Friday, July 15, 2011

Bankruptcy Bar? States Aim to Deny Distressed Cities Chapter 9 Option

The Depression-era bankruptcy code provision known as Chapter 9, which lets local governments seek protection from creditors while restructuring debt, is a rarely used tool.

Since 1937 there have been a total of just 623 Chapter 9 filings in the United States, with 252 of them coming in the past 30 years. Compare that to the 13,500 Chapter 11 filings entered in 2010 alone.

Yet with local governments throughout the U.S. continuing to suffer the lingering effects of a sputtering economy, state lawmakers are apparently sensing a possible surge in new Chapter 9 filing--and are moving to stop it before it starts.

Consider Pennsylvania, where the capital city of Harrisburg--as detailed in the July/August issue of sibling publication The American Lawyer--is teetering on the brink of insolvency.

Facing a debt load of $300 million, Harrisburg has enrolled in Pennsylvania's so-called Act 47 program for distressed municipalities and is now weighing a state-approved recovery plan that calls for the sale of municipal assets, a wage freeze for city workers, and the renegotiation of union contracts. The Harrisburg City Council is to vote on the package July 19. Should the council reject the plan, Mayor Linda Thompson must come up with an alternative solution to the city's fiscal problems.

The vote on the Act 47 plan comes some eight months after the City Council hired Cravath, Swaine & Moore pro bono for advice on how to address its mounting financial woes. Cravath, which is now counseling the city on the state-issued recovery package, was initially brought in to advise on the ramifications of a possible bankruptcy filing.

But Chapter 9 is no longer an option. Last month Pennsylvania lawmakers passed a law that prohibits any financially distressed third-class city in the state--a category that includes Harrisburg--from filing for bankruptcy through June 2012. (more)