May 12 (Bloomberg) — Stockton, the bankrupt California city seeking to resolve $1.18 billion in claims, is in the rare position of fighting a creditor in court to win approval of its debt-cutting plan, a dispute that may presage a much larger battle coming to Detroit.
The city is set to begin a four-day hearing today in Sacramento to win approval of a plan that pays two Franklin Resources Inc. funds only 1 percent of the $35 million they are owed. Franklin says it's being unfairly targeted, as other creditors are due to collect anywhere from half to all of what they are owed.
Few, if any, municipal bankruptcy cases have gone this far without big stakeholders settling, Jim Spiotto, an attorney with Chapman Strategic Advisors LLC in Chicago, said in an interview.
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"It's rare," said Spiotto, who writes about the history of municipal bankruptcy. "I can't think of one where there was a major creditor contesting confirmation."
Detroit, which filed a record $18 billion municipal bankruptcy in July, may face a creditor fight on a much greater scale when it seeks approval of its plan in two months.
Like Stockton, it has settled contentious disputes over pensions and benefits. Still, bondholders and bond insurers say Detroit is offering them too little while giving public workers and retirees too much. They are seeking to force the city to use its art collection to bring in as much as $2 billion.
Tax Plunge
Stockton, a city of 298,000 about 80 miles (130 kilometers) east of San Francisco, filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims.
After months of negotiations with the help of a court- appointed mediator, Stockton cut deals with most creditors, including bond insurer Assured Guaranty Corp. and current and retired city workers, who claimed cuts to retiree health care would cost them $545 million over their lifetimes.
Assured, which insured $164.7 million in bonds, was given an office building that Stockton had planned to use as a city hall. Current and former workers got $5.1 million.
Franklin, the San Mateo, California-based manager of the Franklin and Templeton mutual funds, refused to accept a deal and has asked U.S. Bankruptcy Judge Christopher Klein to reject Stockton's debt-cutting plan.
40 Years
The company said the city has enough money to give it as much as other creditors. Stockton "has the ability (if not the willingness) to pay vastly more of Franklin's claim over time from future revenues," it said in court papers last month.
Stockton said it can't afford to pay more.
"Franklin complains about the high cost of funding pension benefits and the inherent uncertainty in the cost of funding pension benefits over a 30-year period, but offers absolutely no solutions," the city said in court papers.
The city said it's treating Franklin's debt the same way it's handling the claim for retiree health benefits. Both are getting about 1 percent.
The California Public Employees' Retirement System will be paid in full. Imposing cuts would have threatened Stockton's participation in the pension system, and had Calpers thrown Stockton out of the fund, the city would have faced a $1.62 billion claim for unfunded pension liability, Stockton said in court filings.
Unsecured Creditor
Franklin's case will turn on whether the judge decides Calpers should have been treated like an ordinary unsecured creditor, said Dale Ginter, a lawyer who represented creditors in the bankruptcy of Vallejo, California.
Stockton was one of three California cities to file for bankruptcy within a few months of each other in 2012. The mountain resort town of Mammoth Lakes filed in July after a court ordered it to pay $43 million to a land company. It settled that dispute about a month later and the bankruptcy was dismissed.
San Bernardino, about 60 miles east of Los Angeles, filed in August 2012. It's still in bankruptcy, where a federal judge is helping mediate its disputes with creditors.
The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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