Part IV of James Spiotto’s Series on Fiscal Distress Myths & Realities: Whether a Municipality Can File for Chapter 9 Bankruptcy
Fiscal Distress Myths and Realities Part I: Default Rate
Fiscal Distress Myths and Realities Part II: Use of Chapter 9
Fiscal Distress Myths and Realities Part III: Consequences of Default
Myth: Any State or Local Government Can File for Chapter 9 Bankruptcy
Reality: States Cannot File for Chapter 9 Bankruptcies and Only 12 States Allowed their Municipalities to File for Chapter 9 Municipal Bankruptcy 12 Other States Only Allow a Filing if a State Official and Agency Approves the Filing
No Chapter 9 for States:
States can not file for Chapter 9 bankruptcy because they are co-sovereigns with the Federal Government under the U.S. Constitution (10th Amendment). States have the right as sovereigns to permit their respective sub-sovereigns (municipalities) to file.
Who Can Be A Chapter 9 Debtor?:
Not every municipality can be a debtor in Chapter 9. Only municipalities in states that specifically authorize their municipalities to file can use Chapter 9. States as co-sovereigns of the federal government cannot use Chapter 9 or any federal bankruptcy forum. To be a debtor in a Chapter 9, an entity must be:
- A municipality
- Specifically authorized under state law to be a Chapter 9 debtor. Twelve states have statutory provisions in which the state specifically authorizes filing (AL, AZ, AR, ID, MN, MO, MT, NE, OK, SC, TX, WA), another twelve states authorize a filing conditioned on a further act of the state, an elected official or state entity (CA, CT, FL, KY, LA, MI, NJ, NC, NY, OH, PA, RI). Three states (CO, OR and IL) grant limited authorization, two states prohibit filing (GA) but one of them (IA) has an exception to the prohibition. The remaining 21 are either unclear or do not have specific authorization.
- Insolvent (unable to pay its debt as they mature).
- Willing to effectuate a plan.
- Either has obtained the agreement of creditors holding majority amount of the claim of each class that the municipality intends to impair or has attempted to negotiate in good faith, but was unable to do so or it was impractical to negotiate with creditors or a creditor is attempting to obtain a preference.
Look out for more parts of James Spiotto’s Fiscal Distress Myths & Realities coming soon.
James E. Spiotto, Co-Publisher © James E. Spiotto. All rights reserved