Chapter 9 Bankruptcy -

     The Chapter 9 municipal bankruptcy law was enacted in the 1930's, during the midst of the Great Depression. It was to answer the pressing needs of governmental units collapsing under the weight of unsustainable debt. These bankruptcies may have renewed importance today, given the serious economic downturn affecting the country. It provides a constitutional federal method for cities, towns, and other such governmental entities to readjust their debts, reject burdensome government employee collective bargaining agreements and retiree benefit plans, and to emerge as streamlined, fiscally-responsible governmental units.

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The Debtor Filing Chapter 9 Bankruptcy Jurisdictional Issues Sitemap for Chapter 9 Content

Chapter 9 and Municipality

     Chapter 9 is an adjustment of debts of a municipality. The term "municipality" is defined in Bankruptcy Code Section 101(40) as "a political subdivision or public agency or instrumentality of a state". This includes cities, towns, counties, school districts, public improvement districts and other such entities.

Purpose

     The purpose of Chapter 9 is to provide an insolvent municipality with the protection of the federal bankruptcy court's automatic stay, protecting it against creditor action, while it formulates a debt adjustment plan. This plan can have any number of features, including: rejecting or restructuring burdensome public employee union collective bargaining agreements; reducing principal and/or interest on debts; extending the maturity dates of obligations; selling certain assets to raise money for debt payment; and borrowing money to refinance the existing debt at a better rate. Chapter 9 is voluntary only, and creditors cannot force a municipality into bankruptcy court.

Typical Cases

     Municipal bankruptcies have not been very common. In fact, there have only been about 500 such cases, averaging about 8 or 9 per year, across the entire country. There have been some high-profile cases. California's Orange County filed Chapter 9 in 1994, due primarily to heavy losses it incurred in risky securities investments. San Jose Unified School District filed Chapter 9 back in the early 1980's, due to a variety of factors, including unwieldy union contracts. The City of Vallejo, California, filed Chapter 9, due primarily to the enormous cost of public employee union salaries and pension obligations.

Eligibility Requirements

     A Chapter 9 debtor needs to be a "municipality", and must satisfy the following 4 additional requirements set forth in Bankruptcy Code Section 109 ( c):

1).  The municipality must be specifically authorized by state law, or by a state officer or organization empowered by the State to give such authorization, to file Chapter 9.   2).  The municipality must be insolvent, as defined in Bankruptcy Code Section 101(32)( C), which defines insolvency as either generally not paying one's debts as they become due (unless they are in bona fide dispute), or being unable to pay one's debts as they become due.   3).  The municipality must desire to effect a plan to adjust its debts.   4).  The municipality must either: a). Obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under the Chapter 9 plan; or b). Negotiate in good faith with creditors and fail to obtain the agreement of creditors c). Holding at least a majority in amount of the claims of each class that the debtor intends to impair under the Chapter 9 plan; or d). Be unable to negotiate with creditors because such negotiation is impracticable; or e). Reasonably believe that a creditor may attempt to obtain a preference that is avoidable under Bankruptcy Code Section 547.

Chapter 9 May Become More Popular

     The filing rate of Chapter 9 cases may explode, however, due to the pervasive economic decline confronting the country. Many municipalities are almost hopelessly insolvent, due to declining property tax and other revenues, coupled with ever-increasing burdens of runaway public employee union salary and pension plans obligations. Many cities are finally taking steps to reduce these obligations through renegotiated contracts, furloughs, and other cuts. However, where compromise cannot be achieved, and the parties remain intractable in their positions, Chapter 9 may become the solution. It may be the only way that fiscal sanity and financial responsibility can be restored.