|Bankruptcy in the|
|Bankruptcy in the United States|
|Aspects of bankruptcy law|
Chapter 9, Title 11, United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assisting them in the restructuring of their debt. On July 18, 2013, Detroit, Michigan became the largest city in the history of the United States to file for Chapter 9 bankruptcy protection. Jefferson County, Alabama, in 2011, and Orange County, California, in 1994, are also notable examples. The term 'municipality' denotes "a political subdivision or public agency or instrumentality of a State," but does not include a state itself. States are therefore unable to file for bankruptcy, even though they have defaulted in their obligations.
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The first municipal bankruptcy legislation was enacted in 1934 during the Great Depression. Although Congress attempted to draft the legislation so as not to interfere with the sovereign powers of the states guaranteed by the Tenth Amendment to the Constitution, the Supreme Court held the 1934 Act unconstitutional as an improper interference with the sovereignty of the states. Congress enacted a revised Municipal Bankruptcy Act in 1937, which was upheld by the Supreme Court. The law has been amended several times since 1937.
From 1937 to 2008 there were fewer than 600 municipal bankruptcies. As of June 2012 the total was around 640. In 2012 there were twelve chapter 9 bankruptcies in the United States, and five petitions have been filed in 2013. Since 2010, 61 petitions have been filed.
Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities. The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District.
However, a revised act remedying the constitutional deficiencies was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX). This revised act was upheld as constitutional by the Supreme Court in United States v. Bekins.
Chapter 9 was largely unchanged until it was amended in 1976 in response to New York City's financial crisis. The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.
In 1988, Chapter 9 was amended by Congress to provide statutory protection from § 552(a) lien stripping provisions to revenue bonds issued by municipalities. This was addressed with the classification of these bonds as "special revenues" under the newly minted § 928(a) and § 922(d) exemption of special revenues from the automatic stay provisions of § 362.
To prevent overlap with Chapter 11, § 101(41) of the U.S. Bankruptcy Code (11 U.S.C. § 101(41)) defines the term "person" to exclude many "governmental units" as defined in § 101(27), and "municipality" as defined in § 101(40).
While in many ways similar to other forms of bankruptcy reorganization (esp. Chapter 11), Chapter 9 has a number of unique characteristics. Because municipalities are entities of State governments, the power of the bankruptcy court is limited to some extent by the Tenth Amendment to the United States Constitution.
Municipalities' ability to re-write collective bargaining agreements is much greater than in a corporate Chapter 11 bankruptcy and can trump state labor protections, allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.
Section 109(c) of the U.S. Bankruptcy Code provides that a municipality may be a debtor in a Chapter 9 bankruptcy case only if the municipality is specifically authorized to be a debtor by State law, or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor. In 23 states, Chapter 9 authorization laws are either unclear or otherwise prohibited for municipalities. Three states (Colorado, Illinois and Oregon) grant a very limited authorization to file for bankruptcy. Illinois, for example, only grants Chapter 9 authorization to the Illinois Power Agency.
A total of 12 states authorize Chapter 9 upon conditions met and further action of state, officials or other entity; and the remainder (12) specifically authorize bankruptcy.
Main article: State defaults in the United States
Neither Chapter 9 nor any other part of U.S. bankruptcy law allows a state to file for bankruptcy, although states have defaulted on their obligations. The last U.S. state default took place in 1933, when Arkansas defaulted on its bonds.
Certain politicians and scholars have argued that the law should be amended to allow states to file for bankruptcy. Proponents say that an orderly bankruptcy is a better solution than the two alternatives: (1) defaults, which are violations of debt obligations outside of the bankruptcy process), and (2) bailouts by the federal government. Opponents, including representatives of the National Governors Association, say that amending the law to allow states to seek bankruptcy protection could create doubts in the municipal bond market.
|San Jose Unified School District||School District||1983||Completed|||
|Washington Public Power Supply System||Electric district||1983||$2,250,000,000||The agency over-invested in nuclear power, attempting to building five such plants at one time, while new conservation measures reduced demand||Completed|
|Hamilton Creek Metropolitan District (Summit County, CO)||Municipal corporation||1989||$2,000,000||The District was unable to pay back bonds intended to fund a housing project||Completed|||
|Richmond Unified School District||School District||1991||After the District filed its petition, the state loaned the District funds to bridge its budget gap, and also appointed an administrator to take over management of the District. The administrator requested that the bankruptcy court dismiss the petition, and this was granted.||Withdrawn by municipality|||
|Bridgeport, Connecticut||City||1991||141,600||In 1991, the petition for relief filed by the city of Bridgeport, Connecticut, was denied. The case was dismissed because the bankruptcy court concluded that Bridgeport, although financially distressed, was not insolvent within the meaning of the eligibility criteria of Chapter 9.||Denied by courts|||
|North Bonneville, Washington||City||1991||400||Completed|||
|North Courtland, Alabama||City||1992||970||Completed|||
|Orange County, California||County||1994||2,500,000||$1,700,000,000||County treasurer Robert Citron made risky investments, leading to the county's bankruptcy||Completed|||
|Pritchard, Alabama||City||1999||28,600||Due to inability to pay pensions. The city would again declare bankruptcy in 2009.||Completed|||
|Desert Hot Springs, California||City||2001||16,500||$6,000,000||The city lost a housing discrimination lawsuit||Completed|||
|West Jefferson Amusement and Public Park Authority||Parks District||2002||The agency was unable to pay construction bonds for Visionland Park amusement park.||Completed|||
|Millport, Alabama||City||2005||1,100||$3,500,000||The city lost tax revenue after a factory closed||Completed|||
|Los Osos Community Services District||Sewer District||2006||16,500||This sewer district in Los Osos, California was unable to pay debt for a wastewater facility||Completed|||
|West Contra Costa Healthcare District, San Pablo, California||Hospital District||2006||$50,000,000||Completed|||
|Moffett, Oklahoma||City||2007||120||The state revoked the town's ability to issue traffic tickets as it had operated as a speed trap.||Completed|||
|Valley Health Systems District, Hemet and Sun City, California||Hospital District||2007||$100,000,000||Completed|||
|Gould, Arkansas||City||2008||830||The town spent money that should have been withheld to pay employee income taxes.||Completed|||
|Vallejo, California||City||2008||115,900||The city was unable to meet pension obligations.||Completed|||
|Pierce County Housing Authority, Pierce County, Washington||Housing District||2008||The housing authority was unable to pay mold-related lawsuits||Completed|||
|Westfall Township, Pike County, Pennsylvania||Township||2009||2,300||The city lost a lawsuit.||Completed|||
|Prichard, Alabama||City||2009||22,600||The city was unable to pay pensions. The city has already declared bankruptcy for the same reason in 1999.||Completed|||
|Sarpy County Sanitation Improvement District, Sarpy County, Nebraska||Sewer District||2009||The sewer district faced decreased housing development and less revenue as a result.||Completed|||
|New York City Off-Track Betting Corporation||Gambling District||2009||After being unable to pay its debts due to mismanagement, the public corporation was dissolved in 2010||Completed|||
|Connector 2000 Association, Greenville County, South Carolina||Road District||2010||The road district operated the Southern Connector, a portion of Interstate 185, and went bankrupt after toll collections were less than expected.||Completed|||
|Hamtramck, Michigan||City||2010||22,400||In 2010, the city of Hamtramck, Michigan requested permission from the Governor under Michigan's authorizing law to file a petition for Chapter 9 Bankruptcy, but was denied. Instead of bankruptcy, the treasury advised that Hamtramck be offered a selection of loan options.||Denied by courts|
|Washington Park, Illinois||City||2010||4,200||Washington Park, Illinois December 2010. Washington Park briefly emerged from bankruptcy and then filed a new petition for bankruptcy which was rejected by the judge, who stated there was no Illinois state law enabling a municipality to file a Chapter 9 bankruptcy petition.||Denied by courts|||
|Las Vegas Monorail Company, Las Vegas||Private company||2010||The monorail company was ruled to be a private company and not a municipality, so it does not qualify for Chapter 9 bankruptcy.||Denied by courts|||
|Central Falls, Rhode Island||City||2011||19,300||The city was unable to pay its obligations and petitioned to be put into receivership in 2010, as Rhode Island does not generally permit Chapter 9 filings. The state appointed receiver or overseer assumed all financial responsibilities from the mayor. Rhode Island's receivership law was rewritten to allow the receiver the ability to file a petition for Chapter 9 federal bankruptcy and Central Falls has done that.||Completed|||
|Jefferson County, Alabama||County||2011||658,400||$4,000,000,000||Over $4 billion in debt (largest Chapter 9 bankruptcy until 2013 Detroit bankruptcy filing,) from sewer revenue bonds tainted by an interest rate swap bribery scandal with JPMorgan and county commissioner Larry Langford, and bond insurance credit rating collapse in the late-2000s subprime mortgage crisis, followed by the occupation tax being declared unlawful in Alabama. (see Jefferson County, Alabama: Sewer construction and bond swap controversy)||Completed|
|Boise County, Idaho||County||2011||7,000||The County lost a judgement for violating the Fair Housing Act. The bankruptcy petition was dismissed by the judge after concluding the municipality had “sufficient surplus moneys” to satisfy the judgment and continue operations.||Denied by courts|||
|Harrisburg, Pennsylvania||City||2011||49,000||The city was approximately $400 million in debt, due in part to a failed trash incinerator. The bankruptcy judge dismissed the bankruptcy petition on the grounds that not all necessary branches of the municipal government had authorized the filing of the petition.||Denied by courts|||
|San Bernardino, California||City||2012||209,900||$1,000,000,000||Completed|||
|Mendocino Coast Healthcare District||Hospital District||2012||Completed|||
|Mammoth Lakes, California||City||2012||8,200||The city lost a $43 million lawsuit, but its bankruptcy case was voluntarily dismissed after Mammoth Lakes reached a settlement.||Withdrawn by municipality|||
|Detroit, Michigan||City||2013||700,000||$18,000,000,000||The City of Detroit had been in decline for a long time, due to the closure of auto factories, white flight, and other factors, leading it unable to pay its obligations||Completed, under investigation|||
|Hardeman County Memorial Hospital, Quanah, Texas||Hospital District||2013||Completed|||
Note: Population refers to the population served at the time of the bankruptcy and may not be the same as its current population. Dollar values are as reported at the time and do not reflect current value.
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