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.
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.
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.
History
+Recent Chapter 9 filing counts Year Filings 2012 20 2013 9 2014 12 2015 4 2016 8 2017 7 2018 420196202042021420223
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.MuniNetGuide: Vallejo Bankruptcy Filing Garners Attention in Municipal Finance Circles As of June 2012, the total was around 640. In 2012 there were twenty chapter 9 bankruptcies in the United States, and nine petitions have been filed in 2013.USAtoday, July 22, 2013, Page B1, "Detroit woes rattle muni bond market" by Matt Krantz Since 2010, 81 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.Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 534 (1936) (Cardozo, J., dissent) During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.Pub. L. No. 251, 73d Cong., 2d Sess., 48 Stat. 798 (1934).Public Law Research Institute: Municipal Bankruptcy: State Authorization Under the federal Bankruptcy Code The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water Improvement District No. 1.298 U.S. 513, 56 S. Ct. 892, 80 L. Ed. 1309 (1936).
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).An Act to Amend an Act Entitled An Act to Establish a Uniform System of Bankruptcy Throughout the United States,, Pub. L. No. 302, 75th Cong., 1st Sess., 50 Stat. 653 (1937). This revised act was upheld as constitutional by the Supreme Court in United States v. Bekins.304 U.S. 27 (1938)(holding the Municipal Corporation Bankruptcy Act constitutional under both the Fifth and the Tenth Amendments)
Chapter 9 was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.An Act to Amend Chapter 9 of the Bankruptcy Act to Provide by Voluntary Reorganization Procedures for the Adjustment of the Debts of Municipalities, Pub. L. No. 94-260, 94th Cong., 2d Sess., 90 Stat. 315 (1976). 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.See Steven Lessard & Richard Ngo, Riding the Juice Train to Bankruptcy: Ch. 9 Eligibility After In re Las Vegas Monorail Company, NORTON JOURNAL OF BANKRUPTCY LAW & PRACTICE, Vol. 20, No.3, Article 4 (2011); see also An Act to Amend the Bankruptcy Law to Provide for Special Revenue Bonds and for Other Purposes, PUB. L. NO. 100-597 (1988); Municipal Bankruptcy Amendments, Pub L. No 100597 (1988); 4 COLLIER ON BANKRUPTCY ¶ 902.01A, 902-3 (15th ed. 1996)
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).
Features of Chapter 9
While in many ways similar to other forms of bankruptcy reorganization (esp. Chapter 11),Chapter 9 incorporates the provisions of numerous sections from other chapters of the Bankruptcy Code. See Title 11, United States Code, Section 901. 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.
Collective bargaining Municipalities' ability to re-write collective bargaining agreements is much greater than in a corporate Chapter 11 bankruptcyIn re City of Vallejo, 08-26813-A-9 (E. Dist. Calif.). and can trump state labor protections, allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.
Authorization for filing of municipal bankruptcies
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.See . 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.Municipal Bankruptcy: State Authorization Under the Federal Bankruptcy Code, PLRI
Inclusion of states in Chapter 9
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.
Notable Chapter 9 bankruptcies Prior to 2011 +MunicipalityTypeYearPopulationValueDescriptionStatusSourcesSan Jose Unified School DistrictSchool District1983CompletedSAN JOSE SCHOOLS CAN CUT PAY, U.S. BANKRUPTCY COURT RULESWashington Public Power Supply SystemElectric district1983$2,250,000,000The agency over-invested in nuclear power, attempting to building five such plants at one time, while new conservation measures reduced demandCompletedCopperhill, TennesseeCity1988360CompletedHamilton Creek Metropolitan District (Summit County, CO)Municipal corporation1989$2,000,000The District was unable to pay back bonds intended to fund a housing projectCompletedHAMILTON CREEK METROPOLITAN DISTRICT v. BONDHOLDERS COLORADO BONDSHARESRichmond Unified School DistrictSchool District1991After 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 municipalityIn re Richmond Unified Sch. Dist., 133 B.R. 221, 224