Stockton, Creditors Say Debt Talks Will Be Restarted

Stockton, California, the biggest U.S. city to file for bankruptcy, intends to restart talks with creditors while it develops a plan to adjust debt and exit court protection by year’s end.

Lawyers for the city and creditors told a federal judge yesterday that they want to try to negotiate an end to the Chapter 9 case after a months-long fight over whether Stockton should be thrown out of bankruptcy.

“We need to start talking,” Marc A. Levinson, an attorney for the city, told U.S. Bankruptcy Judge Christopher M. Klein yesterday in Sacramento.

Creditors including Assured Guaranty Corp. and Franklin Resources Inc. (BEN) on April 1 lost a battle to force the city out of bankruptcy. Klein ruled that the city was eligible to remain in bankruptcy, where it’s protected from creditor lawsuits. Klein found that creditors didn’t negotiate in good faith last year when the city was seeking to avoid the Chapter 9 filing.

“We are trying to go back to negotiations to see if we can work out a deal,” attorney Jeffrey E. Bjork, who represents Assured, said in court.

The city’s goal is to file a plan to adjust its debt sometime in the third quarter and, assuming Klein approves it, exit bankruptcy by year’s end.

Calpers Request

Both lawyers were responding partly to a request by the California Public Employees’ Retirement System, or Calpers, to start a formal process of exchanging documents and interviewing witnesses. Calpers has requested the right to interview creditor witnesses under oath as it prepares to participate in the city’s bankruptcy.

Klein declined to immediately grant that request.

Earlier this week, the city and creditor Ambac Assurance Corp. won court approval to settle a dispute related to $13.3 million Stockton borrowed to fund an affordable-housing project. Under the settlement, the city will reduce the amount of the debt that must be paid out of its general fund, which pays for police, fire and other basic services.

The general fund will now guarantee 80.5 percent of the debt, down from the full amount, according to court documents. The rest of the money must come from an increase in tax revenue from the housing projects funded by the debt. So far, that tax revenue hasn’t been enough to meet the debt payments, Levinson said during an April 23 court hearing.

Principal Reduction

The city of 296,000, an agricultural center about 80 miles (130 kilometers) east of San Francisco, is among three municipalities that have said they will try to force creditors, including bondholders, to take less than the principal they are owed. The others are San Bernardino, California, and Jefferson County, Alabama.

No city or county since at least the 1930s has used the power of a U.S. bankruptcy court to force a reduction in its debt principal.

Stockton rode a surge in new-home construction in the 2000s before the housing crash set off a wave of foreclosures that sapped tax-revenue gains. It joined cities across the country using the U.S. Bankruptcy Code to get out from under billions of dollars in obligations they couldn’t afford following the longest recession since the 1930s.

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

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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