Bankruptcy Court Hears The Petition of Stockton, California – Round 1 on Friday

San Jose, CA — Just a day after the Fourth of July, lawyers for the City of Stockton will be making a beeline to Sacramento for the first hearing of the bankruptcy petition of the city.

Filed under Case No. 2012-32118, The Chapter 9 Bankruptcy Petition of Stockton, California will be heard by the United States Bankruptcy Court in Sacramento on Friday, July 6. This will be the first time that the court will hear the petition but do expect the case to drag on for quite some time if not for years.

Marc Levinson, former lawyer for the Vallejo bankruptcy petition and now lawyer for the city of Stockton advised there is still no judge assigned to the case. By the way, Vallejo had just recently exited out of bankruptcy and will hopefully be able to make an economic comeback.

Chapter 9 is exclusively for municipalities that are filing for bankruptcy. This type of bankruptcy is similar to Chapter 11 and Chapter 13 in terms of reorganizing debts but the difference is that the municipality is an entity of the state of government and Congress has an ability to adjust the debts of the municipality but to a limited extent. Apart from that a Chapter 9 bankruptcy allows a municipality to re-negotiate their collective bargaining with its constituents/beneficiaries; for example, if an employee was given a good retirement and pension package during the time that the municipality’s economy was at its prime but since the municipality is in dire straits and is unable to sustain that retirement and pension package, under Chapter 9 they could trump up state labor protection and re-negotiate that amount promised to something more sustainable for the municipality.

Stockton is petitioning the court to approve its 2013 fiscal year budget plan. In the said fiscal spending plan for 2013, the proposed budget is for $155 million. Also, Stockton aims to reduce if not eliminate its $26 million deficit by skipping on bond payments, reducing compensation paid to employees and getting rid of the medical insurance provided to retired employees.

This is bad news of course for the union employees and public employees of Stockton. During the time of the fiscal emergency, the  city and the labor unions were at a deadlock and refused to relent to a compromise to reduce benefits. But now with the bankruptcy petition, they really do not have any choice and will further lose some more in case the city shows the court that it is unsustainable to keep up some of the benefits that the employees were receiving before or were supposed to receive upon retirement.

The creditors also are unhappy about this because they cannot collect on the debt owed since the automatic stay will be put in place. A payment plan will be drafted and approved by the court and anything owed after the repayment period is written off unless the court orders it to be paid in full.

One of the Stockton creditors who vowed to fight the bankruptcy petition in court is Assured Guaranty Ltd. Assured Guaranty is arguing that there are other options for Stockton to resolve their debt issues instead of just filing for bankruptcy. The company has sunk $161.4 million into the city via Assured Guaranty  Municipal Corp subsidiaries and Assured Guaranty Corp.

Come Friday, everyone will probably be focusing their attention on the hearing. With a population of 300,000 there will be a lot of unhappy campers once the bankruptcy petition is approved.

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