Stockton or Bust!

The very first real-world test of AB 506, requiring that before municipalities can file Petitions in Bankruptcy (Chapter 9 of the Federal Bankruptcy law), they must first negotiate with their creditors in front of a person who can neutrally evaluate the situation – a mediator – is about to feature the venerable City of Stockton.  People in the know are not holding their collective breath that the newly mandated mediation procedure will avoid Stockton’s imminent bankruptcy.  If Stockton does go bust, with it’s roughly 300,000 area residents who have been hit hard by the Great Recession, it will be the largest municipal bankruptcy in American history – fasten your seat belts, folks!

Stockton is California’s 13th largest city.  It straddles the junctions of I-5, and the old State 99 & 4 Highways, and features a canal system that enables a port for international shipping, though Stockton lies well inland of any ocean or bay.  Sacramento and Stockton are California’s twin, and only, inland ports.

The Miwok Indians were the first humans to arrive in the Stockton area. The Gold Rush beckoned Europeans, including the German, Captain Karl David Weber (1814-1881), who acquired the Rancho Campo de los Frances (meaning “French Camp”) Mexican land grant, a 48,747-acre chunk of San Joaquin County land.  Captain Weber founded Stockton in 1849.  This Rancho had been granted in1844 by then (but, not for long) Mexican Governor, Manuel Micheltorena, to Guillermo Gulnac.

Back to the future, being now . . . Stockton is groaning under a massive debt load and painfully short revenues – $700 Million in outstanding bond debt alone, and a budget shortfall of some $15 Million, with deficit shortfalls predicted anywhere from $20-$38 million, to the Twelfth of Never, in the coming fiscal year.

Stockton’s City Fathers & Mothers have apparently agreed to default on some of that $700 Million bond debt, inviting bankruptcy -they feel that they have run out of options.  A staggering legal question looms, which could stimulate other such bankruptcies, depending on how it comes down.  Will the insurers of all that normally pretty tame municipal bond debt, step up, or will they have to be dragged kicking and screaming to the table?  The ripple effect of this Bust in the heart of San Joaquin County will be akin to throwing a giant boulder into an equally giant lake.

I have fond personal memories of Stockton, either before or after their Urban Renewal brightened the shabby old Downtown, which features an astoundingly high crime rate today.  A formerly Mexican family – three brothers and their three sisters, living there, engaged in the Latin Music business — were my clients from the early 80’s until most reached retirement age, in the mid-2000’s.

I watched them grow a family business starting with one Sacramento record shop, into a chain of some 20 retail stores, a record and publishing company and regional warehouses for wholesale distribution all over the US, and another parallel set of businesses in Guadalajara, run by their father.  A real American success story!

The father came and picked vegetables here.  He eventually bought real estate, first in Mexico, later in Stockton, and brought his wife and six kids to Stockton.  The 3 brothers and 3 sisters, most of whom went to college, became citizens, and things were very good and very successful until the Internet took the wind out of the sails of the music business in the early 2000’s.  In addition, Stockton was hit hard by the extreme drop in value of San Joaquin Co. real estate over the last four years.

In the 80’s, PSA still regularly serviced Stockton – remember those planes with the big smiles on their faces/noses?  I used to take the early morning flight up there, and then take the 11pm night flight back to LAX.   PSA, or it’s successor, finally gave up the route, amid de-regulation of aviation, which had required service to Stockton, and I had to fly to Sacramento or Oakland, and take the hour and a half drive each way.   The night PSA flight from Stockton was usually empty; often, just me and the pre-teen child of a doctor that I actually knew, based in LA.   The kid was in a shared, High Mileage custody arrangement, mercilessly being shuttled back and forth.   The crew often outnumbered us.  Drinks for all, except the kid . . . .

Like the story of my clients, Stockton had a rise and fall of large proportions.  When I attended law school at UC Davis in the mid-70’s, the rice fields would flood in the Winter between Davis and Sacramento and it would look like a small ocean – later, the floods were epic, and not about irrigating rice.  That same rice was trucked down to Stockton, and large ships took it across the Pacific from those Stockton canals  – imagine, exporting rice to Asia!

Bankruptcy lawyers and financial interests of all kinds will have their eyes glued on Stockton for a while.  We shall see whether our Legislature, in their infinite wisdom, have cooked up a mediation procedure which can forestall the biggest municipal bankruptcy in US history, or whether Stockton will, indeed, go Bust.

(David White is the Principal of David S. White & Associates, a real estate and general business law firm, West Los Angeles. Originally posted on Fox & Hounds.)

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