Stockton, Calif., Moves Toward Mediation, City’s Lawyer Says

Stockton, Calif. — testing a new state requirement that municipalities try mediation before seeking bankruptcy protection — formally asked creditors to participate, according to a lawyer for the city.

Notices sent by email on Feb. 29 and by certified mail gave creditors 10 business days to say whether they’ll take part, Marc Levinson, an Orrick, Herrington & Sutcliffe LLP partner in Sacramento, said today by telephone. He declined to say how many or which creditors responded, citing a new state law.

“The statute is untested and expresses a strong preference for confidentiality and that’s what the city intends to do,” Levinson said. “In order to keep confidential what’s discussed in the meeting, everything ought to be confidential, including the participants.”

Stockton’s City Council agreed on Feb. 28 to mediation required under the new law, which aims to deter cities from entering bankruptcy. The process is a necessary step if the agricultural center about 80 miles (130 kilometers) east of San Francisco seeks court protection. City Manager Bob Deis has said the community is running out of funds because of escalating retiree health-care costs, lingering effects of the recession and recently uncovered accounting errors.

National Public Finance Guarantee Corp., which insures municipal bonds against default, has agreed to take part, a person with direct knowledge of the matter said last week. Agreeing to talk doesn’t mean the company, a unit of MBIA Inc., will accept a loss on the $224 million in Stockton bonds it insures, according to the person, who declined to be identified because he isn’t authorized to speak publicly on the matter.

The parties have a week to agree on a mediator once the 10 business days have passed, Levinson said, citing the law. The lawyer for the city wouldn’t say where the process stands now.

“I expect that we will have a mediator by the end of the month,” Levinson said.

The confidential negotiations will take as long as 60 days, Levinson said. During that time, the city or a majority of the interested parties can choose to extend talks another 30 days. After 90 days, the city and a majority of the parties may agree to an indefinite extension, Levinson said.