More on bankruptcy closing arguments

 Continuing from today’s column

The core demerit of Franklin Templeton Investments’ argument in bankruptcy court is pooh-poohing the havoc that will ensue should Stockton impair CalPERS. Come on, a 60% cut in CalPERS pensions? City employees will flock out the door on roller skates – the good ones will, that is. The city will lose its best and brightest employees while the worst ones, the deadwood who have no prospects elsewhere, will remain. The city will function somewhere between miserably and not at all. 

A retired city employee, Frankie Atler, called this morning to comment. Atler is terminally ill. She lives at home with three relatives who take care of her. They all live on her pension, which is $2,000 a month, and $396 from Social Security.

“If you cut that (pension) by 60% — well, there’s just no way we can live,” Atler said. “They better send out suicide pills, too.”

Also Franklin attacks the pension spikers — who deserve it — but admits there is no remedy that dings the spikers without hurting the common pensioners, too. Sorry, but all this is classic corporate coldness.

Franklin – God bless ‘em — also called the arena a “discretionary item,” meaning because it loses money the city should close it and put the subsidies toward Franklin’s debt. This argument is not without merit, but it shows Franklin’s indifference to municipal imperatives. A city has to be a place people want to live. 

Franklin also made arguments I left on the cutting room floor because they are legalistic. For instance, Franklin alleges the city placed it in the wrong class of creditors in order to rig the vote to accept the Plan of Adjustment.

In bankruptcy, creditors are placed into different classes. Members vote on whether to accept the debtor’s deal. The city put Franklin in with retirees. By doing so, Franklin contends, the city ilegally “gerrymandered” the class, making a deal to preserve pensions, which essentially gives retirees 50 cents on the dollar, so they would vote to support the deal, and swamp Franklin’s vote.

The city says Franklin belongs in that class because like retirees Franklin is an unsecured (or undersecured) creditor. Franklin disagrees, saying avenues of recovery are open to it that are not open for retirees – Franklin can recover money from the city’s future home-building fees, while retirees cannot — and this should place Franklin in a different class of creditor.

As I say, a legal issue. I wanted to air the ethics and wisdom of the city’s bankruptcy decisions, on the merits of its dissenting creditor’s arguments, and of the weighty bigger picture.

Franklin’s case also contains internal contradictions. Franklin says pension will bankrupt the city, but accuses the city of hoarding cash. Err, it can’t be both. Franklin says the city will go broke again but attacks its plan to build up cash reserves. Most gallingly, Franklin complained the city is spending too much on attorneys and consultants – though it made them necessary!

I think the judge has another compelling reason to approve Stockton’s Plan of Adjustment. Franklin’s strategy has been to wait out everybody else, then claim whatever money is left by the creditors who sacrificed and made deals. But negotiation and settlements are crucial to the bankruptcy process. The judge should favor those amenable creditors — or allow Stockton to favor them – over hardballers who refuse to negotiate and who draw out the process. If Franklin prevails, he’ll see nothing but hardballers in the future.

Though nothing is certain, I think the judge will approve the city’s Plan of Adjustment. Franklin will get the collateral or the value of the collateral, which is to be determined July 8. If the value is more than $0, the city can arrange to make payments, with an interest rate to be negotiated, meaning the parties will fight over that, too. If the value is $0, so be it.

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    Michael Fitzgerald

    Mike Fitzgerald is The Record’s award-winning metro columnist. His column runs in the paper three times a week. Born in San Francisco, he was raised in Stockton. His column covers diverse beats including, sometimes, the offbeat. Read Full
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