Stockton Seeks to End Bankruptcy After 2 Years of Talks

Stockton, California, made a final plea to a judge to let it exit bankruptcy after spending $13.9 million in fees and almost two years under court oversight trying to restructure $1.18 billion in creditor claims.

Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy in June 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Its bankruptcy has since been dwarfed by Detroit’s $18 billion filing, which is also the subject of creditor disputes.

Under Stockton’s debt-adjustment proposal, two Franklin Resources Inc. funds will get only 1 percent of the $35 million they are owed and, possibly, a money-losing public golf course. Franklin has asked U.S. Bankruptcy Judge Christopher Klein to reject the plan.

“The city’s future is on the line here,” Stockton’s lead bankruptcy attorney, Marc A. Levinson, told Klein yesterday in court in Sacramento.

Franklin is the only large creditor still fighting Stockton’s plan to reduce debt by paying creditors, including public employees, less than they are owed.

“This isn’t the case of inability to pay,” James O. Johnston, an attorney for Franklin, said yesterday. “This is the case of unwillingness to pay.”

No Ruling

Yesterday’s session ended without a decision from Klein, who said he will first rule on the value of the golf course the city is considering giving to Franklin in exchange for canceling its debt. That may come at a July 8 hearing. The judge said he may rule on the rest of the plan by the end of next month.

After negotiations with the help of a court-appointed mediator, Stockton reached deals with most creditors, including bond insurer Assured Guaranty Corp. and current and retired city workers, who claimed cuts to retiree health care would cost them $545 million over their lifetimes.

Assured, which insured $164.7 million in bonds, was given an office building that Stockton had planned to use as a city hall. The city will lease space in the building for as long as 12 years before it must find a new city hall, Levinson said. Current and former workers got $5.1 million to compensate for lost retiree health benefits.

Set Aside

Franklin, the San Mateo, California-based manager of the Franklin and Templeton mutual funds, refused to accept a deal. It argued during four days of hearings that the city’s long-range financial plan shows the city could afford to pay the company in full. The city has insisted on setting aside money for a large financial reserve that should instead be used to pay Franklin, Johnston said.

Stockton has paid lawyers and other advisers $13.9 million so far, according to court filings. That total includes more than $10.4 million to Levinson’s law firm, Orrick, Herrington & Sutcliffe LLP. The city of Vallejo, California, by comparison, paid about $13.3 million to restructure about $436.9 million in bankruptcy, according to public records.

Stockton was one of three California cities to file for bankruptcy within three months of each other in 2012. The mountain resort town of Mammoth Lakes filed in July after a court ordered it to pay $43 million to a land company. It settled that dispute about a month later and the bankruptcy was dismissed.

San Bernardino, about 60 miles east of Los Angeles, filed in August 2012. It’s still in bankruptcy, where a federal judge is helping mediate disputes with creditors.

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

Before it's here, it's on the Bloomberg Terminal.