S. Bankruptcy Court for the Eastern District of California on June 28.

A group of creditors - Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guaranty Corp., Franklin Advisors Inc. and Wells Fargo Bank - sought an eligibility hearing in the Bankruptcy Court, contending that the city did not file its petition in good faith, as evidenced by the fact that the city never asked the largest union representing city workers to restructure retiree pensions in an attempt to avoid bankruptcy.

City officials said in a press release that Bankruptcy Judge Klein's ruling affirmed what they have been saying for nine months:  The city is insolvent and needs bankruptcy protection.

City Insolvent

In the press release, the officials said that at the time of the filing they had already addressed $90 million in general fund deficits in the three prior years and were faced with more than $26 million in general fund deficits in fiscal year 2012-2013.

Before bankruptcy, Stockton had completed 90 days in pre-bankruptcy confidential mediation with its largest creditors, attempting to avoid bankruptcy.

The city paid all costs of this mediation process when the creditors refused to pay their share, Stockton officials said in their press release.  During the mediation, the city submitted a detailed 790-page restructuring proposal for consideration by the creditors, and the city was able to make agreements with some of its labor unions, but in the end it was not enough to prevent bankruptcy, Stockton officials said.

Creditors

The creditors with the 20 largest unsecured claims the city lists are:  California Public Employees Retirement System, with a claim of $147.5 million; Wells Fargo Bank, with six claims totaling $221.29 million; Howard Jarvis Taxpayer Association, with a claim of $31.64 million; the State of California, with a claim of $10,837,363.08; CC Meyers Inc., with a claim of $18,436,411.36; RGW Construction Inc., with a claim of $16,525,615.78; PB Americas Inc., with a claim of $3,855,237.59; CDM Constructors Inc., with a claim of $3,494,569.03; Vascorp Investments Corp. Inc., with a claim of $3,095,241; Preston Pipelines Inc., with a claim of $2,592,553.20; Spanos Family Trust, with a claim of $2,502,800; Granite Construction Inc., with a claim of $1,656,205.26; Pacific Gas & Electric, with a claim of $1,653,124.55; Wells Fargo International Securities, with a claim of $1,526,951,51; and a $1,455,000 claim as part of a lawsuit pending against the city. 

The city is represented by Marc A. Levinson of Orrick Herrington & Sutcliffe in Sacramento. 
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