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Creditor Tells Bankruptcy Judge Stockton Is Recovering, Firms Deserve Better Settlement

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SACRAMENTO, Calif. (AP) – An attorney for the largest city in California to seek bankruptcy protection told a judge Monday that he has tried to reach a deal with Stockton’s last major creditor, but the company is not budging.

Marc Levinson, an attorney for the city, made the comments during his opening statement in a trial over Stockton’s plan to emerge from bankruptcy. The city is asking a judge to approve the plan for reorganizing more than $900 million in long-term debt, while Franklin Templeton Investments wants U.S. Bankruptcy Judge Christopher Klein to reject it.

The city has reached deals with all of its major creditors, except for Franklin, which took Stockton to trial.

The investment firm’s attorney, James Johnston, says it is being offered 1 cent on the dollar for a $35 million loan given to Stockton in 2009 to build firehouses, parks and to move its police dispatch center, amounting to $350,000.

Johnston told the judge that Stockton struck much more favorable deals with other creditors. The attorney said the city is making a meager comeback, allowing it to pay its debts to the firm.

“The city is recovering,” Johnston said. “It is not a strong recovery, but it is undeniably recovering.”

Levinson said Franklin is a billion-dollar investment firm and its potential loss in Stockton amounts to a “rounding error.”

“For the city, this week is a fight for its life,” he said.

Stockton, California’s 13th largest city that is 80 miles east of San Francisco, filed for Chapter 9 protection in 2012, making it the nation’s largest bankrupt city before Detroit filed for bankruptcy last year. Vallejo went through bankruptcy before Stockton. San Bernardino filed shortly after Stockton, but it has yet to present an exit plan.

Stockton’s leaders say the city fell victim to an unforgiving boom-and-bust economic cycle.

Before the recession, leaders spent millions of dollars revitalizing the downtown by buying a new City Hall and building a marina, a sports arena and a ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.

With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn’t pay its bills. The city slashed millions of dollars from its budget and laid off 25 percent of its police officers. Crime soared.

Franklin argues that Stockton agreed to pay its other creditors 52 percent or more of what they owe over the next 40 years. At trial, the judge has the power to approve or reject Stockton’s plan. City Manager Kurt Wilson has said the bankruptcy could be over as soon as June 30. But if the judge rejects this plan, it could take another six months, he said.

Commenting on the bankruptcy trial, San Francisco attorney Michael Sweet noted that the judge has questioned whether the California Public Employees’ Retirement System, which manages the city’s pensions plan, should be brought into the reorganization plan.

“If that pops up again, it’s huge,” Sweet said.

The city says cutting pensions would make it hard to hire workers, such as police.

Jeff Michael, an economist at Stockton’s University of the Pacific, said he was surprised Stockton didn’t reach a deal with Franklin to avoid the trial.

While home building remains low, Michael said the economy surrounding Stockton is starting to improve and crime in the city has declined.

“Some optimism is coming back,” he said. “It’s not a case of endless downward spiral.”

Copyright 2014 The Associated Press.

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