Municipal Bankruptcy

Chapter 9 (Municipal Debt Adjustment) Is Unlike Chapter 11 (Corporate Reorganization)


Chapter 9 (Municipal Debt Adjustment) Is Unlike Chapter 11 (Corporate Reorganization) ( ( Depositphoto_ Justice – © JanPietruszka) )

By James Spiotto

IN A CHAPTER 9IN A CHAPTER 11
•   Only the municipality can initiate a Chapter 9 if authorized by state law.•   The corporation (voluntary) or its creditors (involuntary) can initiate a Chapter 11 case if the corporation is a moneyed entity (not a non-for-profit) and insolvent.
•   Only the municipality can file a Plan of Debt Adjustment.•   The corporate debtor (during the exclusive period) or any creditor (after the exclusive period) may file a Plan of Reorganization or Liquidation.
•   The Plan of Debt Adjustment can only adjust debt. It cannot liquidate the municipality.•   A corporate plan can be for reorganization or liquidation.
•   A Labor Agreement can be rejected in a Chapter 9 if the Labor Agreement burdens the municipality and the equities balance in favor of rejection. This is a lower standard that a Chapter 11.•   Section 1113 of the Bankruptcy Code sets forth the requirements for sharing information with employee representatives and workers and the process of information sharing, and the proposal by the debtor prior to the rejection of the Labor Agreement. It is a higher standard than Chapter 9.
•   There is no limitation on damages on real estate leases held by a Trustee or Municipal Building Authority for a lease financing and the lease financing will be treated as a secured debt financing.•   There is a limitation of the greater of one year’s rent or 15% of the remaining terms of the lease not to exceed three years for lease damages in a corporate Chapter 11. It is not treated as secured debt of the corporate debtor if it is a true lease.
•   Payments to defease or pay current interest or principal on bonds or notes within the 90 day preference period before a Chapter 9 filing are not capable of being voided or deemed a preference.•   Payment of principal or interest not secured by collateral could be voided or deemed a preference during the 90 day period prior to filing a Chapter 11 if the holder would receive more than what it would be entitled to in a Chapter 7 liquidation.
•   There are no priorities ahead of unsecured claims for prepetition claims due to employee wages, pensions, accrued vacations, healthcare and other employment benefits.•   There is a priority ahead of unsecured claims of up to $12,475 per employee for pre-petition wages, benefits, accrued vacation and healthcare benefits.
•   “Special Revenues” and “Statutory Liens” are not limited or terminated by a Chapter 9 filing and are intended to continue to be paid to secured creditor and are unimpaired by the Chapter 9 filing (there is no Chapter 11 provisions comparable).•   Accounts receivable and inventory created post petition are not covered by the pre-petition lien of a secured lender and the pre-petition lien is terminated except for “proceeds” of the pre-petition lien.
•   A Bankruptcy Court cannot interfere with any restrictions or requirements of state law regarding a municipality’s exercise of its governmental powers (including payment of statutory liens). The Bankruptcy Court cannot interfere with the property, revenue and affairs of the municipality.•   The corporate debtor cannot take any action outside the ordinary course of business without Bankruptcy Court approval.
•   The municipality can sell its assets, incur debt, borrow money and engage in governmental affairs without the necessity of having to obtain the approval of the Bankruptcy Court.•   The corporate debtor cannot borrow money, sell assets or expand or contract its business without Bankruptcy Court approval.
Related News