By Tim Reid
RIVERSIDE, Calif. Wed Feb 11, 2015 7:47pm EST
RIVERSIDE, Calif. Feb 11 (Reuters) - Lawyers for bankrupt San Bernardino, California, and the city's creditors clashed in federal bankruptcy court on Wednesday, with a major bondholder accusing the city of stoking "Main Street versus Wall Street fires."
San Bernardino, now in its third year of bankruptcy, accused the bondholder and its bond insurer allies of trying to overwhelm the city with litigation and derail its efforts to produce a viable exit plan.
At the same time, a major bondholder claimed it should be treated on equal terms to that of the city's biggest creditor, Calpers, California's public pension fund.
The growing tension between the city and some of its biggest creditors come after the Luxembourg-based bank Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), which holds $50 million in pension obligation bonds, filed a lawsuit against San Bernardino in January.
Also suing the city in the same lawsuit are Ambac Assurance Corp., which insures a portion of those bonds, and Wells Fargo Bank, the bond trustee and flagship bank of Wells Fargo & Co.
Paul Glassman, an attorney representing San Bernardino, on Wednesday told the judge overseeing the case that EEPK is concerned that it will not be paid in full and is trying "to block confirmation of the city's plan any way they can."
Glassman said EEPK is trying to "cause chaos."
Meanwhile, Vincent J. Marriott, an attorney for EEPK, said the city had misinterpreted the bank's lawsuit, accusing it of trying to "stoke Main Street versus Wall Street fires."
San Bernardino struck a deal last year with Calpers, agreeing to pay the pension fund in full in its bankruptcy exit plan, which it must produce by May 30.
Since then city officials have confirmed to Reuters that San Bernardino intends to pay significantly less than the full amount it owes to EEPK, Ambac and Wells Fargo, and that it views bondholder obligations as less important than its obligations to Calpers.
San Bernardino, a city of 205,000, 65 miles east of Los Angeles, declared bankruptcy in July 2012 with a $45 million deficit. It is one of a handful of bankruptcies that has been closely watched by the $3.6 trillion municipal bond market.
Bondholders and public employees want to understand how distressed cities handle their debts to Wall Street, compared with other creditors such as Calpers.
In recent bankruptcies of Detroit and Stockton, California, pensioners have emerged relatively unscathed compared to Wall Street creditors.
U.S. federal bankruptcy Judge Meredith Jury in federal bankruptcy court in Riverside, California is overseeing San Bernardino's bankruptcy. (Reporting by Tim Reid; Editing by Diane Craft)
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