Chapter 9, Title 11, United States Code - Municipal Bankruptcy

Chapter 9, Title 11, United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities, that assists them in the restructuring of debts. On July 18, 2013 Detroit, Michigan became the largest city in the history of the United States to file for Chapter 9 Bankruptcy protection. Jefferson County, Alabama, in 2011 and Orange County, California, in 1994 are also notable examples. "The term 'municipality' means political subdivision or public agency or instrumentality of a State."

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History

From 1937 to 2008 there were fewer than 600 municipal bankruptcies. As of June 2012 the total was around 640. In 2012 there were twelve chapter 9 bankruptcies in the United States, and five petitions have been filed in 2013. Since 2010 thirty six petitions have been filed.

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities. The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District.

However, a revised act remedying the constitutional deficiencies was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX). This revised act was upheld as constitutional by the Supreme Court in United States v. Bekins.

Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis. The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.

In 1988, Chapter 9 was amended by Congress to provide statutory protection from § 552(a) lien stripping provisions to revenue bonds issued by municipalities. This was addressed with the classification of these bonds as "special revenues" under the newly minted § 928(a) and § 922(d) exemption of special revenues from the automatic stay provisions of § 362.

To prevent overlap with Chapter 11, § 101(41) of the U.S. Bankruptcy Code (11 U.S.C. § 101(41)) defines the term "person" to exclude many "governmental units" as defined in § 101(27), and "municipality" as defined in § 101(40).

Features of Chapter 9

While in many ways similar to other forms of bankruptcy reorganization (esp. Chapter 11), Chapter 9 has a number of unique characteristics. Because municipalities are entities of State governments, the power of the bankruptcy court is limited to some extent by the Tenth Amendment to the United States Constitution.

Collective bargaining

Municipalities' ability to re-write collective bargaining agreements is much greater than in a corporate Chapter 11 bankruptcy and can trump state labor protections, allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.

Authorization for filing of municipal bankruptcies

Section 109(c) of the U.S. Bankruptcy Code provides that a municipality may be a debtor in a Chapter 9 bankruptcy case only if the municipality is specifically authorized to be a debtor by State law, or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor. Municipalities in 26 states must seek enactment of a specific statute particular to it authorizing the filing.

New Jersey, Connecticut, and Kentucky simply give a state appointed official or body the power to approve a filing.

Running out of time, Detroit gambles on municipal bankruptcy and ...

Notable Chapter 9 bankruptcies

Partial list of municipal bankruptcies

Note: Larger bankruptcies are in bold

Hamilton Creek Metropolitan District, a quasi-municipal corporation in Summit County, Colorado, 1989
Orange County, California, 1994, $1.7 billion (largest municipal bankruptcy until November 2011, and $3 billion when adjusted for inflation), on interest rate-related losses (see Robert Citron).
Prichard, Alabama, 1999, due to inability to pay pensions.
Desert Hot Springs, California, 2001, due to losing a housing discrimination lawsuit.
Millport, Alabama, 2005, due to loss of sales tax revenues after factory closing.
Los Osos, California, 2006, debt related to a wastewater facility.
Moffett, Oklahoma, 2007, due to loss of ability to issue traffic tickets.
Gould, Arkansas, 2008, due to spending money withheld to pay employee income taxes.
Vallejo, California, 2008, due to inability to pay pension obligations.
Westfall Township, Pike County, Pennsylvania, 2009, due to losing a lawsuit
Prichard, Alabama, 2009, due to inability to pay pensions and especially state mandated pension increases.
Central Falls, Rhode Island, August 2011, due to inability to pay obligations, especially pensions.
Jefferson County, Alabama, November 2011, over $4 billion in debt (largest Chapter 9 bankruptcy until 2013 Detroit bankruptcy filing,) from sewer revenue bonds tainted by an interest rate swap bribery scandal with JPMorgan and county commissioner Larry Langford, and bond insurance credit rating collapse in the late-2000s subprime mortgage crisis, followed by the occupation tax being declared unlawful in Alabama. (see Jefferson County, Alabama: Sewer construction and bond swap controversy)
Stockton, California, June 28, 2012, Stockton filed for Chapter 9 bankruptcy.
Mammoth Lakes, California on July 3, 2012
San Bernardino, California on August 1, 2012
Detroit, Michigan, 2013, investigations ongoing, estimated to be between $18-20 billion (see Detroit bankruptcy for the most current information)

Municipalities placed under receivership

The city of Central Falls, Rhode Island petitioned to be put into receivership in 2010, as Rhode Island does not generally permit Chapter 9 filings. The state appointed receiver or overseer assumed all financial responsibilities from the mayor. Rhode Island's receivership law was rewritten to allow the receiver the ability to file a petition for Chapter 9 federal bankruptcy and Central Falls has done that.

Hospital and health care district Chapter 9 bankruptcies

A hospital or health care district is a governmental entity, generally with taxing authority, that owns and operates medical facilities. Some examples of health care district Chapter 9 bankruptcies are:

Valley Health System, California
West Contra Costa Healthcare District, California
Hardeman County Memorial Hospital, Quanah, Texas
Mendocino Coast Healthcare District, California

Other entities that declared Chapter 9 bankruptcy

San Jose Unified School District, 1983.
Washington Public Power Supply System (WPPSS), 1983, due to halt in construction of planned nuclear reactors.
The West Jefferson Amusement and Public Park Authority owner of VisionLand Park now known as Alabama Adventure Theme Park, 2002, due to business that could not support its debt.
Pierce County Housing Authority, 2008, in Pierce County, Washington, residents' lawsuits due to mold in properties.
Sarpy County Sanitation Improvement District, 2009, in Sarpy County, Nebraska, due to reduced real estate development.
New York City Off-Track Betting Corporation, December 2009, in New York City, due to mismanagement,
Connector 2000 Association, operator of the Southern Connector, 2010, due to toll collections being less than expected.

Chapter 9 bankruptcy petitions that were filed but voluntarily dismissed

Richmond Unified School District, California, 1991 After the District filed its petition, the state loaned the District funds to bridge its budget gap, and also appointed an administrator to take over management of the District. The administrator requested that the bankruptcy court dismiss the petition, and this was granted.

Petitions for Chapter 9 relief that were denied

In 1991, the petition for relief filed by the city of Bridgeport, Connecticut, was denied. The case was dismissed because the bankruptcy court concluded that Bridgeport, although financially distressed, was not insolvent within the meaning of the eligibility criteria of Chapter 9.
In 2010, the city of Hamtramck, Michigan requested permission from the Governor under Michigan's authorizing law to file a petition for Chapter 9 Bankruptcy, but was denied. Instead of bankruptcy, the treasury advised that Hamtramck be offered a selection of loan options.
Washington Park, Illinois December 2010. Washington Park briefly emerged from bankruptcy and then filed a new petition for bankruptcy which was rejected by the judge, who stated there was no Illinois state law enabling a municipality to file a Chapter 9 bankruptcy petition.
Boise County, Idaho, March 2011, due to judgment against the county for violating the Fair Housing Act. The bankruptcy petition was dismissed by the judge after concluding the municipality had "sufficient surplus moneys" to satisfy the judgment and continue operations.
Harrisburg, Pennsylvania, October 2011, approximately $400 million in debt, due in part to a failed trash incinerator. The bankruptcy judge dismissed the bankruptcy petition on the grounds that not all necessary branches of the municipal government had authorized the filing of the petition.

Notable defaults that did not result in Chapter 9 bankruptcy

Cleveland, Ohio, 1978, dispute with city creditors over sale of a utility.

Notable bankruptcies that were declared ineligible for Chapter 9 bankruptcy

The Las Vegas Monorail Company was declared a private entity, not an eligible governmental entity, in 2010.

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