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Stockton Judge Rejects Creditor Reports on City Finance

The judge who will decide whether Stockton, California, can remain in bankruptcy rejected two reports about the city’s finances by experts hired by creditors, saying they won’t help him in a trial that starts next week.

U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, California, said today he doesn’t need to hear the opinions of the creditors’ experts to interpret the financial details to be laid out during the trial on Stockton’s eligibility for bankruptcy.

“This will be driven by fact and not by opinion,” Klein told lawyers in a hearing. “This is the kind of thing I have seen for 25 years on the bench.”

Klein last month ordered Stockton to prove it is eligible for court protection from creditors under Chapter 9 of the U.S. Bankruptcy Code. He rejected the city’s request that he rule without giving creditors a chance to cross-examine city witnesses or present their own evidence.

Under Chapter 9, governments, unlike corporations, must convince a judge that they are eligible to be in bankruptcy before they can use the court process to reduce debt through actions such as canceling contracts.

To bolster its argument for throwing the city out of bankruptcy, bond insurer Assured Guaranty Corp. hired Robert Bobb, a former city manager in California, Michigan and Virginia, and Nancy Zielke, a public-finance expert with the consulting firm Alvarez and Marsal. Klein ruled that the opinion reports they produced won’t be part of the trial.

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

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