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Stockton Bankruptcy Plan Approved by Judge

STOCKTON, Calif. (CN) - A federal bankruptcy judge has approved the bankruptcy plan for the city of Stockton, Calif., allowing the city of 292,000 to finally crawl out of its 28-month Chapter 9 nightmare.

Judge Christopher Klein, of the U.S. Bankruptcy Court of the Eastern District of California, approved Stockton's proposal during a two-hour session Thursday. The plan fully funds employee pensions, but leaves investors like Franklin Templeton Investments - which loaned the city over $35 million in 2009 - with barely more than 12 cents on the dollar.

Stockton - which Forbes magazine called "the most miserable city in America" in 2011 - filed for Chapter 9 bankruptcy protection in 2012, becoming the largest city in U.S. history to do so. Its pendency plan sought to postpone making payments on bonds, long-term debt and other claims paid out of its general fund while it tried to modify employee agreements and eliminated its contributions to retiree medical insurance in an effort to crawl out of over $2 billion in debt.

Instead of taking the direct path of declaring a fiscal emergency, the city engaged in a 90-day pre-filing mediation process which allowed the time to negotiate many of the conditions confirmed by Klein, including the retiree's health plan contributions.

That mediation process saw all but one of the parties - Franklin Templeton - settling with the city. Franklin continued to object at Thursday's confirmation, demanding to be separated from the general unsecured creditor class because of the size of its outstanding loan.

Under the plan approved by Klein, Stockton will pay Franklin just $4.6 million, or just under 13 percent of the nearly $36 million loan. The vast majority - $4 million - has already been paid after Franklin seized collateral that secured the debt.

But Franklin could not persuade Klein, who made it clear to attorney James Johnston of the firm Jones Day that Franklin was no different from all the other unsecured creditors - including the 2,500 current and retired city employees who have given up $545 million in salaries and benefits to help the city.

After addressing Franklin's objection, Klein offered some insight into the complex, triangular relationship between the health and retirement benefit administrator, CalPERS, the city's employees and the city. He pointed out that Stockton's leaders made the right call by deciding not to reject its contract with CalPERS, since it would never be able to find a cheaper alternative to administer its health and pension obligations.

Klein spent a great deal of Thursday's session identifying the points of bankruptcy law that Stockton's plan had to comply with, and in the end determined that the city had made a good-faith effort - even in its deal with Franklin. The plan is the best possible one considering the interests of its creditors as a whole, Klein said.

"If we look long and hard at the factors of the case and consider the alternatives, including going back to square one and running up millions more dollars for a not-much-different outcome, I am persuaded this plan is the best that can be done to restructure the debts of Stockton," Klein stated, adding that the city's woes should be a cautionary tale for any other city in America contemplating bankruptcy.

"This is a very expensive case and should be an object lesson on why Chapter 9 should not be lightly entered into," Klein said.

Stockton has already paid $14 million in legal fees alone, and its attorney Marc Levinson of the Orrick firm said his firm's October bill is still on the way.

As for Franklin, Johnston told Klein that he was "disappointed by the ruling and will evaluate our next options."

Klein offered to entertain any motions for reconsideration within 14 days of entering final judgment.

Stockton's bankruptcy plan will run through 2052, when it is scheduled to make the last payment to bondholder Assured Guaranty, Ltd.

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