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LJN NewslettersNewsSectionsThe Bankruptcy Strategist

Rediscovering Chapter 9 As Financial Woes of Municipalities Escalate

By Erica M. Ryland and Mark G. Douglas
May 27, 2008

Last month, we discussed the fact that even though Chapter 9 of the Bankruptcy Code has been in effect for over 30 years, fewer than 100 Chapter 9 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. This, however, may be changing. We now continue that discussion.

Bankruptcy Court's Limited Role

Due to constitutional restrictions, the bankruptcy court's role in a Chapter 9 case is quite limited. Section 903 of the Bankruptcy Code expressly reserves to the states the power to control municipalities that file for Chapter 9 protection, with the caveat that any state law (or equivalent judgment) prescribing a method of composition among a municipality's creditors is not binding on dissenters. Section 904 further provides that, without the debtor's consent, the court may not 'interfere' with any of the debtor's 'political or governmental powers,' any of the debtor's property or revenues or the use or enjoyment of its income-producing property. Thus, unlike a Chapter 11 debtor, a municipal debtor is not restricted in its ability to use, sell or lease its property (section 363 does not apply in a Chapter 9 case), and the court may not become involved in the debtor's day to day operations.

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