Judge Rules Stockton Eligible For Bankruptcy
Stockton is eligible for bankruptcy protection, a federal judge ruled on Monday [Apr.1], saying the California city was in fact broke and negotiated with its creditors — including Bermuda-based Assured Guaranty — in good faith last year before seeking Chapter 9 protection.
US Bankruptcy Judge Christopher Klein scolded Wall Street creditors for refusing to pay their share of the mediation costs before bankruptcy and openly stating in court that they did not need to negotiate in good faith, a requirement they put solely on the city’s shoulders.
“I’m sorry. I’m not persuaded,” the judge said. “Negotiation by definition is a two-way street. You cannot negotiate with a stone wall.”
Stockton filed for bankruptcy on June 28. The city must next win the judge’s approval of a plan of adjustment, restructuring millions of dollars of debt held by Wall Street creditors, who have so far fought the city’s bankruptcy.
Assured Guaranty Corp. and National Public Finance Guarantee Corp. — two firms leading the charge against Stockton — insure millions of dollars worth of bonds that the city stopped repaying.
Those bonds issued during the boom years were used to build parking garages, buy what was to become the new city hall and reduce pension costs.
With its filing, Stockton became the nation’s largest city to seek Chapter 9 protection. Three months before that, the city tried to negotiate itself away from bankruptcy court under a new law commonly called AB506.
Assured Guaranty issued its own reaction, saying that it “respectfully disagrees” with Judge Klein that the city lived up to its obligation spelled out under the US bankruptcy code.
Assured Guaranty downplayed the significance of the ruling, calling the eligibility stage a preliminary hearing, much like a “qualifying heat in a race.”
“Assured Guaranty remains committed to working with the city to find a productive path forward that addresses the challenges facing the city,” the firm said. It also, “looks forward to the city working with it and all the other stakeholders on a collective approach to achieve that goal.”
