9 11 the reorganization of the u s

The first municipal bankruptcy legislation was enacted in during the Great Depression. Although Congress took care 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 Act unconstitutional as an improper interference with the sovereignty of the states.

9 11 the reorganization of the u s

The first municipal bankruptcy legislation was enacted in during the Great Depression. Although Congress took care 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 Act unconstitutional as an improper interference with the sovereignty of the states.

Cameron County Water Improvement Dist. Congress enacted a revised Municipal Bankruptcy Act inPub. The law has been amended several times since In the more than 60 years since Congress established a federal mechanism for the resolution of municipal debts, there have been fewer than municipal bankruptcy petitions filed.

Although chapter 9 cases are rare, a filing by a large municipality can— like the filing by Orange County, California—involve many millions of dollars in municipal debt. Purpose of Municipal Bankruptcy The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts.

Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Although similar to other chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors.

Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs.

Indeed, due to the severe limitations placed upon the power of the bankruptcy court in chapter 9 cases required by the Tenth Amendment and the Supreme Court's decisions in cases upholding municipal bankruptcy legislationthe bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under chapter The functions of the bankruptcy court in chapter 9 cases are generally limited to approving the petition if the debtor is eligibleconfirming a plan of debt adjustment, and ensuring implementation of the plan.

As a practical matter, however, the municipality may consent to have the court exercise jurisdiction in many of the traditional areas of court oversight in bankruptcy, in order to obtain the protection of court orders and eliminate the need for multiple forums to decide issues.

Eligibility Only a "municipality" may file for relief under chapter 9. The term "municipality" is defined in the Bankruptcy Code as a "political subdivision or public agency or instrumentality of a State. The definition is broad enough to include cities, counties, townships, school districts, and public improvement districts.

It also includes revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities, and gas authorities.

Section c of the Bankruptcy Codes sets forth four additional eligibility requirements for chapter 9: Commencement of the Case Municipalities must voluntarily seek protection under the Bankruptcy Code. They may file a petition only under chapter 9.

A case under chapter 9 concerning an unincorporated tax or special assessment district that does not have its own officials is commenced by the filing of a voluntary "petition under this chapter by such district's governing authority or the board or body having authority to levy taxes or assessments to meet the obligations of such district.

A municipal debtor must file a list of creditors. Normally, the debtor files the list of creditors with the petition. However, the bankruptcy court has discretion to fix a different time if the debtor is unable to prepare the list of creditors in the form and with the detail required by the Bankruptcy Rules at the time of filing.

Assignment of Case to a Bankruptcy Judge One significant difference between chapter 9 cases and cases filed under other chapters is that the clerk of court does not automatically assign the case to a particular judge. This provision was designed to remove politics from the issue of which judge will preside over the chapter 9 case of a major municipality and to ensure that a municipal case will be handled by a judge who has the time and capability of doing so.

The Bankruptcy Rules provide that the clerk, or such other person as the court may direct, is to give notice. The notice must also be published "at least once a week for three successive weeks in at least one newspaper of general circulation published within the district in which the case is commenced, and in such other newspaper having a general circulation among bond dealers and bondholders as the court designates.

The court typically enters an order designating who is to give and receive notice by mail and identifying the newspapers in which the additional notice is to be published. The Bankruptcy Code permits objections to the petition.

Typically, objections concern issues like whether negotiations have been conducted in good faith, whether the state has authorized the municipality to file, and whether the petition was filed in good faith.

If an objection to the petition is filed, the court must hold a hearing on the objection. The court may dismiss a petition if it determines that the debtor did not file the petition in good faith or that the petition does not meet the requirements of title If the petition is not dismissed upon an objection, the Bankruptcy Code requires the court to order relief, allowing the case to proceed under chapter 9.

Automatic Stay The automatic stay of section of the Bankruptcy Code is applicable in chapter 9 cases. The stay operates to stop all collection actions against the debtor and its property upon the filing of the petition.

Additional automatic stay provisions are applicable in chapter 9 that prohibit actions against officers and inhabitants of the debtor if the action seeks to enforce a claim against the debtor.

Thus, the stay prohibits a creditor from bringing a mandamus action against an officer of a municipality on account of a prepetition debt. It also prohibits a creditor from bringing an action against an inhabitant of the debtor to enforce a lien on or arising out of taxes or assessments owed to the debtor.

Section d of title 11 limits the applicability of the stay. Under that section, a chapter 9 petition does not operate to stay application of pledged special revenues to payment of indebtedness secured by such revenues. Thus, an indenture trustee or other paying agent may apply pledged funds to payments coming due or distribute the pledged funds to bondholders without violating the automatic stay.

9 11 the reorganization of the u s

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9 11 the reorganization of the u s

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11 U.S. Code § - Exceptions to discharge | US Law | LII / Legal Information Institute