Stockton Says Creditors Group Files Bankruptcy Objection

The city of Stockton, California, said a group of bond insurers, banks and financial trustees filed objections to the city’s eligibility for Chapter 9 bankruptcy protection.

Yesterday’s filing by the group, Capital Markets Creditors, offers the first specific responses to the city’s restructuring proposal and bankruptcy filing, according to an e-mailed statement sent by the city. Yesterday was the deadline for creditors to file formal objections to the city’s eligibility, the city said in an e-mailed statement.

“The city looks forward to analyzing the specific objections and information submitted by the CMC and will file a complete and thorough response with the court,” according to the statement. “We are not going to argue this in the media.”

Stockton is trying to become the first American city since the Great Depression to use bankruptcy to force bondholders to take less than the principal they’re owed. Vallejo, California, exited bankruptcy last year after persuading lenders to take less interest and extend repayment.

Under Chapter 9 of the U.S. Bankruptcy Code, governments, unlike corporations, must first prove to a judge that they are eligible to be in bankruptcy before they can use the court process to try to cut debt through actions such as canceling contracts.

The filing by the creditors group wasn’t immediately available yesterday on the court’s website.

January Hearing

The city and bondholders agreed in August to return to U.S. Bankruptcy Court in Sacramento, California, in January for a trial-like hearing over whether Stockton is legally entitled to remain in bankruptcy after elected officials sought court protection in June.

Stockton sought court protection on June 28, listing assets of more than $1 billion and debt of more than $500 million. Mammoth Lakes, California, followed Stockton into bankruptcy on July 3 and San Bernardino, California, filed for Chapter 9 protection on Aug. 1. Mammoth Lakes won dismissal of its bankruptcy case Nov. 19 after settling the $43 million development lawsuit that forced the city to seek court protection from its creditors.

The case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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