San Joaquin County Superior Court Judge Roger Ross in Stockton yesterday made the decision about who controls the garages after Stockton missed a $779,935 payment on lease revenue bonds issued in 2004.
Stockton, a farming center about 80 miles (130 kilometers) east of San Francisco, is struggling under the weight of escalating retiree costs, dwindling tax revenue, accounting errors and the lingering effects of the recession. As part of its effort to avert bankruptcy, the City Council decided Feb. 28 to default on $2 million in bond payments after missing the bond payment for the parking garages.
The ruling against Stockton “enables the City to sit down with Wells Fargo to work out terms and conditions that we think will protect the public and assure uninterrupted vital parking services,” Connie Cochran, a spokeswoman for the city, said in an e-mail. “These assurances and our ability to work through the details with Wells Fargo are particularly important in light of how essential these resources are to downtown Stockton and special events.”
Standard & Poor’s lowered its rating on the garage bonds to CC from BB- on Feb. 29, citing concerns about the city’s “willingness to meet its obligations” after the Feb. 28 council meeting.
Under a state law signed last year, Stockton is relying on an outside mediator to resolve disputes with creditors and unions. After 60 days without a resolution through mediation, or if the city runs out of money, it may then seek court protection. The law was sought by public-employee unions after Vallejo, a city of 120,000 in the San Francisco Bay Area, went bankrupt in 2008 and asked a court to help it void labor contracts.
In the case that went to trial before Ross yesterday, Wells Fargo argued that the city entered into a lease agreement for the garages and has defaulted on that agreement, allowing the San Francisco-based bank to repossess the property. Stockton acknowledged the missed bond payment, though claimed in court documents that the repossession isn’t permitted because the relationship between the city and the bank is “not that of a landlord-tenant.”
Jeff Davis, a lawyer for Wells Fargo, told Ross that after Stockton failed to make its bond payment, the bank served the city with a three-day “pay or quit” notice followed by a filing claiming Stockton is occupying the garages illegally.
“The bondholders are not being paid,” Davis told the judge. With a court order allowing Wells Fargo to repossess the garages, the bank could collect parking fees and “investors would get some of their money back,” Davis said. The city would get credit for those payments, he said.
Thomas Keeling, a lawyer representing Stockton, told Ross that the San Francisco-based bank had adopted a “shoot first and ask questions later strategy.” The order the bank seeks isn’t a “permissible remedy” because under state law regulating financing for the garages, Stockton must benefit from the bank’s re-leasing.
“Wells Fargo has not presented a plan for re-letting, much less a plan showing that the city will benefit from it,” Keeling told Ross.
The City Council also decided in February to suspend sick leave and vacation payouts to retiring workers. That prompted an objection from the Stockton Police Officers’ Association in a previously filed lawsuit. A hearing on the officers’ request for a court order requiring the city to restore the payouts is scheduled for today in the same court before Judge Lesley Holland.
“The city’s finances are precarious for the balance of this fiscal year,” City Manager Bob Deis said in a Feb. 24 letter to Stockton employees. “Any new surprise may push us into insolvency or uncontrolled default. As a result, we are forced to implement a temporary ‘time out’ and examine our leave-payout exposure.”
The move is intended to discourage employees from seeking early retirement and extracting large amounts from city coffers during its negotiations with creditors.
The case is Wells Fargo Bank National Association v. City of Stockton, 39-2012-00277662, Superior Court of San Joaquin County (Stockton).