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Beyond City Limits: Restructuring a Municipality in Chapter 9


Title: Chapter 9 Bankruptcy Author: Andrea Brown Last modified by: Jennifer Wise Created Date: 9/13/2013 3:12:56 AM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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Title: Beyond City Limits: Restructuring a Municipality in Chapter 9

Beyond City Limits Restructuring a
Municipality in Chapter 9
  • Laura Day DelCotto, Esq.
  • DelCotto Law Group PLLC
  • 859-231-5800

Todays Economic Climate
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  • Despite media reports, its not over yet slow
    economic recovery and weak job growth expected
    even as the recession ends
  • Protracted weakness of real estate projectedslow
    recovery expected along with structural changes
  • Housing market still in recovery residential
    values will take many years to return to 2006
    levels, with great geographic disparity
  • Changing consumer behaviorlower retail spending
    will significantly affect numerous

Why? (cont.)
  • Demographics
  • Kentucky Fried Pensions

Why? (cont.)
  • Show me the MONEY
  • http//

Why? (cont.)
  • Denial/Fear
  • Extend and Pretend

Effects on Municipalities
  • Exotic financial instruments behaving
    unpredictably, causing borrowing costs to
  • Municipal credit suffering an eroding tax base as
    a result of the stalled housing market and
    consumer distress
  • Unfunded Mandates
  • Squeezed between costs of providing basic
    services and flat or declining revenues
  • Squeezed by budgeted revenues not meeting
    budgeted expenditures, and insufficient reserves
    to cover shortfall
  • Payroll costs and employee benefits are often a
    key component of a municipality's fiscal stress

Cost/Benefit Analysis Why Would a Municipality
File a Chapter 9?
  • Burdensome contracts - labor, supplies, etc.
  • Pension and OPEB renegotiation
  • Health insurance costs for current workers
  • Restructuring debt
  • Other factors that apply in Chapter 11 (vs.
    Chapter 9)
  • Creates forum for all parties
  • Who will exhibit Leadership?

Cost/Benefit Analysis Why Would a Municipality
Avoid Chapter 9?
  • Stigma/Fear
  • Future access to debt markets
  • Unpredictability of court proceedings
  • Compounded by lack of Chapter 9 case law
  • Public nature of court proceedings
  • Greater scrutiny and influence of outside parties
  • Independent federal court judge
  • Creates forum for all parties

Cost/Benefit Analysis More Assessment Factors
  • Better to resolve problems outside of bankruptcy
    if at all possible yes and no
  • Transparency
  • ID in clear terms specific factors that are
    driving revenues down and/or expenses up
  • Communicate scope and nature of challenges to all
    potentially impacted stakeholders
  • May be necessary for the municipality's
    management to engage in extensive labor
    negotiations with assistance of labor attorneys
  • Restructure creditors long term debt -
    consensual vs. cram down
  • Make the hard decisions about ongoing programs
    and projects-- postponing, scaling back
    cancelling to free up cash
  • Press/Public Relations

Recently Filed Cases
  • Zone of Insolvency Duties

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Preparing for Chapter 9
  • Good faith negotiations with creditors and
    stakeholders legal prerequisite to filing a
    Chapter 9 case
  • Continued negotiations with key constituencies
  • Analyze all possible options short term fixes
    and long term exit strategies

Eligibility Who can File?
  • An entity that is eligible for chapter 11 is
    generally not eligible for chapter 9, and vice
  • Knox County Hospital
  • Adair County Hospital District
  • Seven Counties
  • Only a municipality may file for chapter 9,
    whereas only a person may file for chapter 11
  • Absent certain narrow exceptions, 11 U.S.C.
    section 101(41) defining person excludes
    governmental units
  • Section 303 expressly limits chapter 9 to
    voluntary proceedings (no risk of involuntary

Eligibility Who can File?
  • To be eligible, must satisfy all of the following
    11 U.S.C.109(c)
  • Must be a municipality Means political
    subdivision or public agency or instrumentality
    of a State 11 U.S.C.101(40)
  • Must be specifically authorized under state law
    to be a debtor under federal bankruptcy law
  • Must be insolvent unable to or not paying debts
    as they come due (cash flow test)
  • Must desire to effect a plan to adjust its
    debts and
  • Must (A) have obtained the agreement of majority
    of each impaired class of creditors, or (B) have
    negotiated in good faith with its creditors and
    failed to obtain agreement of majority within
    each class, or (C) be unable to negotiate with
    creditors because such negotiation is
    impracticable, or (D) must reasonably believe
    that a creditor may attempt to obtain an
    avoidable preferential transfer.

Eligibility What is a Municipality?
  • A municipality is a political subdivision or
    public agency or instrumentality of a State.
  • Courts determine whether a petitioner is a
    municipality by evaluating whether the
  • Was created with the sovereign powers of the
    state, such as the power to sue and be sued,
    issue bonds, levy and collect
  • Is subject to control by a state or municipal
    authority or
  • Would have fallen within the jurisdiction of the
    bankruptcy courts under prior bankruptcy

Eligibility Is the Municipality Specifically
  • Pursuant to section 109(c)(2), a municipality may
    only file a chapter 9 case if it has been
    specifically authorized to do so under state law
  • KRS Chapter 66
  • A state may specifically authorize a municipality
    in its capacity as a municipality or by name.
  • A state statute authorizing its subdivisions to
    commence bankruptcy adequately satisfies
    requirement of specific authorization

Eligibility Is the Municipality Insolvent?
  • Pursuant to sections 109(c) and 101(32)(C), a
    municipality must show, as of the date of filing,
    that it is either
  • Generally not paying its debts as they become due
    unless such debts are the subject of a bona fide
    dispute or
  • Unable to pay its debts as they become due

Eligibility Is the Municipality Insolvent?
  • Insolvency Test 1 generally not paying its
    debts as they become due
  • Courts view this as a flexible standard,
  • Consideration of the totality of the
    circumstances and
  • A balancing of the interests of the debtor and
    its creditors/stakeholders

Eligibility Is the Municipality Insolvent?
  • Insolvency Test 2 unable to pay its debts as
    they become due.
  • Courts consider a cash-flow basis i.e., the
    municipality must show that debt payments would
    cause a negative cash balance
  • This test further requires certainty that debts
    will not be met a mere possibility that the
    municipality is cash-flow negative will not
    satisfy this test

Eligibility The Intent Based Requirements
  • Chapter 9 eligibility also requires a
  • Act in good faith and
  • Evidence a desire to effect a plan to adjust its
  • These intent based requirements generally impose
    a duty on a municipality to negotiate with
    creditors and propose a settlement if feasible
    both before and after its chapter 9 petition

Eligibility The Intent Based Requirements
  • There are four independent statutory tests for
    good faith under section 109(c)(5).
  • A court will conclude a municipality filed in
    good faith if it
  • Has obtained the agreement of creditors holding
    at least a majority in amount of the claims of
    each class that such entity intends to impair
    under a plan
  • Has negotiated in good faith with creditors and
    has failed to obtain the agreement of creditors
    holding at least a majority in amount of claims
    of each class that such entity intends to impair
    under a plan
  • Is unable to negotiate with creditors because
    such negotiation is impracticable or
  • Reasonably believes that a creditor may attempt
    to obtain a transfer that is avoidable under 11

Eligibility The Intent Based Requirements
  • There is no statutory language to determine
    whether a municipality desires to effect a plan
    to adjust its debts. Courts interpreting this
    requirement have considered the following
  • Does the municipality have debts that could be
    adjusted in a plan?
  • Has the municipality proposed a reasonable
    settlement with its creditors?
  • Has the municipality administered its case in a
    reasonably timely manner?

Role of Bankruptcy Court
  • Role of a Chapter 11 Court
  • A debtors business in a chapter 11 case is
    generally subject to review of the bankruptcy
    court under a business judgment standard.
  • Additionally, a chapter 11 debtor must obtain the
    approval of the court to, among other things, use
    cash collateral outside of the ordinary course of

Role of Bankruptcy Court
  • Role of a Chapter 9 Court
  • Bankruptcy Code provides that the Chief Judge of
    the Circuit in which the case is filed shall
    assign a judge to each Chapter 9 case
  • Sections 903 and 904 work in tandem to curtail a
    courts ability to control a municipalitys
    governance and spending/constitutional state
    sovereignty issues
  • Bankruptcy court has the discretion to approve or
    reject a plan, or dismiss the case for cause on
    its own initiative, after notice and a hearing
    under sections 930 and 943

Commencement of a Chapter 9 Case
  • In addition to filing the petition itself, the
    municipality must file a number of pleadings in
    order to initiate the bankruptcy case
  • Creditors list
  • List of Creditors Holding the 20 largest
    unsecured claims (Top 20 List)
  • Pleadings establishing eligibility
  • Notice by publication 11 U.S.C.923
  • 11 U.S.C. 103(f) and 11 U.S.C. 901 what else
    within the Bankruptcy Code applies?

Automatic Stay in Ch. 9
  • In all chapter cases, once a petition is filed
    there is an automatic stay on all actions to
    collect against the debtor under 11 U.S.C.362.
  • In a chapter 9 case, Section 922
  • Incorporates all of the protections of the
    automatic stay of 362 and
  • Stays actions against an officer or inhabitant of
    the debtor and actions to enforce liens or
    assessments owed to the debtor.
  • Note The 922 stay does not operate to stay the
    application of pledged special revenues to
    indebtedness secured by such revenues

Retention of Professionals
  • In a chapter 11 case
  • Applications for employment of professionals must
    be filed and require approval of the bankruptcy
  • Interim and final payments to professionals
    during the course of a chapter 11 process require
    notice and court approval
  • In a chapter 9 case
  • No required approval process for employment or

Official Committees
  • The United States Trustee for the relevant
    district may appoint a committee or committees to
    represent the interests of creditors holding
    similar classes of claims. Section 901(a) and
    Section 1102

Preparing the Chapter 9 Plan of Adjustment
  • Plan Process
  • Exclusivity in Filing/Modifying a Plan
  • In a chapter 11 case The debtor has the
    exclusive right, for a statutorily prescribed
    period, to file a plan and after this period has
    expired, or a trustee has been appointed, any
    party in interest may file a plan.
  • In a chapter 9 case only the debtor may file or
    modify a plan at any time.
  • Despite exclusivity, a chapter 9 debtor does
    operate under time constraints in filing a plan
    as the court fixes.

Plan of Adjustment
  • Plan of Adjustment
  • Classifies claims according to their legal
    priority under state and federal law
  • As to each class of similar claims, the plan
    provides a treatment for how that class of
    claims is to be satisfied
  • Must be confirmed by vote of creditors and Court
  • The Disclosure Statement
  • Issued with the proposed Plan of Adjustment
  • Includes an overview of the plan, treatment of
    claims, financial projections
  • Ballots
  • Each class must vote in favor requires ½ in
    number and 2/3 in value of each class
  • Cramdown

Plan Confirmation
  • As in chapter 11, plan confirmation in a chapter
    9 case requires a proposed plan to be feasible
    and in the best interests of creditors per 943
  • Feasible
  • Best Interest of Creditors best of all
    reasonably possible alternatives. Chapter 9 test
    differs from better than liquidation test for
    chapter 11 debtors
  • Regulatory or electoral approval under
    non-bankruptcy law
  • Confirmation Requirements of943(b)

  • Under 944, upon confirmation, a chapter 9 plan
    is binding on all creditors who had actual notice
    or knowledge of the chapter 9 case, and the
    debtor is discharged from all debts except those
    debts that are excepted from discharge by the
  • Chapter 9 creditors must have notice or actual
    knowledge of the case. Ensure that all entities
    get notice of chapter 9 case.
  • Emergence the municipality emerges from chapter
    9 with all of the rights and powers established
    under state law and under the terms of the plan
  • Perform confirmed plan often years in to future


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Out of clutter, find simplicity. From discord,
find harmony. In the middle of difficulty, lies
opportunity. Albert Einstein
The beauty of the soul shines out when a man
bears with composure one heavy mischance after
another, not because he does not feel them, but
because he is a man of high and heroic temper.