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Assured Seeks New Ruling on Stockton Pre-Bankruptcy Talks

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April 12 (Bloomberg) -- Assured Guaranty Corp., fighting to avoid losses in the bankruptcy case of Stockton, California, asked a judge to reverse a ruling that it and other creditors failed to negotiate in good faith with the city.

The insurer asked U.S. Bankruptcy Judge Christopher M. Klein in Sacramento to reverse his April 1 finding that so-called capital markets creditors acted as a “stone wall” during pre-bankruptcy negotiations with the city.

Assured and other creditors had argued that the city should be thrown out of bankruptcy because it failed to negotiate with them in good faith. The judge rejected their arguments and found that the creditors were the ones who failed to negotiate seriously because they “voted with their feet” by quitting the talks, which the company denied in court papers.

“Assured’s decision not to provide a formal written counteroffer does not demonstrate a lack of good faith,” Assured said in its filing, made public today.

The city of 296,000, an agricultural center about 80 miles (130 kilometers) east of San Francisco, is one of three municipalities in bankruptcy 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.

City’s Debt

Before filing for bankruptcy in June, Stockton asked bondholders and other lenders owed more than $300 million to take less than full repayment. The city listed assets of more than $1 billion and debt of more than $500 million in its bankruptcy petition.

The insurer will be on the hook for tens of millions of dollars in bond payments if Stockton wins permission to eliminate the debt.

The case is In re Stockton, 12-32118, 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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