Aug. 09--STOCKTON -- The first major creditor to challenge Stockton's bankruptcy filed papers Wednesday, seeking to have a judge toss the case because the city didn't ask its largest stakeholder to take a loss.

The California Public Employees' Retirement System, which manages the pensions of Stockton employees, dwarfs all other creditors with a $245 million liability in the city over the next decade.

Yet National Public Finance Guarantee Corp., an insurer of several Stockton bonds, contends in its court papers that CalPERS is conspicuously missing from the list of those Stockton engaged in pre-bankruptcy negotiations through AB506, a state law requiring confidential talks with creditors to head off bankruptcy.

National Public argues this absence invalidates Stockton's claim that the city negotiated in good faith, the first major hurdle it must cross to proceed in its Chapter 9 case.

"The city did not intend to and in fact did not negotiate with its single largest unsecured creditor, CalPERS, either before, during or after the AB506 process," National Public said in the filing.

Today is the deadline for stakeholders to file their objections to the city's bankruptcy. After today, they will be required to work with Stockton to craft a so-called plan of adjustment and likely take a loss. Those who don't agree to a "haircut" may be subject to a "cram-down."

While National Public is the first to file a formal objection, another of the city's bond insurers, Assured Guaranty, has issued statements criticizing the Stockton City Council for supposedly lacking the political will to avoid Chapter 9.

Assured Guaranty also said Stockton didn't treat CalPERS with the same force as others, giving a hint into what its objections may be.

For its part, National Public, based in Armonk, N.Y., insures $224 million worth of Stockton's bonds, including some of those $89 million in bonds backed by the city's ailing general fund.

The city issued the bonds to build a $47 million events center as well as parking garages, which Wells Fargo repossessed from the city as a trustee to bondholders. National Public is left to pay bondholders for their investment.

Stockton officials at the outset of the confidential mediation provided each creditor with it 790-page "ask," a document outlining what the city wanted each to give up to restructure its finances.

The "ask" sought cuts from Stockton's current and retired employees, bond insurers and past litigants.

The city has made public a list of creditors who made counteroffers in mediation in an effort to show that it negotiated in good faith. National Public and Wells Fargo are listed as two that did not make counteroffers.

"The city admits that its liability to CalPERS has greatly contributed to the city's cash and budget crisis," National Public said. "The city never asked for a single dollar in reductions."

U.S. Bankruptcy Judge Christopher Klein will consider the objections at a hearing Aug. 23.

Contact reporter Scott Smith at (209) 546-8296 or ssmith@recordnet.com. Visit his blog at recordnet.com/smithblog.

___

(c)2012 The Record (Stockton, Calif.)

Visit The Record (Stockton, Calif.) at www.recordnet.com

Distributed by MCT Information Services