By Tim Reid
LOS ANGELES, Dec 11 (Reuters) - Wall Street bondholders have
thrown down the gauntlet to America's biggest public pension
fund, demanding similar rights as creditors in bankrupt San
Bernardino, California - and they say they could take the fight
all the way to the U.S. Supreme Court.
A group of bondholders and bond insurers on Monday filed a
114-page objection to arguments by the California Public
Employees' Retirement System (Calpers) that it should enjoy its
historical primacy as a municipal bankruptcy creditor.
A person familiar with the bondholders' case told Reuters
they would vigorously argue that Wall Street creditors have the
same rights as Calpers, and are probably in the proceeding for
the long haul, if that is what it takes.
"We view these issues as extremely important and the
precedent that could be set as extremely important," he said.
"It may be the kind of thing that gets litigated for years, all
the way to the U.S. Supreme Court."
The San Bernardino case is moving ahead swiftly since the
city of 210,000 about 60 miles east of Los Angeles filed for
bankruptcy protection on Aug. 1. It has triggered a high-stakes
battle between Wall Street and state pension funds over how they
are treated when cities run out of money.
The bondholders and bond insurers argue that under federal
law, Calpers should be treated as any other creditor and its
claims to supremacy under state law are void.
Michael Sweet, a bankruptcy attorney with Fox Rothschild in
San Francisco who is not currently representing any party in the
San Bernardino case, said: "This is definitely the first direct
confrontation between two groups that are hugely invested in
what is going on in San Bernardino.
"This is game on," Sweet added.
Calpers is San Bernardino's biggest creditor. The city,
which has a nearly $46 million deficit for the current fiscal
year, lists its unfunded pension obligations to Calpers at
$143.3 million.
Calpers says if it halted its relationship with the city
immediately and it had to pay all current and future obligations
to Calpers today, that figure would climb to $319.5 million.
The city's pension bondholders are the city's second-biggest
creditor. Among them, they own nearly $50 million in bonds the
city issued in 2005 to reduce its debt to Calpers.
Among the bondholders and bond insurers challenging Calpers
are bond insurer National Public Finance Guarantee Corporation,
a unit of MBIA. National insures three series of development
bonds issued in the 1990s.
Another party, Ambac Assurance Company, insured the $50
million of pension bonds. Wells Fargo Bank, trustee for the
pension bonds, and Erste Europaische Pfandbrief-und
Kommunalkreditbank AG, the pension bondholder, are also
challenging Calpers.
On Nov. 28, Calpers, which manages $241 billion in assets,
moved aggressively against the city, declaring its intention to
sue San Bernardino for millions of dollars in pensions arrears.
Since Aug. 1 the city has failed to make its biweekly $1.2
million payment to Calpers.
Calpers argues that under California state law its pension
contributions cannot be touched or reduced, even in a
bankruptcy. In its Nov. 28 filing the pension fund said it was
"concerned about inappropriate preferential treatment that might
be given to other creditors" in the San Bernardino case.
SAN BERNARDINO FIRST MAJOR CHALLENGE TO CALPERS
Until the San Bernardino case, Calpers' stance of supremacy
had remained unchallenged. The California city of Stockton, also
seeking bankruptcy protection, decided to keep current on all
payments to Calpers, as did the city of Vallejo, which emerged
from bankruptcy in 2011.
The group of bondholders argues in its motion to the San
Bernardino bankruptcy court that Calpers' claims under
California state law are trumped by federal law and federal
court precedent. All bankruptcy proceedings are heard in federal
courts.
"Calpers distorts the fundamental principles of bankruptcy
law and omits or ignores governing constitutional, statutory and
judicial authority establishing that the Bankruptcy Code
pre-empts and supersedes inconsistent state law," the
bondholders and insurers argue in their court filing.
The next hearing in the bankruptcy case will be held on Dec.
21.
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