Chapter 9 Bankruptcy

Chapter 9 bankruptcies, also known as municipal bankruptcies, have origins relating back to the Great Depression. Chapter 9 bankruptcies provide a framework for taxing authorities (cities, municipal utilities, counties, school districts, etc.) to reorganize and adjust debt obligations, while receiving temporary protection from creditors. Congress initially created municipality bankruptcies via the 1934 Municipal Bankruptcy Act. Although this legislation was later deemed unconstitutional by the US Supreme Court in 1936 via the case Ashton v. Cameron County Water Improvement Dist. No. 1, a later revision passed in 1937. The Municipal Bankruptcy Act of 1937 was upheld later by the Supreme Court in United States v. Bekins.

Only a “municipality” may file for a Chapter 9 bankruptcy. A municipality is defined as a “political subdivision or public agency or instrumentality of a State.” Once this requirement is satisfied, a municipality must satisfy four additional eligibility requirements under Section 109(c) of the Bankruptcy Code:

1. The municipality must be specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;
2. The municipality must be insolvent;
3. The municipality must desire to effect a plan to adjust such debts; and
4. The municipality must satisfy one of the following:a. obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;b. negotiate in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;

   c. be unable to negotiate with creditors because such negotiation is impracticable; or

   d. reasonably believe that a creditor may obtain a preference, pursuant to 11 U.S.C. § 547.

Once these requirements are met, the municipality must voluntarily seek relief under the Bankruptcy Code. After, the municipality has filed, notice must be given as to the commencement of proceedings and the order for relief. Provided no objection is filed and accepted and the court does not pre-emptively dismiss the case, the bankruptcy proceedings may continue.

As with any bankruptcy, a municipality considering this a Chapter 9 filing should consult a bankruptcy attorney. If you are considering bankruptcy, contact the Indiana bankruptcy attorneys at McNeely Law to discuss your options.

This McNeely Law LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.