By Ed Mendel
Monday, June 9, 2014

Stockton filed a revised debt-cutting plan last week that could lead to a deal with a holdout creditor, Franklin bonds, possibly enabling the city to emerge from bankruptcy without cutting pensions.

But however that plays out, a federal judge may make a clarifying ruling on the general issue of whether public pensions issued through the California Public Employees Retirement System can be cut in bankruptcy like other debts.

Two Franklin bond funds, which would get a $350,000 payment for a $35 million bond issue, claim unfair treatment because other creditors get most of what they are owed and the largest creditor, CalPERS, is untouched.

Stockton was able to negotiate agreements with all city unions, retirees and other major creditors, including two insurers of the city’s largest bond issues, who opposed the city’s eligibility for bankruptcy.

In a trial triggered by the opposition of Franklin, U.S. Bankruptcy Judge Christopher Klein last week heard closing arguments about whether the Stockton debt-cutting plan to exit bankruptcy should be confirmed by the court.

The judge took a step toward settling the holdout by scheduling July 8 for his decision on the value of the Franklin bond collateral, two golf courses and a park. Stockton put Franklin in the same creditor class of unsecured debt as retiree health care.

The small payment to Franklin was said to be similar to the deep cut in retiree health care. After Judge Klein’s ruling that retiree health care can be cut in bankruptcy, a debt valued at $544 million by the city was cut to a one-time payment of $5.1 million.

Stockton argued that the two money-losing golf courses and the park have little value due to use restrictions and other factors. But an expert testifying for Franklin said the golf course property was worth nearly $15 million.

A revised plan Stockton filed last week put Franklin in a class by itself. After the judge sets a value for the golf courses and park, said the new plan, the city will choose one of three options: full payment, full payment over time or transfer of the property.

Klein said he may produce something before the scheduled July 8 ruling on the value of the Franklin bond collateral.

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