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Rediscovering Chapter 9
Even though Chapter 9 of the Bankruptcy Code has been in effect for over 30 years, fewer than 100 cases have been filed during that time. Municipal bankruptcy cases ' or, more accurately, proceedings involving the adjustment of a municipality's debts ' are a rarity, compared with reorganization cases under Chapter 11. The infrequency of Chapter 9 filings can be attributed to a number of factors, including the reluctance of municipalities to resort to bankruptcy protection due to its associated stigma and negative impact, perceived or otherwise, on a municipality's future ability to raise capital in the debt markets. Also, Chapter 9's insolvency requirement, which exists nowhere else in the Bankruptcy Code, actually discourages municipal bankruptcy filings.
As the enduring fallout from the sub-prime mortgage disaster and the commercial credit crunch that it precipitated continue to paint a grim picture portending hard times ahead for the U.S. economy, municipalities are suffering from a host of troubles. Among them are skyrocketing mortgage foreclosure rates and a resulting loss of tax base, bad investments in derivatives and the higher cost of borrowing due to the meltdown of the bond mortgage industry and the demise (temporary or not) of the $330 billion market for auction rate securities ('ARS'), which municipalities have relied upon for nearly two decades to float inexpensive debt. The cost of borrowing in the ARS market has almost doubled since January 2008, according to the Securities Industry and Financial Markets Association. This confluence of financial woes is likely to propel an increasing number of municipalities to the brink of insolvency and beyond. This, in turn, may mean a significant uptick in the volume of Chapter 9 filings. In anticipation of Chapter 9's emergence from relative obscurity, it is important to understand what degree of utility federal bankruptcy law has in addressing municipal financial problems.
Constitutional Conflict
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