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Judge's Ruling Makes Stockton, Calif., Most Populous City To Enter Bankruptcy

Stockton, Calif., is now the most populous city in the U.S. to enter bankruptcy, after a decision by U.S. Bankruptcy Judge Christopher Klein on Monday.

Bloomberg News reports that Judge Klein said the city negotiated in good faith with its creditors, and that the creditors did not.

"Creditors, including Assured Guaranty Corp. and Franklin Resources Inc. (BEN) had argued that Stockton didn't qualify for bankruptcy because the city isn't truly insolvent, and that its leaders didn't negotiate a potential settlement in good faith.

Negotiation is a "two way street," said U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, addressing creditors who he said didn't negotiate in good faith. "You cannot negotiate with a stone wall."

Klein said the bankruptcy was necessary so that the city could continue to provide basic services.

"It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law," Klein said.

The bankruptcy protection will keep the city shielded from lawsuits from creditors, who otherwise would be free to sue in state court in order to force asset sales, cut city services or create boosts in revenue in order to pay debts.

According to the Associated Press, the $900 million that Stockton owes to the California Public Employees' Retirement System to cover pension promises is its biggest debt. The city so far has kept up with the pension payments, but that had forced them to neglect other debts.

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