The Chapter 9 Debtor -

     A municipality, due to its unique standing, has numerous powers which simply are not available to debtors under other chapters. For instance, a Chapter 9 debtor: can use, sell and lease property-other debtors need a court order under Section 363; it can borrow money, whereas other debtors need a court order under Section 364; it can reject collective bargaining agreements and retiree benefit plans, whereas other debtors need a court order under Section 365; it can raise taxes and spend money; hire lawyers, accountants and other professionals without court approval, which other debtors need to obtain under Section 327; and can file preference and fraudulent conveyance actions, just like other debtors.

Borrowing Money

     Perhaps the most important power in Chapter 9 is the municipality to be able to borrow money. Most municipalities who file Chapter 9 are on the ropes financially, and need an immediate cash infusion. This can be done by granting the new lender an administrative expense for the loan, which puts it ahead of all of the pre-bankruptcy creditors.


Participation by Other Parties

     Besides the debtor and creditors, there are other participants in the typical Chapter 9 case. These can include: (a) the U.S. Trustee, whose role is fairly circumscribed, as there are no monthly operating reports, no meeting of creditors, and no duty to attempt to supervise the debtor; and (b) other people whose interests may be impacted by the Chapter 9 case, including the United States Treasury Department, the Securities and Exchange Commission, and local government employees, residents, and banks and other businesses.

Confirming a Debt Adjustment Plan

     Bankruptcy Code Section 941 says that the debtor must file a plan. To be confirmed by the Court, the plan needs to meet 7 statutory minimum requirements. These essentials are a blend of Chapter 9 law and the confirmation requirements for Chapter 11 plans, found in Bankruptcy Code Section 1129. The Court will confirm the plan if:

  • It complies with all of the Title 11 provisions which are made applicable via Bankruptcy Code Sections 103(e) and 901, which allow a plan to be approved without the approval of all creditors, if the rules for "cramdown" under Chapter 11 are met
  • It complies with all provisions of Chapter 9.
  • All professional fees and other expenses in the case have been fully disclosed and are reasonable.
  • The debtor is not prohibited from taking any action needed to carry out the plan.
  • All administrative expenses are paid in full on the effective date of the plan, unless they have agreed to less favorable treatment.
  • All needed electoral and regulatory approval has been obtained, or is condition precedent to the plan's effectiveness.
  • The plan is both feasible and in the best interests of creditors under Bankruptcy Code Section 943(b), with the latter meaning that the plan is better than the alternative, which would be dismissal of the case, and "every man for himself", with a chaotic "race to the courthouse".

Discharge of Debts

     Under Bankruptcy Code Sections 944(b) and (c), a Chapter 9 debtor receives a discharge of all of its debts, except for: those specifically excepted from discharge by the plan; and debts to persons or entities who had notice or actual knowledge of the pendency of the case. This discharge is issued once the following 3 conditions are met:

 1).  The plan has been confirmed.
 2).  Any deposit required by the plan has been paid to the disbursing agent.
 3).  The court has determined that securities deposited with the disbursing agent will constitute valid legal obligations of the municipality and that any provision made to pay or secure payment of such obligations is valid.

Written by Henry Rendler

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