Stockton Judge Limits Release of Mediation Details

The judge overseeing Stockton, California’s bankruptcy limited the amount of information the city and its creditors can make public about a months-long mediation process that failed.

On the city’s first day in court, U.S. Bankruptcy Judge Christopher Klein also said he may ask another judge to be on call to act as a mediator for a new round of talks between the city and creditors.

“A successful case will result in what is basically a consensual plan of adjustment,” Klein said at a hearing in Sacramento. Under federal law, in order to cut debt and exit bankruptcy, a city must win court approval for such a plan.

Stockton is trying to become the first American city since the Great Depression to use bankruptcy to successfully force bondholders to take less than the principal they are owed. On June 28, Stockton became the biggest U.S. city to seek court protection, listing assets of more than $1 billion and debt of more than $500 million.

Stockton was in court today seeking approval to release all of the details from a mediation process that ended last month without a deal. Such talks are required under California law before a city can file bankruptcy.

Initial Offer

Klein rejected part of the request, which was also backed by bondholders. Klein said the city can release later this month its initial 790-page offer to creditors, which the city is calling its “ask.” Any counteroffers will remain secret, he said. The city and the bondholders can also release other details, like how often they met and who was present.

Klein said his goal was to protect the mediation process and to make sure the bankruptcy case followed federal rules of evidence, which generally require that offers made during confidential settlement talks remain secret.

Bondholders and other creditors were given until Aug. 9 to say whether they will try to force the city out of bankruptcy by challenging its eligibility to file under Chapter 9 of the U.S. Bankruptcy Code.

William Kannel, a lawyer for bondholder trustee Wells Fargo & Co., said his clients, who are owed more money than any other creditor, haven’t decided whether to challenge the bankruptcy filing.

Lower Rates

No U.S. municipality has used bankruptcy to force bondholders to take less than the full principal due since the Great Depression, according to Jim Spiotto, a bankruptcy attorney, and Richard Ciccarone, chief research officer at McDonnell Investment Management LLC in Oak Brook, Illinois. Vallejo, California, which exited bankruptcy last year, forced lenders to reduce their interest rate.

At least 18 creditors were involved in the failed talks, which began March 27 and were extended to June 25. They included the California Public Employees’ Retirement System, the largest U.S. pension fund, owed $147.5 million, bond insurer Assured Guaranty Ltd. and Wells Fargo, acting as trustee for different group of bondholders owed $231.3 million.

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

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