A U.S. federal judge on Monday approved the city of Stockton's petition for bankruptcy in a case that sets the stage for a lengthy battle between bondholders and the California pension system.
In a case being studied by other cash-strapped American cities including Detroit, U.S. Bankruptcy Court Judge Christopher Klein's decision was a setback for bondholders and insurers who had resisted the California city's bankruptcy filing. Stockton is the largest U.S. city ever to file for bankruptcy.
Michael Sweet said the judge's remarks suggested that "somewhere along the line the city will have to go to Calpers, because otherwise they will have problems with discrimination in the plan."
A plan of adjustment, like any bankruptcy reorganization plan, cannot favor one group of creditors over another.
"You're going to see an issue teed up that could go to the U.S. Supreme Court," Sweet said.
Calpers asserts that California law protects pensioners from any haircut even in bankruptcy, but that position has never been tested in court.
Previously published in Thomson Reuters News & Insight
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