Creditor challenges city’s gerrymandering of bankruptcy claims classification process

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What are the pros and cons of bankruptcy ?”


A creditor challenging a California city’s bankruptcy plan says the city and its retirees manipulated the bankruptcy process in an effort to drown out the creditor’s objections to the plan.

Stockton Sign Charlotte Area Bankruptcy Lawyer Mecklenburg Chapter 7 AttorneyThe creditor—Franklin High Yield Tax-Free Income and Franklin California High Yield Municipal Fund—loaned the City of Stockton $35 million in 2009, money the city used “to build police and fire stations, seven parks and other public facilities.” After making just four loan payments to Franklin, Stockton sought bankruptcy protection under Chapter 9 of the United States Bankruptcy Code.

At the time the city filed for bankruptcy, its debt obligations were significant, with some $266 million in unsecured and partially secured debt owed to bondholders. The city owed bondholders an additional $124.3 million in debt related to pensions paid to city employees. The city was also obligated to pay “$289 million in future unsecured pension obligations to [approximately 1,100] retirees,” an additional $545 million towards the retirees’ future healthcare benefits, and $4 million in unsecured debt to vendors who had provided services or products to the city, according to Clayton W. Davidson, a bankruptcy attorney writing in The Legal Intelligencer.

After Stockton filed for bankruptcy, the bankruptcy court split Franklin’s claim into a $4.05-million secured claim and a $30.48-million unsecured claim. That meant that Franklin would receive a payment of $4.05 million plus an additional $285,000 for the unsecured claim. Vendors were paid in full. Retirees lost most of their future healthcare benefits but received all of the $289 million for future unsecured pension obligations, according to the Intelligencer.

In general, every unsecured creditor in Stockton’s case received at least a one-half distribution on its claim, with the exception of Franklin, which received less than one-percent on its $30.48 million unsecured claim.

Franklin appealed the bankruptcy court’s approval of the city’s bankruptcy plan, arguing that Stockton and its creditors unfairly manipulated the bankruptcy process to squash Franklin’s objections to the plans and—in doing so—squashed a large chunk of Franklin’s claim.

The United States Bankruptcy Code requires that creditors vote in favor of a proposed bankruptcy plan. If a group of creditors have substantially similar claims, they are grouped in a class for voting purposes. In the Stockton case, Franklin’s unsecured $30.48-million claim was grouped with the unsecured future healthcare claims of retirees, which totaled approximately $540 million. Stockton—Franklin alleged—knew “full well that the retirees would dwarf Franklin in size and amount and vote in favor of the plan.”

Franklin argued that its claim should never have been classed with the retirees’ unsecured claim for lost healthcare benefits, and said Stockton and the retirees tried to gerrymander the bankruptcy process in order to drown out Franklin’s objections to the plan and win the bankruptcy court’s approval.

Franklin’s appeal of the bankruptcy court’s confirmation of the plan is pending before the Ninth Circuit United States Court of Appeals.

If you find yourself needing the services of an experienced Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.






Image Credit:

“Stockton San Joaquin Street Sign” by NapoliRoma – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons –



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