Sunday, August 15, 2010

(BN) MBIA Unit Asks Court to Make Bankrupt California City Pay Debt With Fees

Bloomberg News, sent from my iPhone.

MBIA Unit Asks Judge to Make Bankrupt Vallejo Use Fees for Debt

Aug. 12 (Bloomberg) -- MBIA Inc.'s municipal-bond insurance unit is asking a bankruptcy court judge to order Vallejo, California, to make good on promises to pay investors in case of default by using money from vehicle registrations.

Debtor protection doesn't pre-empt a state law that requires the use of the license fees to pay off city debts, National Public Finance Guarantee Corp. said in a motion filed Aug. 10 with U.S. Bankruptcy Judge Michael McManus. The income derived from the registration payments was used as a type of secondary pledge to back a $4.8 million bond issue in 1999.

The community of 115,000 on the northern edge of San Francisco Bay sought Chapter 9 bankruptcy protection in May 2008 after it failed to convince labor unions to accept salary concessions as the recession began cutting into municipal tax collections nationwide. Chapter 9 of the U.S. Bankruptcy Code lets cities and towns reorganize rather than liquidate.

State law "was specifically designed to protect debt holders in the event a municipal issuer fails to pay for any reason, by using vehicle-license fees," Kevin Brown, a spokesman for the Armonk, New York-based insurer, said yesterday by e-mail. "National's motion simply asks the court to ensure that investors receive what was promised when the bonds were issued."

In September 2008, McManus ruled from his Sacramento, California, court that the city was insolvent because it couldn't pay its bills. In March 2009, he ruled that the city can nullify contracts with police and firefighter unions.

Financed Fire Station

The city sold $4.8 million of "certificates of participation" in 1999 to build a fire station and finance improvements on six others. In May last year, the city stopped making payments to bondholders, a default allowed under bankruptcy protection. National said it has paid more than $200,000 in resulting claims filed by investors.

Under a proposed workout plan approved by the City Council in March, holders of the 1999 bonds are expected to forgo the vehicle fees and four years of interest, and to defer payments of principal for three years so that other creditors and union members can be paid, National said in the court filing.

California collects a registration fee of 0.65 percent of the value of a vehicle and each month doles out most of that money to cities and counties. Local governments are allowed to use that revenue as a form of additional backup security on municipal debt. At least six other cities and counties in the state sold bonds with the additional backup security, according to a 2010 Standard & Poor's report included in court papers.

Fee Mandates

Under California law, if there is a default on bonds backed by the fees, the state controller must turn the city's portion of the money over to investors through a trustee. Vallejo contends that while in bankruptcy, it doesn't have to make payments to bondholders or divert the funds.

"We have been discussing the matter with National Public's counsel for some time and we disagree with National Public as to its rights to these funds," said Marc Levinson, the city's bankruptcy lawyer in a telephone interview yesterday. He works for Sacramento-based Orrick, Herrington & Sutcliffe LLP.

The insurer's lawyers said in the court filing that "the city's bankruptcy does not change or interfere with the 1999 trustee's right to receive" the fees. "Thus any attempt to collect such amount should not be subject to the automatic stay or any other provision of the bankruptcy code."

A call to Robert Adams, Vallejo's city manager, wasn't returned yesterday.

Ratings Cut

Standard & Poor's in March lowered its rating on the debt to C, the second-lowest level, from B, the fifth step below investment grade. In December, the city had about $51.6 million in debt payable directly from its general fund.

Before Vallejo, the last California city to seek protection from creditors was Desert Hot Springs in 2001. The town of 20,000 near Palm Springs was hit by a legal verdict it couldn't afford. Orange County filed the biggest municipal bankruptcy in U.S. history in 1994, after some investments soured.

The Vallejo case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

To contact the reporter on this story: Michael B. Marois in Sacramento at

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