Resnick Law, P.C.

Chapter 9 Municipal Bankruptcy Lawyers

What is a Chapter 9 Bankruptcy?

Title 11 is the section of Federal Law that regulates Bankruptcy proceedings in the Bankruptcy Courts. Chapter 9 of Title 11 is the chapter of the bankruptcy code that is available exclusively to municipalities to assist them in the restructuring of municipal debts. To learn more about Detroit’s Ch. 9 bankruptcy filing visit our Chapter 9 Bankruptcy FAQs.

A “municipality” is defined by the Bankruptcy Code as a political subdivision or public agency or instrumentality of a State, so a municipality includes many types of governmental units besides cities.

What happens when the City of Detroit, or any municipality files Bankruptcy?

The Automatic Stay.

Once the Bankruptcy is filed, an automatic stay is put into place. The automatic stay requires all creditors to immediately stop all collection actions against the debtor. The stay prohibits a creditor from bringing or continuing any legal action against the city to collect on its debts, or to force an officer of the city to perform any actions that relate to a pre-petition debt.

You may ask the Bankruptcy Court to grant you relief from the automatic stay. We have successfully obtained that permission for our clients, and we can help you obtain relief from the automatic stay as well. To learn more, please schedule an initial consultation at the Bloomfield Hills law firm of Resnick Law, P.C., by calling 248-642-5400 or contact us online, or read our frequently asked questions on Detroit’s municipal bankruptcy.

Initial Legal Challenges to the City’s Eligibility to file Bankruptcy.

Not every city that files for Bankruptcy protection will be allowed to proceed. In order to file a Bankruptcy case, the city must show that it is eligible to file.   In virtually every case, creditors file legal challenges to the city’s eligibility to file a Bankruptcy case. To be eligible, under the Bankruptcy Code the debtor must be:

• A “municipality”;
• Authorized to file by state law, or by a governmental officer who, under state law, is permitted to file;
• Shown to have attempted to negotiate with creditors in good faith, or that there are too many creditors  and negotiation is impractical;
• Insolvent;
• Intending on filing a plan of reorganization; and
• Able to show that they have a plan of reorganization that has been accepted by a majority of creditors in each creditor class;

The Plan of Reorganization.

If the city is eligible to file Bankruptcy, it will file a Plan of Reorganization for its debts.  Only the city may file a plan.  Creditors are not allowed to file a competing plan.   A city’s plan will usually seek to adjust its debts by extending maturity dates of debts, reducing the amount of principal or interest that is owed to creditors, or refinancing the municipal debt by obtaining a new loan.

Chapter 9 is significantly different from other Bankruptcy chapters in that the law does not require the municipality to liquidate assets of the municipality and to distribute the proceeds to creditors.  They may do so, but are not required to do so.

The Bankruptcy Court’s Limited Power

The Court is not as active in Chapter 9 cases as it is in corporate reorganizations under Chapter 11. The functions of the Bankruptcy Court in Chapter 9 cases are limited to a determination of the debtor’s eligibility to file a Chapter 9 case, approving the petition, confirming a plan of debt adjustment, and ensuring implementation of the plan.  The Bankruptcy Code severely limits the power of the Court over operations of a municipal debtor.  For instance:

• The Bankruptcy Court may not “interfere with – (1) any of the political or governmental powers of the municipal debtor; (2) any of the property or revenues of the municipal debtor; or (3) the municipal debtor’s use or enjoyment of any income-producing property” unless the debtor consents or the plan so provides.
• The Bankruptcy Court may not control or veto the debtor’s day-to-day activities.  They are not subject to Court approval.
• The debtor may borrow money without Court authority.
• The Bankruptcy Court may not interfere with the operations of the debtor or with the debtor’s use of its property and revenues.
• The Chapter 9 debtor may employ professionals without Court approval.   The Court may only review the reasonableness of the fees at confirmation.
• Strict limits on the Court’s authority is necessary to ensure the constitutionality of Chapter 9 and to avoid the possibility that the Court might substitute its control over the political or governmental affairs or property of the debtor for that of the state and the elected officials of the municipality.

Confirmation – The Court has final say over whether or not the debtor’s plan is approved or confirmed.  There are general conditions required for confirmation of a plan. If the plan meets these requirements, the Court must confirm the plan whether or not a creditor objects:

1. The plan complies with the Bankruptcy Rules;
2. The legal fees of the debtor’s attorneys and fees paid to professionals who assisted the debtor have been fully disclosed to the Court and creditors, and are reasonable;
3. State or Federal Law does not prohibit anything that the plan requires to be done to carry out the plan;
4. The plan provides that on the date of confirmation, all creditors with filed and accepted claims will receive full payment of their claim, or they have agreed to less than full payment;
5. If the debtor requires the approval of any regulatory agency, or if approval of any legislature is necessary to carry out any provision of the plan, that approval has been obtained.
6. The plan is in the best interests of creditors and is feasible.

Discharge – Similar to a Chapter 7 or Chapter 11 case, a municipal debtor receives a discharge in a Chapter 9 case when the plan is confirmed.  The discharge can be delayed further if the plan provides for the payment of any money, and/or the issuance of any bonds or securities.

There are two exceptions to a discharge in Chapter 9 cases. The confirmation and discharge will not discharge any debt that the plan says will not be discharged, and will not discharge a debt to a creditor that did not receive notice of the case, and did not have actual knowledge of the case.

I am a contractor with a Municipality that has filed a bankruptcy.  Should I consult with an attorney?

Yes.  If you have contracts with a municipality that has filed for Bankruptcy protection, you undoubtedly will have questions regarding how the Bankruptcy case will impact you.  Vendors and contractors are strongly recommended to contact a Bankruptcy attorney before making any decisions regarding their performance under their contracts with a municipality that has filed a Chapter 9 case.

Your existing contracts may be cancelled, but if your contract is important to the continuing operation of the city, they may be “assumed” and continued.   Chapter 9 proceedings are designed so that there is as little as possible interruption in the everyday on-going obligations of the city.  In a Chapter 9 case, the city is not required to seek the Bankruptcy Court’s approval to conduct its business, to borrow money, and/or to enter into contracts with vendors.

If you provide critical supplies or services to the city, there is a good likelihood that the city will continue to honor its contract and you should continue to receive payments.  After consultation with counsel, critical vendors should consider contacting the city departmental officer responsible for their contract to discuss how that department intends to deal with the contract and to determine specifically how future transactions, obligations, and payments are to be handled.

Will you be paid for past products and services?

If your contract requires you to provide products or services in the future, do you continue to provide those products and perform those services, uninterrupted?  The answer to that question is complicated.  Each client’s situation is unique and must be evaluated on its own terms. Our lawyers will do that and we encourage you to talk to us about your situation and concerns today.   Any delay can be costly.

To learn more, please schedule an initial consultation at the law firm of Resnick Law, P.C., by calling 248-642-5400 or contact us online.  Our attorneys will explain the Chapter 9 Bankruptcy process, what the municipality can and cannot do and what other options might be available for you.  We can help you  understand the Chapter 9 legal process, and assess the status of your current contracts and your ability to receive payment for amounts due on completed contracts.  You choose the course of action. We will provide the services and representation needed to achieve your goals. Contact us now via our online form or call 248-642-5400.