The Chapter 9 Crucible

Under other chapters of the Bankruptcy Code, the constituents can predictably be corralled and branded: debtor, secured creditors, unsecured creditors, equity security holders, perhaps a trustee and, of course, the Office of the United States Trustee. In a Chapter 9 case, this defined universe of identifiable interests is expanded to include the more amorphous opinions and positions of the public, the media and politicians of various shapes and sizes. Such opinions and positions are often at odds with the legal dictates of the Bankruptcy Code, but recent experience acts as a reminder that such constituents must be “classified” and “treated” during the course of a Chapter 9 case just as if they were creditors holding claims.

This point is often made before a Chapter 9 bankruptcy case has even begun. Section 109(c) of the Bankruptcy Code restricts eligibility under Chapter 9 of the Bankruptcy Code to a municipality that is: 1) specifically authorized 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; 2) is insolvent; 3), wishes to effect a plan to adjust its debts; and 4) has sought from its primary creditors an agreement regarding their claims or has negotiated in good faith, or is unable to negotiate because it is impracticable. The nebulous nature of these conditions to entry has provided both economic and non-economic stakeholders an opening to advance their agendas and interests through an eligibility contest.