Chapter 9, Title 11, United States Code

Chapter 9, Title 11, United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assisting them in the restructuring of their debt. On July 18, 2013, Detroit, Michigan became the largest city in the history of the United States to file for Chapter 9 bankruptcy protection. Jefferson County, Alabama, in 2011, and Orange County, California, in 1994, are also notable examples. The term 'municipality' denotes "a political subdivision or public agency or instrumentality of a State," but does not include a state itself.[1] States are therefore unable to file for bankruptcy even though they have defaulted in their obligations.

Bankruptcy in the
United States
Bankruptcy in the United States
Chapters
Aspects of bankruptcy law

History
Recent Chapter 9 filing counts
YearFilings
20065
20076
20084
200912
20106
201113
1st half 20127

The first municipal bankruptcy legislation was enacted in 1934 during the Great Depression.[2] Although Congress attempted to draft the legislation so as not to interfere with the sovereign powers of the states guaranteed by the Tenth Amendment to the Constitution, the Supreme Court held the 1934 Act unconstitutional as an improper interference with the sovereignty of the states.[2] Congress enacted a revised Municipal Bankruptcy Act in 1937, which was upheld by the Supreme Court. The law has been amended several times since 1937.[2]

From 1937 to 2008 there were fewer than 600 municipal bankruptcies.[3] As of June 2012, the total was around 640.[4] In 2012 there were twelve chapter 9 bankruptcies in the United States, and five petitions have been filed in 2013.[5] Since 2010, 61 petitions have been filed.[6]

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes.[7] During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.[8][9] The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District.[10]

However, a revised act remedying the constitutional deficiencies was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX).[11] This revised act was upheld as constitutional by the Supreme Court in United States v. Bekins.[12]

Chapter 9 was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.[13] The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.

In 1988, Chapter 9 was amended by Congress to provide statutory protection from § 552(a) lien stripping provisions to revenue bonds issued by municipalities. This was addressed with the classification of these bonds as "special revenues" under the newly minted § 928(a) and § 922(d) exemption of special revenues from the automatic stay provisions of § 362.[14]

To prevent overlap with Chapter 11, § 101(41) of the U.S. Bankruptcy Code (11 U.S.C. § 101(41)) defines the term "person" to exclude many "governmental units" as defined in § 101(27), and "municipality" as defined in § 101(40).

Features of Chapter 9

While in many ways similar to other forms of bankruptcy reorganization (esp. Chapter 11),[15] Chapter 9 has a number of unique characteristics. Because municipalities are entities of State governments, the power of the bankruptcy court is limited to some extent by the Tenth Amendment to the United States Constitution.[16]

Collective bargaining

Municipalities' ability to re-write collective bargaining agreements is much greater than in a corporate Chapter 11 bankruptcy[17] and can trump state labor protections,[18] allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.[19]

Authorization for filing of municipal bankruptcies

Section 109(c) of the U.S. Bankruptcy Code provides that a municipality may be a debtor in a Chapter 9 bankruptcy case only if the municipality is specifically authorized to be a debtor by State law, or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor.[20] In 23 states, Chapter 9 authorization laws are either unclear or otherwise prohibited for municipalities. Three states (Colorado, Illinois, and Oregon) grant a very limited authorization to file for bankruptcy. Illinois, for example, only grants Chapter 9 authorization to the Illinois Power Agency.

A total of 12 states authorize Chapter 9 upon conditions met and further action of state, officials or other entity; and the remainder (12) specifically authorize bankruptcy.[21][22]

Inclusion of states in Chapter 9
Main article: State defaults in the United States

Neither Chapter 9 nor any other part of U.S. bankruptcy law allows a state to file for bankruptcy, although states have defaulted on their obligations.[23] The last U.S. state default took place in 1933, when Arkansas defaulted on its bonds.[24]

Certain politicians and scholars have argued that the law should be amended to allow states to file for bankruptcy.[23][25][26] Proponents say that an orderly bankruptcy is a better solution than the two alternatives: (1) defaults, which are violations of debt obligations outside of the bankruptcy process), and (2) bailouts by the federal government.[27] Opponents, including representatives of the National Governors Association, say that amending the law to allow states to seek bankruptcy protection could create doubts in the municipal bond market.[24]

Notable Chapter 9 bankruptcies
Municipality Type Year Population Value Description Status Sources
San Jose Unified School District School District 1983 Completed [28]
Washington Public Power Supply System Electric district 1983 $2,250,000,000 The agency over-invested in nuclear power, attempting to building five such plants at one time, while new conservation measures reduced demand Completed
Copperhill, Tennessee City 1988 360 Completed [29]
Hamilton Creek Metropolitan District (Summit County, CO) Municipal corporation 1989 $2,000,000 The District was unable to pay back bonds intended to fund a housing project Completed [30]
Richmond Unified School District School District 1991 After the District filed its petition, the state loaned the District funds to bridge its budget gap, and also appointed an administrator to take over management of the District. The administrator requested that the bankruptcy court dismiss the petition, and this was granted. Withdrawn by municipality [31]
Bridgeport, Connecticut City 1991 141,600 In 1991, the petition for relief filed by the city of Bridgeport, Connecticut, was denied. The case was dismissed because the bankruptcy court concluded that Bridgeport, although financially distressed, was not insolvent within the meaning of the eligibility criteria of Chapter 9. Denied by courts [32]
Lipscomb, Alabama City 1991 2,800 Completed [33]
North Bonneville, Washington City 1991 400 Completed [34]
North Courtland, Alabama City 1992 970 Completed [35]
Orange County, California County 1994 2,500,000 $1,700,000,000[36] County treasurer Robert Citron made risky investments, leading to the county's bankruptcy Completed [37][38]
Kinlock, Missouri City 1994 2,700 Completed [39]
Pritchard, Alabama City 1999 28,600 Due to inability to pay pensions. The city would again declare bankruptcy in 2009. Completed [40]
Desert Hot Springs, California City 2001 16,500 $6,000,000 The city lost a housing discrimination lawsuit Completed [41][42]
West Jefferson Amusement and Public Park Authority Parks District 2002 The agency was unable to pay construction bonds for Visionland Park amusement park. Completed [43]
Millport, Alabama City 2005 1,100 $3,500,000 The city lost tax revenue after a factory closed Completed [44]
Los Osos Community Services District Sewer District 2006 16,500 This sewer district in Los Osos, California was unable to pay debt for a wastewater facility Completed [45]
West Contra Costa Healthcare District, San Pablo, California Hospital District 2006 $50,000,000 Completed [46]
Moffett, Oklahoma City 2007 120 The state revoked the town's ability to issue traffic tickets as it had operated as a speed trap. Completed [47]
Valley Health Systems District, Hemet and Sun City, California Hospital District 2007 $100,000,000 Completed [48]
Gould, Arkansas City 2008 830 The town spent money that should have been withheld to pay employee income taxes. Completed [49]
Vallejo, California City 2008 115,900 The city was unable to meet pension obligations. Completed [50]
Pierce County Housing Authority, Pierce County, Washington Housing District 2008 The housing authority was unable to pay mold-related lawsuits Completed [51]
Westfall Township, Pennsylvania Township 2009 2,300 The city lost a lawsuit. Completed [52]
Prichard, Alabama City 2009 22,600 The city was unable to pay pensions. The city has already declared bankruptcy for the same reason in 1999. Completed [53]
Sarpy County Sanitation Improvement District, Sarpy County, Nebraska Sewer District 2009 The sewer district faced decreased housing development and less revenue as a result. Completed [54]
New York City Off-Track Betting Corporation Gambling District 2009 After being unable to pay its debts due to mismanagement, the public corporation was dissolved in 2010 Completed [55]
Connector 2000 Association, Greenville County, South Carolina Road District 2010 The road district operated the Southern Connector, a portion of Interstate 185, and went bankrupt after toll collections were less than expected. Completed [56]
Hamtramck, Michigan City 2010 22,400 In 2010, the city of Hamtramck, Michigan requested permission from the Governor under Michigan's authorizing law to file a petition for Chapter 9 Bankruptcy,[57] but was denied. Instead of bankruptcy, the treasury advised that Hamtramck be offered a selection of loan options.[58] Denied by courts
Washington Park, Illinois City 2010 4,200 Washington Park, Illinois December 2010. Washington Park briefly emerged from bankruptcy and then filed a new petition for bankruptcy which was rejected by the judge, who stated there was no Illinois state law enabling a municipality to file a Chapter 9 bankruptcy petition. Denied by courts [59][60]
Las Vegas Monorail Company, Las Vegas Private company 2010 The monorail company was ruled to be a private company and not a municipality, so it does not qualify for Chapter 9 bankruptcy. Denied by courts [61][62]
Central Falls, Rhode Island City 2011 19,300 The city was unable to pay its obligations and petitioned to be put into receivership in 2010, as Rhode Island does not generally permit Chapter 9 filings. The state appointed receiver or overseer assumed all financial responsibilities from the mayor. Rhode Island's receivership law was rewritten to allow the receiver the ability to file a petition for Chapter 9 federal bankruptcy and Central Falls has done that.[63] Completed [63][64]
Jefferson County, Alabama County 2011 658,400 $4,000,000,000 Over $4 billion in debt (largest Chapter 9 bankruptcy until 2013 Detroit bankruptcy filing,)[36] from sewer revenue bonds tainted by an interest rate swap bribery scandal with JPMorgan and county commissioner Larry Langford, and bond insurance credit rating collapse in the late-2000s subprime mortgage crisis, followed by the occupation tax being declared unlawful in Alabama.[38][65] (see Jefferson County, Alabama: Sewer construction and bond swap controversy) Completed
Boise County, Idaho County 2011 7,000 The County lost a judgement for violating the Fair Housing Act. The bankruptcy petition was dismissed by the judge after concluding the municipality had “sufficient surplus moneys” to satisfy the judgment and continue operations. Denied by courts [66][67]
Harrisburg, Pennsylvania City 2011 49,000 The city was approximately $400 million in debt, due in part to a failed trash incinerator. The bankruptcy judge dismissed the bankruptcy petition on the grounds that not all necessary branches of the municipal government had authorized the filing of the petition. Denied by courts [68][69]
Stockton, California City 2012 291,700 Completed [70]
San Bernardino, California City 2012 209,900 $1,000,000,000 Completed [71]
Mendocino Coast Healthcare District Hospital District 2012 Completed [72]
Mammoth Lakes, California City 2012 8,200 The city lost a $43 million lawsuit, but its bankruptcy case was voluntarily dismissed after Mammoth Lakes reached a settlement. Withdrawn by municipality [73]
Detroit, Michigan City 2013 700,000 $18,000,000,000 The City of Detroit had been in decline for a long time, due to the closure of auto factories, white flight, and other factors, leading it unable to pay its obligations Completed, under investigation [74][75][76]
Hardeman County Memorial Hospital, Quanah, Texas Hospital District 2013 Completed [77]
Hillview, Kentucky City 2015 9,000 Completed [78]
Fairfield, Alabama City 2020 10,000 [79]
Chester, Pennsylvania City 2022 32,535 [80]

Note: Population refers to the population served at the time of the bankruptcy and may not be the same as its current population. Dollar values are as reported at the time and do not reflect current value.

Notable defaults that did not result in Chapter 9 bankruptcy

See also

References
  1. 11 U.S.C. § 101(40))(
  2. "Chapter 9 - Bankruptcy Basics". United States Courts. Retrieved 14 November 2019.
  3. MuniNetGuide: Vallejo Bankruptcy Filing Garners Attention in Municipal Finance Circles Archived January 6, 2009, at the Wayback Machine
  4. Wozniacka, Gosia (2012-06-27). "Stockton bankruptcy is hard hit for city retirees". Boston.com. Retrieved 2013-07-20.
  5. USAtoday, July 22, 2013, Page B1, "Detroit woes rattle muni bond market" by Matt Krantz
  6. Governing, September 14, 2017, Bankrupt Cities, Municipalities List and Map
  7. Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 534 (1936) (Cardozo, J., dissent)
  8. Pub. L. No. 251, 73d Cong., 2d Sess., 48 Stat. 798 (1934).
  9. Public Law Research Institute: Municipal Bankruptcy: State Authorization Under the federal Bankruptcy Code Archived 2008-12-12 at the Wayback Machine
  10. 298 U.S. 513, 56 S. Ct. 892, 80 L. Ed. 1309 (1936).
  11. An Act to Amend an Act Entitled An Act to Establish a Uniform System of Bankruptcy Throughout the United States,, Pub. L. No. 302, 75th Cong., 1st Sess., 50 Stat. 653 (1937).
  12. 304 U.S. 27 (1938)(holding the Municipal Corporation Bankruptcy Act constitutional under both the Fifth and the Tenth Amendments)
  13. An Act to Amend Chapter 9 of the Bankruptcy Act to Provide by Voluntary Reorganization Procedures for the Adjustment of the Debts of Municipalities, Pub. L. No. 94-260, 94th Cong., 2d Sess., 90 Stat. 315 (1976).
  14. See Steven Lessard & Richard Ngo, Riding the Juice Train to Bankruptcy: Ch. 9 Eligibility After In re Las Vegas Monorail Company, NORTON JOURNAL OF BANKRUPTCY LAW & PRACTICE, Vol. 20, No.3, Article 4 (2011); see also An Act to Amend the Bankruptcy Law to Provide for Special Revenue Bonds and for Other Purposes, PUB. L. NO. 100-597 (1988); Municipal Bankruptcy Amendments, Pub L. No 100597 (1988); 4 COLLIER ON BANKRUPTCY ¶ 902.01A, 902-3 (15th ed. 1996)
  15. Chapter 9 incorporates the provisions of numerous sections from other chapters of the Bankruptcy Code. See Title 11, United States Code, Section 901.
  16. John Knox; Marc A. Levinson (2009). Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress (PDF). Orrick, Herrington & Sutcliffe, LLP. pp. 21–22. Archived from the original (PDF) on 2014-08-23. Retrieved 2013-07-21.
  17. In re City of Vallejo, 08-26813-A-9 (E. Dist. Calif.).
  18. "Contracts Now Seen as Being Rewritable". The New York Times. 2009-03-31.
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  28. SAN JOSE SCHOOLS CAN CUT PAY, U.S. BANKRUPTCY COURT RULES
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  30. HAMILTON CREEK METROPOLITAN DISTRICT v. BONDHOLDERS COLORADO BONDSHARES
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  60. Judge denies Washington Park's bankruptcy bid
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