Chapter 9, Title 11, United States Code

Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts. The two largest municipal bankruptcies under Chapter 9 have been Jefferson County, Alabama in 2011 and Orange County, California in 1994.

History

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.^[1][2] The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District,;^[3] however, a similar act was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX).^[4] Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.^[5] 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.^[6]

To prevent overlap Chapter 11, 11 USC § 101(41), of the US Bankruptcy code defines the term "person" to exclude many so called "governmental units" as defined in 11 USC § 101(27), and "Municipality" as defined in § 101(40).

Since 1937, there have been fewer than 600 municipal bankruptcies.^[7]

Features of Chapter 9

While in many ways similar to other forms of bankruptcy reorganization (Chapters 11, 12, and 13), Chapter 9 has a number of unique characteristics. Because municipalities are entities of State governments, the power of Congress to adjust their debts through bankruptcy is limited considerably by the 10th and 11th Amendments.

Collective bargaining

Municipalities' ability to re-write collective bargaining agreements are much easier than in a corporate Chapter 11 bankruptcy^[8][9] and can trump state labor protections^[10] allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.^[11]

"Congress did not extend the same projection [sic] to public employees that it did to those working in the private sector under Chapter 11 bankruptcy rules."^{[12][clarification needed]}

Some states do not permit Chapter 9 filings without authorization

A municipality in some states must seek enactment of a specific statute particular to it authorizing the filing.^[13]

New Jersey, Connecticut, and Kentucky simply give a state appointed official or body the power to approve a filing.^[14]

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^[15]
• Orange County, California, 1994, $1.7 billion^[16] (largest municipal bankruptcy until November 2011, and $3 billion when adjusted for inflation^[17]), on interest rate-related losses^[18] (see Robert Citron).
• Prichard, Alabama, 1999, due to inability to pay pensions.^[19]
• Desert Hot Springs, California, 2001, due to losing a housing discrimination lawsuit.^[20][21]
• Millport, Alabama, 2005, due to loss of sales tax revenues after factory closing.^[22]
• Los Osos, California, 2006, debt related to a wastewater facility. ^[23]
• Moffett, Oklahoma, 2007, due to loss of ability to issue traffic tickets.^[24]
• Gould, Arkansas, 2008,^[25] due to spending money withheld to pay employee income taxes.
• Vallejo, California, 2008, due to inability to pay pension obligations.^[26]
• Westfall Township, Pike County, Pennsylvania, 2009, due to losing a lawsuit^[27]
• Washington Park, Illinois, 2009, due to high license fees for topless bars being ruled unconstitutional.^[28]
• Prichard, Alabama, 2009, due to inability to pay pensions and especially state mandated pension increases.^[29]
• Central Falls, Rhode Island, August 2011, due to inability to pay obligations, especially pensions.^[30]
• Harrisburg, Pennsylvania, October 2011, approximately $400 million in debt, due in part to a failed trash incinerator.^[31]
• Jefferson County, Alabama, November 2011, over $4 billion in debt (largest Chapter 9 bankruptcy to date),^[16] from sewer revenue bonds tainted by a 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.^[18][32] (see Jefferson County, Alabama: Sewer construction and bond swap controversy)

Municipalities placed under receivership

The town of Central Falls, Rhode Island petitioned to be put into receivership in 2010, as Rhode Island does not 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 declare Chapter 9 Federal Bankruptcy and Central Falls has done exactly that.^[33]

Hospital district Chapter 9 bankruptcies

A Hospital District is a governmental entity with taxing authority that owns and operates medical facilities.

• The Valley Health Systems district, California^[34]
• West Contra Costa Healthcare District, California^[35]

Other entities that declared Chapter 9 bankruptcy

• San Jose Unified School District, 1983.^[36]
• 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.^[37]
• Pierce County Housing Authority, 2008, in Pierce County, Washington, residents' lawsuits due to mold in properties.^[38]
• Sarpy County Sanitation Improvement District, 2009, in Sarpy County, Nebraska, due to reduced real estate development.^[39]
• New York City Off-Track Betting Corporation, December 2009, in New York City, due to mismanagement,^[40]
• Connector 2000 Association, operator of the Southern Connector, 2010, due to toll collections being less than expected.^[41]

Chapter 9 bankruptcies that were declared but withdrawn

• Bridgeport, Connecticut, 1991^[42]

Petitions for permission that were denied

• In 2010, the city of Hamtramck, Michigan requested permission from the Governor to declare Chapter 9 Bankruptcy,^[43] but was denied. Instead of bankruptcy, the treasury advised that Hamtramck be offered a selection of loan options.^[44]
• Washington Park, Illinois January, 2011. Washington Park briefly emerged from bankruptcy and then filed a new petition for bankruptcy which was rejected by the judge, who claimed there was no state law enabling a municipality to declare bankruptcy.^[45]
• Boise County, Idaho, March 2011, due to judgment against the county for violating the Fair Housing Act.^[46] The claim was dismissed by the judge after concluding the municipality has “sufficient surplus moneys” to satisfy the judgment and continue operations.^[47]

Notable defaults that did not result in Chapter 9 bankruptcy

• Cleveland, Ohio, 1978, dispute with city creditors over sale of a utility.^[48]

Notable Bankruptcies that were declared ineligible for Chapter 9 bankruptcy

• The Las Vegas Monorail was declared a private entity, 2010.^[49][50]

See also

• Financially Distressed Municipalities Act, State of Pennsylvania Act. 47

References

1. ^ Pub. L. No. 251, 73d Cong., 2d Sess., 48 Stat. 798 (1934).
2. ^ Public Law Research Institute: Municipal Bankruptcy: State Authorization Under the federal Bankruptcy Code
3. ^ 298 U.S. 513, 56 S. Ct. 892, 80 L. Ed. 1309 (1936).
4. ^ An Act to Amend an Act Entitled An Act to Establish a Uniform System of Bankruptcy Throughout the United States,, Pub. L. No. 302, 75th Cong., 1st Sess., 50 Stat. 653 (1937).
5. ^ An Act to Amend Chapter IX of the Bankruptcy Act to Provide by Voluntary Reorganization Procedures for the Adjustment of the Debts of Municipalities, Pub. L. No. 94-260, 94th Cong., 2d Sess. (1976).
6. ^ See Steven Lessard & Richard Ngo, Riding the Juice Train to Bankruptcy: Ch. 9 Eligibility After In re Las Vegas Monorail Company, NORTON JOURNAL OF BANKRUPTCY LAW & PRACTICE, Vol. 20, No.3, Article 4 (2011); see also An Act to Amend the Bankruptcy Law to Provide for Special Revenue Bonds and for Other Purposes, PUB. L. NO. 100-597 (1988); Municipal Bankruptcy Amendments, Pub L. No 100597 (1988); 4 COLLIER ON BANKRUPTCY ¶ 902.01A, 902-3 (15th ed. 1996)
7. ^ MuniNetGuide: Vallejo Bankruptcy Filing Garners Attention in Municipal Finance Circles
8. ^ In re City of Vallejo, 08-26813-A-9 (E. Dist. Calif.).
9. ^ Cf. 11 U.S.C. § 1113
10. ^ http://www.nytimes.com/2009/03/31/business/economy/31contracts.html?hp
11. ^ http://www.law.com/jsp/article.jsp?id=1202429132330
12. ^ P.G. explores bankruptcy option
13. ^ Bankruptcy Bloodbath May Hit Muni Owners: Joe Mysak (Update1)
14. ^ Municipal Bankruptcy: State Authorization Under the Federal Bankruptcy Code, PLRI
15. ^ HAMILTON CREEK METROPOLITAN DISTRICT v. BONDHOLDERS COLORADO BONDSHARES
16. ^ ^{a b} Van Anglen, Jim; Condon, Bernard (November 9, 2011 7:10 PM). "Alabama county files for largest municipal bankruptcy". Associated Press. Montgomery, Alabama. http://www.cbsnews.com/8301-501369_162-57321878/al-county-files-for-largest-municipal-bankruptcy/. Retrieved 2011-11-10. 
17. ^ Consumer Price Index (estimate) 1800–2008. Federal Reserve Bank of Minneapolis. Retrieved December 7, 2010.
18. ^ ^{a b} Church, Steven; Selway, William; McCarty, Dawn (Wed Nov 09 23:46:41 GMT 2011). "Jefferson County Alabama Files Bankruptcy". Bloomberg.com (New York City: Bloomberg L.P.). http://www.bloomberg.com/news/2011-11-09/alabama-s-jefferson-county-files-for-u-s-s-biggest-municipal-bankruptcy.html. Retrieved 2011-11-10. 
19. ^ Analysis of Factors Associated with the Municipal Bankruptcy of Pichard, Alabama
20. ^ The City of Desert Hot Springs filed Chapter 9 bankruptcy papers in late December, making it the first California city in at least 25 years to seek bankruptcy protection
21. ^ California City files for bankruptcy protection
22. ^ Millport making a comeback
23. ^ After 6 years, Los Osos CSD bankruptcy plan approved
24. ^ Oklahoma: Speed Trap Town Goes Bankrupt
25. ^ Bankruptcy filed, tiny town hopes to rise again
26. ^ Vallejo's path to bankruptcy - Vallejo Times Herald
27. ^ [1]
28. ^ Washington Park seeks bankruptcy protection
29. ^ Prichard files for bankruptcy protection again
30. ^ Rhode Island's Central Falls files for bankruptcy
31. ^ Tavernise, Sabrina (12 October 2011). "City Council in Harrisburg Files Petition of Bankruptcy". The New York Times. http://www.nytimes.com/2011/10/13/us/harrisburg-pennsylvania-files-for-bankruptcy.html?_r=1. Retrieved 16 October 2011. 
32. ^ Selway, William (Fri Sep 16 17:41:31 GMT 2011). "Jefferson County’s Journey From Sewer-Bond Scandal to Settlement: Timeline". Bloomberg.com (New York City: Bloomberg L.P.). http://www.bloomberg.com/news/2011-09-16/jefferson-county-alabama-s-path-from-scandal-to-debt-settlement-timeline.html. Retrieved 2011-11-10. 
33. ^ [2] Rhode Island city overseer starts by firing mayor
34. ^ Hospitals file for Chapter 9 bankruptcy : North County Times - Californian
35. ^ Doctors Medical Center files for Chapter 9 bankruptcy protection - San Francisco Business Times:
36. ^ SAN JOSE SCHOOLS CAN CUT PAY, U.S. BANKRUPTCY COURT RULES
37. ^ VisionLand debt prompts Chapter 9 filing
38. ^ Pierce County's low-cost housing filing for bankruptcy
39. ^ Sarpy County SID Files For Bankruptcy
40. ^ New York City Off-Track Betting Corporation Facts
41. ^ Connector 2000 Association Files Chapter 9 Bankruptcy
42. ^ Former Bridgeport CT mayors speak out
43. ^ Letter requesting permission from the Governor of Michigan for Hamtramck to declare bankruptcy
44. ^ CORRECT: Michigan Forbids City To Seek Municipal Bankruptcy
45. ^ Judge throws out Ill. village's bankruptcy case
46. ^ Boise County files for bankruptcy
47. ^ Judge rejects Boise County’s bankruptcy filing
48. ^ Three Decades After Cleveland Defaulted on Its Debts, Cities Face Recession Budget Woes
49. ^ Las Vegas Monorail Determined Ineligible for Chapter 9 Bankruptcy
50. ^ Steven Lessard & Richard Ngo, Riding the Juice Train to Bankruptcy: Chapter 9 Eligibility After In Re Las Vegas Monorail Company, NORTON ANNUAL SURVEY OF BANKRUPTCY LAW, Vol. 20, No.3, Article 4 (2011).

External links

• Adjustment of Debts of a Municipality
• GASB Accounting and Financial Reporting for Chapter 9 Bankruptcies
• Number of Ch. 9 filings by year data from the American Bankruptcy Institute
• Avoiding and Using Chapter 9 in Times of Fiscal Stress, john knox and marc levinson, ORRICK
• Ohio Local Government Fiscal Emergency/Fiscal Watch Law Fact Sheet
• Municipal Bankruptcy in Perspective, A Joint Publication of PAR and BGR
• Michigan Public Act 72 of 1990, Local Government Fiscal Responsibility Act, and the Appointment of Emergency Financial Managers
• all the Chapter 9, Title 11, United States Code on the Cornell University Law School
• Municipal Bankruptcy in Alabama - Kerem Deal
• AN EXAMINATION OF MUNICIPAL FINANCE REFORM REGARDING MUNICIPAL BANKRUPTCIES IN THE UNITED STATES - Kerem Deal