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BUILDING CONSENSUS IN A MUNICIPAL BANKRUPTCY
By: Meagan Costello
Throughout the United States, many municipalities are facing severe financial distress and being forced to examine Chapter
9 (http://www.law.cornell.edu/uscode/text/11/chapter-9) -- the section of the Bankruptcy Code governing municipality
eligibility -- as a means of eliminating debt and restructuring their obligations.
While the causes of financial distress vary among municipalities, municipal creditors are often composed of the same
groups, a mix of “ordinary people” such as pensioners and civil servants, combined with sophisticated financial institutions
and bondholders.
Add these diverse constituencies to the current political environment, mix in the fact that municipalities must often raise taxes
to raise revenue, and the result is often a prolonged political battle that provides little progress towards a real solution.
It is often overlooked that the Bankruptcy Code itself attempts to alleviate the potential for stalemate and assuage fears that if
bankruptcy is “too easy” there will be a rash of unnecessary municipal filings. The Bankruptcy Code does this by generally
requiring municipalities to work with their creditors as a prerequisite to filing for protection under Chapter 9.
Chapter 9 (http://www.law.cornell.edu/uscode/text/11/109) requires the municipality to demonstrate that prior to filing for
bankruptcy, it:
Obtained the agreement of certain creditors to the restructuring plan; or
Negotiated with creditors but was unable to reach a resolution; or
Show that although it did not negotiate with its creditors, engaging in the process would have been impractical.
Additionally, some states, such as California (http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-
0550/ab_506_bill_20111009_chaptered.html) , require a municipality to attend mediation with its creditors before filing for
Chapter 9 protection (unless a state of emergency exists.) Failure to adhere to these requirements can result in dismissal of
the bankruptcy petition.
This pre-filing negotiation process is intended to expedite the Chapter 9 process and maximize its efficiency. Creditors should
use this process wisely and recognize that, no matter what the cause of a municipality’s financial woes, all parties will need to
compromise their claims for a prompt and efficient resolution.
Fundamentally, all restructurings are simply a matter of math: the assets of the debtor must be valued, measured against the
claims asserted, and then distributed accordingly. The more quickly major constituencies (including the taxpayers) accept
the inevitable, the faster municipalities can move forward with reorganization, emerge from Chapter 9 protection and
establish a new sense of normalcy.
FOR MORE ANALYSIS AND COMMENTARY VISIT MUNIBK at http://blog.munibk.com/