A years-long political duel over whether California should control local government bankruptcies was resolved on October 9, 2011. Chapter 9 of the Bankruptcy Code provides specifically for the reorganization of cities and towns, taxing districts, municipal utilities, and school districts. California Governor Jerry Brown (D) signed legislation prohibiting local municipalities from filing for bankruptcy unless they first negotiate with creditors using a “neutral evaluation process” or vote to declare a fiscal emergency after a public hearing.
On November 23, 2011, the Bankruptcy Court for the Middle District of Pennsylvania dismissed Harrisburg, Pennsylvania’s Chapter 9 bankruptcy petition because, shortly before the filing, the state legislature expressly prohibited Harrisburg from seeking relief under Chapter 9.
On January 6, 2012, Judge Thomas Bennett of the United States Bankruptcy Court for the Northern District of Alabama (the "Court") issued a 57-page opinion in the chapter 9 bankruptcy case of Jefferson County, Alabama (the "County") on several critical jurisdictionally related issues raised by the state court appointed receiver of the County's sewer system, the indenture trustee for the special revenue warrants for the sewer system (the "Indenture Trustee") and certain other joining creditors.
Leading the Past Week
Fallout from the Great Recession continues to figure prominently in world headlines, as governments around the globe struggle to implement or extend programs designed to jumpstart stalled economies and attempt to gauge the health of financial institutions deemed “too big to fail” or otherwise critical to long-term prospects for recovery.
Department of Community and Economic Development (DCED) Secretary C. Alan Walker filed a petition with the Commonwealth Court to appoint David Unkovic as the receiver for the financially distressed state capital, Harrisburg.
The city’s failure to come to an agreement on an acceptable recovery plan has forced the commonwealth to take this action,‖ Governor Tom Corbett said in a statement. ―As more time goes by without action, the city’s financial situation continues to get worse.‖
As expected the Harrisburg City Council has filed a reply to the numerous objections to the Chapter 9 filing of Harrisburg initiated by the City Council. The City Council’s brief (harrisburg response.pdf) appears to be the only timely filed reply to the objections to the Chapter 9 filing.
On November 11th, Reuters reported on the November 10 filing of bankruptcy court protection by Jefferson County, Alabama, the largest municipal bankruptcy in U.S. history. The county declared bankruptcy after failing to reach an agreement with its creditors on its $3.14 billion debt. Hearings are set for November 21 and December 15 to decide who maintains control of the sewer system and to determine eligibility for Chapter 9. Bankruptcy.
The bankruptcy court in the City of Harrisburg's Chapter 9 proceeding held a hearing on Tuesday, November 1 on the Mayor’s motion for an order clarifying that the City had the ability to pay its debts in the ordinary course. The court found that given the limitation on its jurisdiction under Chapter 9 of the Bankruptcy Code and given that Bankruptcy Code Section 363 (which deals with generally with the use, sale or lease of property) is not incorporated into Chapter 9, the City does have the authority to pay its vendors in the ordinary course, including vendors with amounts owed
Numerous municipalities in California and elsewhere are struggling financially. Indeed, Harrisburg, Pennsylvania and Central Falls, Rhode Island have both recently filed for Chapter 9 protection. State governments may have neither the economic reserves nor the political will to bail out troubled cities and counties. These circumstances have raised the focus on Chapter 9 as a tool for reorganizing municipality debt obligations and has deepened the debate between states and their municipalities about the best strategies for addressing a fiscal crisis.