Judge Rules Against Stockton Bankruptcy Creditors

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SACRAMENTO-

A federal judge ruled that Stockton is eligible to file for bankruptcy protection after creditors went to court saying the city didn’t do enough to pay them back.

Judge Christopher Klein didn’t accept the arguments made by Wall Street bond holders in a three day trial.  Creditors said the city caused its own problems by continuing to overspend as it was going into debt.

Stockton City Manager Bob Deis said the win in court was no cause for celebration.He said the capital market creditors pursed a “scorched earth” legal policy.

“That caused Stockton to spend millions of dollars to defend itself.  An insolvent city spent millions to avoid a fiscal meltdown,” said Deis.

Klein didn’t buy the argument that the city’s bankruptcy was staged when it skipped out on a $2 million loan payment last year.

“This is not a case where the city budgeted itself into insolvency…Stockton was insolvent by any measure,” said Klein.

Klein said the city was in large part a victim of the great recession in which home prices and tax revenues to the city plummeted by 70 percent.  He also said the city undertook major emergency measures to reduce debt including cutting police and fire personnel and reducing city services.  He also said the city renegotiated city worker benefits.

City officials say 9 months were lost by the court action.  It hopes to negotiate a repayment plan with creditors in the next few months.

“We have so much money to spend, how do we spend it and make deals and stop spending on me and start spending money on creditors and services and safety officers,” said Marc Levinson, the city’s bankruptcy consultant.

Deis said it has spend $2 million on the bankruptcy process created by the state and up to $5 million additional dollars on the court case.

Another potential roadblock looms.  Creditors objected to the city’s plan to continue paying in the CalPERS retirement system for its workers. Judge Klein said there might be future court action to consider if the city is discriminating against bond holders who may get just 17 cents on the dollar while the retirement system is fully funded.

After today’s ruling the repayment negotiations will continue even if there are more court appeals.

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