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Bankruptcy Judge Confirms City of Stockton Plan of Adjustment

Makes Detailed Findings that Plan Conforms to Bankruptcy Code in All Respects

October 30, 2014
In a proceeding today lasting just over two hours, U.S. Bankruptcy Court Judge Christopher Klein rejected the claims of the remaining holdout creditor, Franklin Templeton Investments, and approved the city of Stockton’s proposed Chapter 9 Bankruptcy Plan of Adjustment.
 
The judge detailed the various classes of creditors and the extent to which they would be paid. He specifically refused to categorize the $32 million Franklin unsecured claim as a separate class, leaving it in a class of even larger unsecured claims, effectively rejecting Franklin’s claim of discrimination. The court previously ruled that roughly $4 million of Franklin’s $36 million claim was secured.

Earlier this month on Oct. 1, Judge Klein ruled that federal bankruptcy law preempted California law and made the city’s contract with CalPERS subject to impairment by the city in the Chapter 9 proceeding. Today the judge said that contract was inextricably tied to Stockton’s collective bargaining agreements with various employee groups. Further, he stressed how in reality this amounts to a triangle of contracts because the employees are third party beneficiaries of Stockton’s contract with CalPERS. Contrary to Franklin’s assertion that CalPERS is the city’s largest creditor, the Judge said that the employees are Stockton’s largest creditor, citing ample evidence that their benefits and salaries have been substantially reduced.
 
In response to Franklin’s assertion that the employee’s pensions were given favorable treatment in the Plan of Adjustment, the judge detailed all the reductions since 2008 (not just since the filing of the case in 2012) that have collectively ended the prior tradition of paying above market salaries and benefits to Stockton employees. This includes loss of retiree health care,  reductions in positions, salaries and employer pension contributions, and approval of a new pension plan for new hires, The judge said any further reductions, as called for by Franklin, would make city employees “the real victims” of the proceeding.
 
Judge Klein also referred to the U.S. Supreme Court’s decision in N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513 (1984) in which the court held that collective bargaining agreements should receive greater deference from impairment in bankruptcy proceedings than other executory contracts. The judge explained how Stockton and its employees previously approved collective bargaining agreements with substantial reductions in costs, and the city was not proposing to further reduce those agreements in light of the substantial reductions that had already been approved.
 
Citing an earlier disclosure by the city of over $13 million in professional services and other costs only through the end of May, Judge Klein also commented that the high cost of Chapter 9 proceedings should be an object lesson for everyone about why Chapter 9 bankruptcy should not be entered into lightly.


 
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