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Vallejo Should Start Bankruptcy Fight in June, Judge Says

Vallejo, California, the biggest U.S. city in bankruptcy, and the unions it blames for its financial woes should prepare for their final court fight over a debt-adjustment plan by June, a judge said today.

“This has been going on long enough,” U.S. Bankruptcy Judge Michael S. McManus told a lawyer representing one of the city’s unions today at a hearing in Sacramento, California. “You’re going to be here in June.”

McManus said he will issue a written ruling in the next few days on a request that more information about the city’s bankruptcy-exit plan be included in a disclosure statement for the proposal. He declined to put off beyond June a court hearing for him to approve or reject the proposal.

A group of retirees opposed to the plan has asked that details about work the city’s mayor did as a bond lawyer be included in the disclosure statement. The group claims Osby Davis may have a conflict of interest in the bankruptcy case because he was involved in reviewing some of the debt the city issued from 1999 through 2003.

Davis didn’t immediately return a phone call for comment.

The retirees claim the city plans to repay its bank lenders by cutting benefits to current and former workers and slashing city services.

Instead, it should cancel leases that guarantee payment of $45.9 million in debt owed to Union Bank NA, the retiree panel said yesterday in a U.S. Bankruptcy Court filing in Sacramento. The city would save millions of dollars on payments to Union Bank, R. Dale Ginter, an attorney for the retirees, said in court papers.

‘We Lose City Hall’

Canceling those leases may cause the city to be sued by lenders, Vallejo’s attorney Marc A. Levinson said in court papers.

“If we lose the litigation, we lose city hall, we lose city properties,” Levinson said in court today.

Levinson said he will add more information to the disclosure statement, which is written to give creditors enough information to vote on the plan. The city is unlikely to make major changes to the plan itself, Levinson said.

Once the disclosure statement is approved by the judge, it will be sent to creditors, who will be asked to vote on the plan.

McManus will take that vote into account when he decides whether to approve the plan after the court hearing in June.

The city says its plan will save about $100 million by reducing retirees’ health benefits.

Navy Town

Vallejo, a onetime U.S. Navy town of about 120,000 on San Francisco Bay, sought protection from creditors in May 2008 under Chapter 9 of the U.S. Bankruptcy Code, after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate.

The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents.

The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

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