Throwing Stockton, Calif., out of bankruptcy will require creditors including Assured Guaranty Corp. and mutual-fund manager Franklin Resources Inc. to convince a judge that the city is not insolvent and never really tried to cut a deal, Bloomberg News reported today. The odds are against them, said attorneys who are not involved in the case. Assured, a bond insurer, and Franklin’s high yield, tax-free income fund are set to be in court March 25 for the start of a four-day trial before Bankruptcy Judge Christopher M. Klein. If creditors win, they will be free to sue the city in state court, where it is much easier to force the sale of assets, or a reduction in services or a boost in revenue to pay off debts, said James E. Spiotto, a partner at Chapman & Cutler LLP. A trial victory by Stockton would allow the city to pursue its original debt-reduction plan. Before filing bankruptcy in June, the city asked bondholders and other lenders owed more than $300 million to take less than full repayment. In court papers, the city listed assets of more than $1 billion and debt of more than $500 million.
