By Robin Respaut and Jim Christie
Tue Jan 20, 2015 4:02pm EST
Jan 20 (Reuters) - The judge overseeing the bankrupt city of Stockton, California, has denied a motion by a holdout creditor to stall the city's plan to begin paying its debts.
U.S. Federal Bankruptcy Court Judge Christopher Klein said on Tuesday the potential harm to other creditors, such as the city's 1,100 retirees, and to the city's ability to attract new business, along with the low likelihood of an appeal's success, convinced him to deny a pending stay on the confirmed plan.
The holdout creditor, two funds managed by Franklin Templeton Investments, has said it would appeal Stockton's exit plan, a rare move among municipal bankruptcies.
Franklin argued at a hearing last week that it was harmed by the city's plan, which pays over $4 million to Franklin on a $36 million debt.
The city warned that the impact of a stay would hurt city retirees, along with the moral of current employees, make hiring more difficult.
On Tuesday, Judge Klein agreed.
"Since we're dealing with retirees that are presumably in the later stages of their lives, longer delays are very much to their detriment," said Klein, who estimated that an appeal could take five years to resolve.
Klein repeatedly pointed out that Franklin had admitted "only money" motivated the appeal.
"I do not criticize them for that. That's the name of the game," Klein said.
However, the judge added that municipal insolvency is an issue of great public interest. The state, the municipality and the capital markets are served by a definitive resolution in bankruptcy cases, "so people understand what they are facing."
"Capital markets have figured out there is more risk to municipal bonds than they once thought," he said.
Stockton, a city of nearly 300,000 people located in Northern California, got the green light for its exit plan last October, over two years after the city filed for Chapter 9 protection.
Stockton's case, along with other high-profile municipal bankruptcies in Detroit, Michigan, and San Bernardino, California, have been closely followed by the $3.6 trillion municipal bond market to see how bondholders are treated compared with other creditors, such as pensioners.
Stockton elected not to harm employee pensions, but it did call for the elimination of future healthcare benefits for retirees, a haircut on bondholders' debts, and the renegotiation of collective bargaining agreements.
If Franklin wins an appeal, Klein said the city could carve out more money without impacting its existing plan. (Reporting By Robin Respaut. Editing by Andre Grenon)
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