Judge Rules Stockton Eligible for Municipal Bankruptcy


After reviewing arguments from last week from Stockton, CA officials and creditors’ representatives, a bankruptcy judge has ruled that the struggling city is eligible to file for Chapter 9 bankruptcy. However, the judge did little to immediately clear up other points of contention or explain the basis for how he ruled.

U.S. Bankruptcy Judge Christopher Klein ruled Stockton did meet the threshold, even one heightened by a 2011 change trying to slow potential filings, to officially enter into municipal bankruptcy. However, there was little explanation released publicly Monday to explain the decision nor was there clarity provided on the issue of renegotiating pension terms.

“There’s no explanation yet, just an order held that they were eligible,” said Bruce Nathan, Esq., of Lowenstein Sandler LLP. “It seems unknown what the court based its decision on, as a number of requirements were litigated here. So, it’s vague what the court did other than to say that it holds a Chapter 9 is usable.  It’s almost anti-climatic at this point.”

Arguments wrapped last week in the case, which is one of the first to include potential plans to not only slash retiree and pension benefits, but also short bondholders, creditors and other insurers. Representatives for the city officially filed for Chapter 9 protection in federal court in the state capital of Sacramento in June 2012. Negotiations since that time, mandated by a then-new California state law requiring attempts to work out solutions without court judgments or hastily-considered filings, failed.

Stockton is among many U.S. cities, including several others in California, struggling to get out of crushing debt wrought by expensive union contacts, pension payments and tax base shrinkage caused by the real estate collapse, for which it boasts the nation’s second-highest foreclosure rate.

-Brian Shappell, CBA, NACM staff writer

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