Ryan Hagen, Staff Writer - San Bernardino County Sun

RIVERSIDE - San Bernardino scored a victory in bankruptcy court Friday, as Judge Meredith Jury refused a motion by CalPERS that would have allowed the pension giant to sue in state court for millions of dollars in payments the city has stopped making.

She said she was inclined to think at least $13 million in payments the city plans to defer until July 2013 are legally required, but the harm to the city would be overwhelming.

"One of the immediate effects of that would be that the employees would not be paid, and that, to me, is a death knell for the city of San Bernardino, and an immediate one," she said at a hearing in U.S. Bankruptcy Court in Riverside.

There likely would be eventual harm to CalPERS if the payments weren't made, she said, but based on evidence available so far she said she believed the city's claims that it didn't have the money to maintain essential services and stay current in its CalPERS payments.

"I don't think there's really anyone in the room who thinks the city isn't broke," she said.

CalPERS' lawyers argued against that point, saying they suspect the city has assets and money in places such as the water fund.

"We support the city's efforts to try to restore financial stability," said attorney Michael Gearin. ...I'm not sure it is all that devastating."

Jury sided with the city in refusing to lift the stay that prevents people from suing the city during bankruptcy in most circumstances, but left CalPERS the option to later argue the stay should be lifted for other reasons.

And CalPERS reserved the right to go directly to a state court to argue it deserved to be paid despite the stay, a strategy Jury said would violate precedent set by the 9th Circuit Court of Appeals.

"I will be highly disappointed if you go to a state court," she said.

CalPERS would follow the law, but it wanted to check its options before committing, Gearin said.

"We're not trying to make an end-run around your court, but I do have to make a reservation of the state of California's rights to go to another court," he said.

It wasn't all good news for the city, though.

For one thing, Jury said she thought San Bernardino did have a legal obligation - rather than just a contractual one as it has with other creditors - to pay back CalPERS, although she didn't formally rule on that.

That would need to be done soon to come up with a genuinely balanced budget, which would be required to exit bankruptcy, she said.

And in the city's legal fight to prove it is eligible for bankruptcy protection, Jury initially said she was leaning toward not allowing formal discovery - the requirement for the city to produce documents and interviews requested by creditors.

That appeared to be too much of a burden on the city and its understaffed Finance Department when the relevant facts are already known, Jury said early in the four and a half hour hearing.

CalPERS then listed some of the information it wanted but hadn't gotten from the city - highlights from a court document listing 53 requests it made, of which it said 11 were fulfilled - and how it thought some of that information would show the city had filed in bad faith or didn't have a desire to adjust its debts, both requirements for bankruptcy protection.

"I do believe they're trying," said CalPERS attorney Michael Lubic. "I think the city has made the business decision not to give its Finance Department adequate staffing."

After considering that testimony, Jury said she wanted to allow about 60 days of discovery, looking at information from about the last year.

Attorneys for the city and its creditors then met privately and said they hadn't agreed about what should be allowed, but would meet again later and come to court Jan. 22 to discuss the scope of discovery.

Many community members attended the hearing along with most of the City Council and other elected city officials, who said Friday was a significant victory.

"The ruling was quite important, keeping this before the eyes of one judge," said Mayor Pat Morris.

The city will hire five or six experts in finance and reorganization to help it prepare the required documents, a plan set it motion before Friday's hearing, according to City Attorney James F. Penman.

All three City Council members on the city's restructuring committee had expressed support for the idea, which will go before the full council for approval in January, Penman said.