Chapter 9 Basics H. Slayton Dabney, Jr. King & Spalding LLP 1185 Avenue of Americas New York, NY 10036-4003 212-556-2287 Eligibility Requirements.. Must be a municipality (political subdivision or public agency or instrumentality of a State); see In re Las Vegas Monorail Co., 429 B.R. 770 (Bankr.D.Nev.2010) Legislative Authority Municipality must be specifically authorized under state law to be a chapter 9 debtor Approximately one-half of states currently have legislation providing some form of authorization Certain of these statutes contain limitations as to the type of entity that may file, and some require further approval from the state prior to any filing Insolvency Requirement In chapter 9, the debtor bears a burden of proving that it is insolvent as of the date of filing the petition; see In re City of Vallejo, 408 B.R. 280 (B.A.P. 9th Cir. 2009) A municipality will be considered insolvent ifit can show that it is (i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute, or (ii) unable to pay its debts as they become due The "generally not paying its debts as they become due" test is a more factual analysis of what payments have been missed and their relation to the municipality's overall financial position This material was published for the 2011 American Bankruptcy Institute ("ABI"), Northeast Bankruptcy Conference. It is used with the permission of the author and ABI.
In determining whether the municipality is unable to pay its debts as they become due, courts will generally look at the cash flow of the municipality rather than using a balance sheet test ~ Must desire to effect a plan to adjust its debts ~ Good Faith Requirements In order to qualify as a chapter 9 debtor, a municipality must show that it either Obtained the agreement of creditors holding at least a majority in amount of the claims of each class that the municipality intends to impair under a plan Negotiated in good faith with creditors but failed to reach an agreement Is unable to negotiate with creditors because negotiations are impracticable, or reasonably believes that a creditor may attempt to obtain an avoidable preference A bankruptcy judge may also dismiss a chapter 9 petition if the debtor did not file the petition in good faith Case Administration ~ Automatic stay Additional automatic stay provisions are applicable that prohibit actions against officers and inhabitants of the debtor if the action seeks to enforce a claim against the debtor Prohibits a creditor from bringing a mandamus action against an officer of a municipality on account of a prepetition debt Prohibits a creditor from bringing an action against an inhabitant of the debtor to enforce a lien on or arising out of taxes or assessments owed to the debtor Limited applicability of the stay 2
Committees Chapter 9 petition does not operate to stay application of pledged special revenues to payment of indebtedness secured by such revenues An indenture trustee or other paying agent may apply pledged funds to payments coming due or distribute the pledged funds to bondholders without violating the automatic stay Creditors' committee has powers and duties same as those of a committee in a chapter 11 case It cannot be appointed until after the entry of the order for relief, which may take months in a chapter 9 where eligibility is challenged Debtor cannot be ordered to pay the professionals employed by a committee DMSLlBRAR YOI-I6482493.1 3
Other Considerations Special Revenues ~ In chapter 9, bondholders secured by a lien on special revenues retain their lien on the special revenues post-petition. However, the security interest is subject to the necessary operating expenses of the project involved The holder of a claim payable solely from special revenues will not be of revenue bonds into general obligation bonds Preferences ~ In chapter 9 cases, a transfer of property by a municipality to or for the benefit of a bondholder on account of such bond may not be avoided as a preference ~ Other avoidance powers still applicable Collective Bargaining Agreements ~ A chapter 9 municipal debtor enjoys greater latitude than a debtor under chapter 11 with respect to modification or rejection of labor agreements in bankruptcy The bankruptcy court should permit rejection if the municipal debtor demonstrates that the CBA burdens the estate, that, after careful scrutiny, the equities balance in favor of rejection, and that the prospects of reaching a deal in the near future are not good N.L.R.B v. Bildisco & Bildisco, 465 U.S. 513 (1984) rejection standards apply to rejection of CBAs in Chapter 9 since 1113 of the Bankruptcy Code is not expressly incorporated by 90I(a); see In re City of Vallejo, CA, 432 B.R. 262 (E.D.Cal. 2010) Unique Characteristics ~ Chapter 9 only contains Bankruptcy Code provisions expressly set forth in Chapter 9 or expressly incorporated by reference in 90 1. Therefore, many of the features of Chapter II (e.g. 363) simply do not exist in Chapter 9. DMSLlBRAR YO 1 1648249).1
~ There are two critical stages in a Chapter 9. First, whether the filing requirements have been met and therefore an order for relief can be entered. The first stage can involve litigation that plays out over an extended period oftime. The second stage is whether the debtor can file a plan of adjustment that meets the confirmation standards. In the interim, many of the events that normally take place in Chapter 11 are eliminated by the 10 th Amendment of the United States Constitution. An obvious exception to this comment is the ability of Chapter 9 debtors to challenge CBAs subsequent to the entry of an order of relief in an effort to assist with their reorganization efforts. Practical Uses ~ Chapter 9 provides municipal debtors with a means to possibly escape economically burdensome CBAs. Chapter 9 provides an opportunity to prepackage restructuring solutions with regard to municipal bond debt that otherwise would require unanimous consent of bondholder constituents. The expense and political aspects of Chapter 9 are substantial and suggest the process should only be undertaken for good and sound reasons. 5