Filing Chapter 9 Bankruptcy -

     In Chapter 9, the municipality files the petition with the bankruptcy court. Under Bankruptcy Code Section 924, the petition is typically accompanied by a complete list of all creditors. The Court can allow this list to be filed later, for cause shown, under Bankruptcy Rule 1007.

Notice of the Commencement

     Once the petition and list of creditors are filed, then, per Bankruptcy Code Section 923, the Bankruptcy Court Clerk, or such other person as the Clerk may direct, mails out notice of the commencement of case to all creditors. The notice is to be published once a week for 3 successive weeks in a newspaper of general circulation published in the judicial district in which the case is commenced, and in such other newspaper having a general circulation among bond dealers and bondholders as the court may designate. The notice will have a deadline for filing claims. Unlike the other chapters, there is no meeting of creditors in Chapter 9.

Objections to the Petition

     Under Bankruptcy Code Section 921( c) a creditor is permitted to file a written objection to the Chapter 9 petition. The creditor might claim, for instance, that: the petition was not authorized by the state; the municipality is not insolvent; the municipality did not negotiate in good faith with its creditors. The "failure to negotiate in good faith" objection is commonly raised by the public employee union attorneys in connection with collective bargaining agreements concerning the municipality. If an objection is filed, the Court will hold a hearing and issue an order either overruling or sustaining the objection. If the objection is sustained, the case will be dismissed. If it is overruled, then, under Bankruptcy Code Section 921(d), the case will proceed in Chapter 9.

Nature of Automatic Stay

     The Chapter 9 automatic stay is a little different from the other bankruptcy chapters. Like most chapters, the stay goes into effect immediately upon the filing of the petition, per Bankruptcy Code Section 901(a). Under Bankruptcy Code Section 922, Chapter 9 debtors receive the benefit of the Section 362 automaticstay provisions given to debtors in other chapters. This includes stoppingall collection actions and lawsuits against the debtor and the debtor's property. In addition, under Bankruptcy Code Section 922(a), there is a Chapter 9 "co-debtor" stay which prohibits lawsuits against officers and inhabitants of the debtor, if the suit concerns a debt of the debtor.

     There is one specific exception to the Chapter 9 automatic stay, set forth in Bankruptcy Code Section 922(d), namely: the stay does not prevent the application of pledged special revenues under Section 927 of the Code, which relates to the payment of certain bondholders.

Creditors' Claims

     The handling of creditors' claims in Chapter 9 is set forth in Bankruptcy Code Section 925. It is similar to Chapter 11. In Chapter 9, under Bankruptcy Rule 3003( c)(3), the Court imposes a deadline for the filing of proofs of claim with the Court. If the creditor is listed on the debtor's creditor list, then the claim is deemed allowed, and no proof of claim need be filed. However, if the claim is listed on the debtor's list of creditors, but marked as being "contingent, unliquidated or disputed", then the creditor is required to file its proof of claim by the claims bar-date,. If it fails to do so, then it is barred from participating in the case and will not receive payments under the plan.

Creditors Committee

     Under Bankruptcy Code Section 901(a), in each Chapter 9 case, the Court appoints a Creditors Committee. This Committee has many of the same duties and rights of such committees in Chapter 11, including: helping the Debtor to formulate a plan, investigating the acts, conduct, assets and liabilities of the Debtor; advising the Debtor concerning administration of the case; hiring lawyers, accountants and other professionals to assist with their duties; and performing other services which are beneficial to creditors and the estate.

Powers of the Creditors

     The powers of the creditors are constrained in Chapter 9 by the fact that they are not allowed to propose competing plans, the case cannot be converted to Chapter 7 to have the assets liquidated by a trustee, a plan can be "crammed-down" over a class of dissenting creditors, and the Debtor, due to its 10th Amendment constitutional rights, generally enjoys substantially more flexibility and freedom than debtors have in any other chapter.

Written by Henry Rendler