US Bankruptcy Judge Christopher Klein issued a ruling on April 1, 2013 that the City of Stockton was eligible for Chapter 9 Bankruptcy proceedings. Judge Klein’s ruling comes after a 3 day trial where certain creditors of the City, particularly Wall Street companies that either bought Stockton’s bonds or insured them fought the City’s application and argued that it should not be allowed access to Chapter 9 Bankruptcy proceedings because it did not propose equal or even remotely similar losses for all creditors. Particularly galling to Stockton creditors was the fact that when the City couldn’t make its pension payments, it borrowed money via pension-obligation bonds. Now the City’s plan is to pay little or nothing back to those bond holders while the pension benefits that the loan funded remain untouched.
Judge Klein’s decision should come as no real surprise since the only issue up for his decision was whether the City was in such a dire financial condition that it had no alternative to bankruptcy protection. The evidence is virtually undisputed that the City’s financial condition was a disaster to where its only realistic option was bankruptcy protection. Judge Klein made the right decision regarding the sole issue that was before him. However, he went out of his way to criticize seemingly all parties. He noted bond holders refused to participate in the mediation process or negotiate in good faith. He also criticized the city for long term, systematic over compensation of current and former
The Court’s ruling simply established the bankruptcy eligibility for the city. The next step in the process is approval or rejection of the City’s reorganization plan, known as the Plan of Adjustment. Within the next couple of months the City will propose its Plan of Adjustment and the parties will conduct investigation and discovery regarding the viability of the Plan. The Court will then hold a hearing on the Plan approval. Experts close to this matter estimate that the Court’s hearing will not be for at least several months and possibly sometime into 2014. In all likelihood, the City will propose a Plan of Adjustment that is equally unacceptable to its original plan under the petition for bankruptcy protection. It’s unlikely that the City’s Plan of Adjustment will contain any compromise or reduction in pension benefits to either retirees or active employees. The City is unlikely to propose any reduction in its Calper contributions. Creditors, especially bond holders are likely to scream loud and hard! In reality it’s too early to tell from Judge Klein’s initial ruling where he will fall in an inevitable battle between bond holders and the City/Calpers. Judge Klein will decide those questions during the next phase of the bankruptcy proceeding.