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Judge Rules City of Stockton Eligible for Chapter 9 Bankruptcy

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(Sacramento, CA)
Monday, April 1, 2013

Judge Christopher Klein's ruling Monday after last week's three-day trial clears the way for the city to move into the next legal phase of bankruptcy proceedings.

Monday's ruling is a loss for Wall Street creditors, who argued the city had manufactured its financial crisis and - by leaving its payments to CalPERS untouched while attempting to reduce its bond payments - did not negotiate in good faith. In fact, the judge said, the creditors themselves did not negotiate in good faith - and the city has done so.

The creditors argued that only the city was required to negotiate in good faith. "I'm sorry," Judge Klein said from the bench, "I'm not persuaded. Negotiation is by definition a two-way street. You cannot negotiate with a stone wall."

stokton-attorney-reaction-rotStockton City Manager Bob Deis talks outside the Federal Courthouse following the decision that the city is eligible for Chapter 9 bankruptcy. (Ben Adler photo)

Judge Backs Stockton Arguments

Judge Klein agreed with just about every argument Stockton made - that the city was truly fiscally insolvent, and that it had negotiated in good faith.

"There's nothing to celebrate about bankruptcy," said Stockton City Manager Bob Deis after the ruling.  "But there's a certain sense of vindication" because Stockton's Wall Street Creditors had argued that the city had not negotiated in good faith.  In fact, Judge Christopher Klein said it was the creditors who didn't negotiate in good faith.

Now, says Deis, it's time for a new round of talks.  "(The) city of Stockton makes deals.  We negotiate.  We've already negotiated 10 deals.  We've got a handful more, and we look forward to that opportunity."

This case was closely watched because of its potential implications on government pension payments.  The creditors argued it wasn't fair for Stockton to reduce its bond debt to pennies on the dollar while maintaining its CalPERS payments in full.  The judge said that's not a reason to keep Stockton out of bankruptcy, but he added, "This does not mean there's not potentially a serious issue involving CalPERS."

The city hopes to negotiate a plan to exit bankruptcy in the next few months.

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