File Is Early
in Chapter 9
BY CATHY L. REECE, DIRECTOR &
ANTHONY W. AUSTIN, ASSOCIATE,
FENNEMORE CRAIG, P.C.
Of the more than 33 million bankruptcy cases filed between 1990 and 2012, only 239
were Chapter 9 cases. 1 Chapter 9
filings are rare and are intended
to be a remedy of last resort.
The goal of a municipal bankruptcy
case is to ensure that residents receive
essential services, such as public
health and safety, utilities, and other
critical services, despite the reality that
the government entity cannot pay
its debts. The Chapter 9 framework
enforces the breathing spell of the U.S.
Bankruptcy Code through the automatic
stay while giving the municipality
the ability and flexibility to adjust its
debts through a plan of adjustment.
Vallejo, Stockton, and San Bernardino,
California; Harrisburg, Pennsylvania;
Detroit; Orange County, California;
Jefferson County, Alabama; and Boise
County, Idaho, have all filed Chapter
9 in recent years. Most government
bankruptcy cases, however, were
filed by improvement districts, school
districts, hospital districts, and similar
types of municipal jurisdictions.
One of the first questions a court
must decide in a Chapter 9 is whether
the party before it is even eligible for
bankruptcy. The determination is made
by the court after notice and opportunity
to object, and it is not uncommon for
parties to raise objections to eligibility,
which may take months to resolve. If it is
determined to be eligible for Chapter 9,
the municipality may then file its plan of
adjustment and proceed with the plan
process. If the municipality is not eligible
for Chapter 9, the case may be dismissed.
Section 109(c) of the Bankruptcy Code
outlines five requirements for eligibility. 2
First, the entity must be a municipality.
The Bankruptcy Code specifically
states that a political subdivision, public
agency, or instrumentality of a state
is considered to be a municipality. 3
Second, the municipality must be
authorized to file by the state in which
it is located. Only 28 states have given
permission to their municipalities to
file a Chapter 9 petition. In the others,
municipalities’ financial problems must
be resolved in other ways and with the
participation of the state government.
Third, the municipality must desire to
effect a plan to adjust its debts. This
requirement is one of many good faith
checks built into the statute. The desire