Stockton wins first part of its bankruptcy appeal. Plan implementation begins next month.

According to the Stockton Record, Judge Klein has rejected a stay in the bankruptcy plan implementation, and the City will move forward with implementing the plan in February.  These excerpts from Roger Philips' article in the Record, featuring comments from the Judge, are very informative about his reasoning and what lies ahead.

In announcing his ruling, Klein took into account Stockton’s success at negotiating settlements with all of its creditors other than Franklin before the city’s trial began last May.

“The nature of the plan has involved a lot of hard work and hard-fought matters involving compromise by virtually all of the parties of interest,” Klein said. “My ultimate rationale … was everybody with the exception of Franklin had come to the table and given up quite a bit. They elected not to come to the table and deal, and they chose instead to challenge confirmation and to appeal.” 

In refusing to stay confirmation of Stockton’s plan pending the appeal’s outcome, Klein noted that Franklin’s appeal solely concerns the amount of money the firm will receive. As a result, Klein said, he saw no reason to delay implementation of the bulk of the restructuring plan and no cause to risk scuttling what has already been accomplished. If the case is returned to him by the appellate panel, Klein said, “I think I can (handle it) without tearing up the existing plan and throwing it away and having to abandon all the difficult compromises that were achieved.” 

Klein said the appeal could take as many as five years to resolve, and that to delay Stockton’s exit from bankruptcy over a money issue involving one creditor was against the public interest. The judge also said he does not think it is likely Franklin’s appeal will succeed. “The public interest is served by actually being able to implement a plan upon which people can rely,” Klein said. “When I add up those aspects in the analysis, I’m seeing little likelihood of success on appeal. I’m not seeing significant harm to (Franklin).”

As I have discussed before, Franklin's recovery is extremely low compared to other unsecured creditors - whether they are the other bondholders who settled - or even the retirees who lost health coverage but retained pensions.  So Franklin has some arguments, but there is also the argument that creditors who didn't negotiate and settle and who loaned the city money in 2009 once the downward spiral in the City's economy and finances was extremely obvious should take a larger loss.

The Judge is right, the City needs to be able to move forward.  Franklin is a relatively small creditor, and if they win the right to greater payment on appeal - it would almost certainly amount to less than a million dollars a year.  That would hurt the City's efforts to restore services, but it is not enough to upend the whole plan.  So while there is still some lingering uncertainty regarding the Franklin appeal, it is just going to be a footnote to the bankruptcy story.

The more important questions are how the City will move forward from here financially?  Is there enough revenue in Measure A (and will it be managed properly) so that the City can live up to the promise of 120 more police in Measure B?  Will the City maintain fiscal discipline with future employee contracts and budgets?  How much will the CalPers burden grow in the future?  Can it come up with creative ways to start restoring some of the non-safety services given its budget constraints?  Many challenges still lie ahead for City leaders, but at least Stockton can move forward with more certainty and confidence now.