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Bankrupt San Bernardino, creditors to meet in "painfully slow" case

A real estate sign is seen outside a deserted home stripped of its copper wiring in San Bernardino, California September 11, 2012. REUTERS/L
A real estate sign is seen outside a deserted home stripped of its copper wiring in San Bernardino, California September 11, 2012. REUTERS/L

By Tim Reid

LOS ANGELES (Reuters) - Creditors of bankrupt San Bernardino, including America's biggest pension fund and Wall Street bondholders, are due to meet in court on Tuesday in a case bogged down in arguments over the Southern California city's disclosure of financial records.

The slow progress in San Bernardino's case contrasts with that of another California city, Stockton, which last week was declared eligible for municipal bankruptcy in proceedings that have moved relatively swiftly since it filed for Chapter 9 in June.

For San Bernardino, a city of 210,000 which filed for bankruptcy just a month after Stockton and declared a fiscal emergency to avoid pre-bankruptcy negotiations with creditors, it is still unclear if the judge will be able to set a trial date to determine the city's eligibility for Chapter 9 protection.

"It's like Stockton is on jet fuel, and San Bernardino is walking," said Karol Denniston, a bankruptcy attorney with Schiff Hardin in San Francisco, who is not involved in either case.

"One city has got liquidity to work with and sophisticated planning. The other fell into bankruptcy and is crawling along, with a lack of staff and chaos. It's as different as you can get."

Both cities are considered test cases in the battle over whether municipal bondholders or pensioners will absorb most of the pain when a government goes broke. Battle lines have been drawn in both cases between Calpers, the state pension fund, and Wall Street bondholders over how they will be treated as creditors.

In August last year, San Bernardino, 60 miles east of Los Angeles, stopped paying its $1.2 million, twice weekly employer contributions to Calpers - America's biggest pension fund, with assets of $256 billion. The pension fund is opposing its bankruptcy petition. Stockton has kept current on its Calpers payments, and the fund did not oppose that city's bankruptcy.

Calpers says that for months it has been asking for an array of financial information from San Bernardino, whose city manager and finance chief both quit earlier this year. Last week San Bernardino's council voted to contract out its finance department.

A Calpers spokesman said there had been "fruitful" meetings with San Bernardino, but "progress remains painfully slow."

SAN BERNARDINO SAYS HAS PROVIDED DOCUMENTS

In a court filing submitted on Monday afternoon, San Bernardino said it had provided more than 23,200 documents in support of its bankruptcy application.

The city said it "is making every effort to meet Calpers' proposed deadlines and still devote sufficient resources to the City's daily operations."

Last week, three labor unions asked the judge overseeing San Bernardino's case to allow them to sue the city in state court, so the unions could try to overturn contracts imposed by the city that cut pensions and other benefits.

The judge, Meredith Jury, said she would probably rule on that motion on Tuesday, but indicated that she was unlikely to allow the unions' request to bypass the federal bankruptcy court.

In December, she blocked a similar attempt by Calpers to bypass the bankruptcy court and collect on its overdue pension payments from San Bernardino.

The judge also repeated an assertion she made at an earlier hearing - that she is convinced the city is insolvent.

Denniston said what the city must now show is that it acted in good faith with its creditors when it declared bankruptcy.

The burden of proof on that is higher for San Bernardino than Stockton, because in San Bernardino's case the city declared a fiscal emergency before filing for bankruptcy - a move aimed at avoiding pre-bankruptcy negotiations with creditors.

Denniston said San Bernardino is the first city to take the fiscal emergency route, and must now show, among other things, that it was not a self-created fiscal emergency due to years of bad financial management, which some creditors, including Calpers, claim.

(Editing by Tiziana Barghini, Leslie Gevirtz and Mohammad Zargham)

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