By Peter Henderson
SAN FRANCISCO, Dec 18 (Reuters) - The biggest U.S. pension
fund argued in a court filing that its status as a state agency
gave it sweeping powers in the San Bernardino, California
bankruptcy case and that the federal jurisdiction that applies
in bankruptcy should be overridden by the state's rights.
San Bernardino is emerging as a precedent-setting case in
determining how creditors, including Wall Street bondholders and
retirees, are treated in a municipal bankruptcy.
The California Public Employees' Retirement System latest
legal argument, filed late on Monday, contends that bond
insurers who are opposing Calpers in San Bernardino are actually
supporting its legal position in another big municipal
bankruptcy in Alabama.
San Bernardino, a city of 210,000 about 60 miles east of Los
Angeles, filed for bankruptcy protection on Aug. 1. Since then,
it has halted its bi-weekly, $1.2 million payment to Calpers,
saying it wants to defer any payments to the fund until fiscal
Calpers says the city is already millions of dollars in
arrears, and wants a federal bankruptcy judge to let it sue San
Bernardino in state court. No other city in bankruptcy has
stopped payments to Calpers, and the courts will eventually have
to determine whether pension payments take precedence over other
debts in a municipal bankruptcy.
The main question is whether a state maintains elements of
financial control over a city or county, once the municipality
enters federal bankruptcy court.
Calpers says it is an arm of the state and aims to enforce
state law, which requires municipalities that use Calpers as a
pension system make payments to the fund. Federal bankruptcy
code lets the state enforce its own laws, and Calpers argues
that its ongoing payments to retirees since the city declared
bankruptcy give it special 'post-petition' rights.
Lawyers for bond insurers in the case want to treat Calpers
as a creditor, though. "All that they are raising are claims,"
said Lawrence Larose, who represents bond insurer National
Public Finance Guarantee Corp, a wholly owned subsidiary of MBIA
Inc. Because the issue is claims, the federal court should keep
control of the process, he said in an interview.
Section 903 of federal bankruptcy code, which sets the
limits on court powers, is key. In a municipal bankruptcy case
in Jefferson County, Alabama, Larose argued that the limits on
court power applied even after bankruptcy was declared.
"In order to protect a state's right to control its
municipalities, 903 must be applied to post-petition acts,
including bankruptcy court orders," he argued in a Jefferson
filing cited by Calpers. Calpers said that argument dovetailed
with its own.
"It's a complete red herring," Larose said. Jefferson county
involved control of the local sewer system, not a financial
claim, he said. In San Bernardino, Calpers is acting as a
creditor, not as an arm of the state, he said.
The case is In re City of San Bernardino, U.S. Bankruptcy
Court Central District of California, Riverside Division,
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