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Alabama County Files Largest Ever Chapter 9 Municipal Bankruptcy: Is This A Trend?

Published on November 17, 2011 in Bankruptcy Filings. 0 Comments

By Scott D. Fink, Esq.

Last week, Jefferson County, Alabama filed for bankruptcy relief under Chapter 9 of the Bankruptcy Code as case number 11-5736 in the Northern District of Alabama.   This represents the 12th municipal entity to file a Chapter 9 Bankruptcy this year, following on the heels of a recent Chapter 9 filing by the City of Harrisburg, Pennsylvania last month.[1]    Based on the total amount of debt scheduled, this case represents the largest municipal Bankruptcy filing in U.S. history[2] , rivaling the bankruptcy filed by Orange County, California (case number 94-22272 filed in the Central District of California on December 6, 1994).    Debts related to Jefferson County’s sewer system, alone, exceed $3.1 billion.  According to the County’s bankruptcy counsel, Kenneth Klee, the filing came as a result of the inability of the County and its creditors to reach a deal to restructure the County’s debt, despite negotiations over the past several months.   Jefferson County had previously defaulted on bonds, which were used to refinance the county’s sewer system.  “There was an impasse reached,”  Klee stated to Bloomberg News in an interview last week.  “None of the creditors — zero– signed up to the deal that we have been negotiating for six weeks.”
 
By seeking Chapter 9 relief, the County may now have the ability to restructure and renegotiate its debt obligations over creditors’ objections.  In addition, Chapter 9 gives the County the option of assuming or rejecting executory contracts, which potentially encompass a whole range of potential obligations, including ongoing service contracts, vendor agreements and perhaps even existing agreements with public employee unions.

Many other municipalities around the country will be watching this case closely, as they are faced with their own budget shortfalls, resulting from cuts in state and federal funding, as well as ever-increasing obligations for retirement benefits and health insurance for their workers and retirees.  Whether the decision to utilize Chapter 9 for debt relief becomes a trend or a cautionary tale remains to be seen.  We will continue to monitor the case as it progresses and will provide further updates as events warrant.

If you have any questions on this matter, please contact Mr. Scott Fink, Esq. Scott is an associate in the Bankruptcy Practice of Weltman, Weinberg & Reis Co., LPA located in the Brooklyn Heights office. He can be reached at 216.739.5644 and .

[1] Bloomberg News, November 9, 2011
[2] Id.

City of Harrisburg, PA files for Chapter 9 Municipal Bankruptcy Relief

Published on October 14, 2011 in Bankruptcy Court. 0 Comments

While still in its early stages, the City of Harrisburg, PA’s recent Chapter 9 Bankruptcy filing represents a rare move by a municipality to seek the protection of the Bankruptcy Code.  The City Council authorized the filing of the Chapter 9 case, while the mayor and other city officials opposed, and continue to oppose, the move.  Chapter 9 is designed to provide a municipality with “breathing room” from its creditors’ collection efforts, which will then enable the municipality to formulate a plan of debt adjustment acceptable to a majority of its creditors.  A municipality in Chapter 9 has the ability to adjust debts and other obligations, with a plan of debt adjustment ultimately resulting in the unpaid claims of creditors being reduced and/or extended or restructured, including those unpaid pre-petition claims of a utility or other creditor.
 
Utilities do not have the same rights to adequate assurance of payment in Chapter 9 as they do in Chapter 11.  In Chapter 11, a debtor must provide a form of adequate assurance of payment that is satisfactory to the utility and is limited to a very small list of options (cash deposit, letter of credit, surety bond, certificate of deposit, prepayment or any other form that is mutually agreed upon by the parties).  However, in Chapter 9, the form of adequate assurance is not limited and may include granting of an administrative priority claim.  Further, the requirement that the offer of adequate assurance be “satisfactory to the utility” is not included in Chapter 9.  In addition, Chapter 9 gives the municipality the option of assuming or rejecting executory contracts.  Such contracts could include a whole range of potential obligations, from ongoing service contracts to vendor agreements and, possibly, collective bargaining agreements with its public employee unions.
 
Weltman, Weinberg & Reis Co., LPA will continue to monitor this case and provide additional updates as events dictate.

If you have any questions on this matter, please contact Mr. Scott D. Fink, Esq. Scott is an associate in Bankruptcy focused on the Consumer Bankruptcy and Commercial Bankruptcy Groups with Weltman, Weinberg & Reis Co., LPA. He is located in the Brooklyn Heights, OH office. Scott can be reached at 216.739.5644 and .