City Chapter 9 bankruptcy 'easier said than done'

  • By Mark Basch
  • | 12:00 p.m. July 18, 2012
  • | 5 Free Articles Remaining!
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While you might continue to hear the word “bankruptcy” tossed around in the next few weeks during negotiations for the City’s pension obligations and other budget items, it’s likely only an idle threat.

Chapter 9 of the U.S. Bankruptcy Code allows cities and counties, as well as other municipal entities such as utilities and school districts, to file for bankruptcy.

But it’s a rare and difficult tool for municipalities to use to fix their financial problems.

“It’s easier said than done,” said lawyer John Macdonald of the Akerman Senterfitt firm.

Macdonald has represented parties in many corporate bankruptcy filings but said he has never been involved in a Chapter 9 case.

In fact, the Associated Press reports that there have been only 640 total U.S. filings under Chapter 9 since it was authorized by Congress in 1937.

That’s fewer than the number of bankruptcies that have been filed each month under all chapters in the Jacksonville Division of the U.S. Bankruptcy Court Middle District of Florida.

A check of the U.S. Court system’s Pacer database shows only 25 Chapter 9 filings since the beginning of 2011, and only six of those were made by cities or counties.

The last Chapter 9 filing in Florida was in 1995 by the Lake Apopka Natural Gas District.

“It’s just not a chapter that is utilized with any degree of regularity,” Macdonald said.

“Chapter 9 is relatively unchartered territory,” said lawyer Gardner Davis of the Foley & Lardner firm. That would make Chapter 9 a very uncertain solution to negotiating a reduction in the City’s pension obligations.

“Both the City and the unions face some risk of what the process would produce,” said Davis.

Even talking about bankruptcy has risks, he said.

“The City enjoys a strong bond rating. Talk of Chapter 9 does not do the bond rating any good,” Davis said.

One requirement for filing Chapter 9 is that the municipality must prove it is insolvent and unable to pay its debts. It also has to show it negotiated in good faith with its creditors.

Boise County, Idaho, filed for Chapter 9 last year after being hit with a $4 million judgment in a lawsuit. However, a U.S. bankruptcy judge dismissed the case, saying Boise did not prove that it was insolvent.

The federal bankruptcy code also has provisions that leave it up to individual states to decide if their municipalities can file for Chapter 9.

Pennsylvania’s capital city of Harrisburg filed for Chapter 9 last year, but its case was thrown out by a bankruptcy judge who ruled that state law did not allow it to file.

Florida law allows municipalities to file for Chapter 9, but only if authorized by the governor, Macdonald said.

Basically, a municipality has to work with the governor to find solutions to its financial woes outside of court before seeking bankruptcy relief.

The good news about a municipality in Chapter 9 is that there are more limits on what the bankruptcy court can do, as opposed to a corporation that files to reorganize under Chapter 11.

While the court can appoint a trustee to run a business while it is in Chapter 11, the court does not have the power to appoint a trustee to run the municipality.

Also, the court can’t order a municipality to be liquidated to pay off its creditors.

After the Harrisburg and Boise filings were dismissed, only four Chapter 9 filings made by cities or counties since the beginning of 2011 are still moving forward.

That includes two filings within the past three weeks in California by the City of Stockton and the Town of Mammoth Lakes.

The city council in San Bernardino, Calif., also voted July 10 to authorize the city to go into Chapter 9, but a filing has not been made.

The two other ongoing Chapter 9 filings were made in 2011. One is the city of Central Falls, a small Rhode Island town of 1.5 square miles and about 18,000 residents, according to its website.

The other current case is Jefferson County, Ala. It filed the largest Chapter 9 case ever in November with $4.15 billion in debt linked to sewer system bonds.

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