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Municipal Bankruptcy: a Guide for Public Finance Attorneys

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Municipal Bankruptcy: a Guide for Public Finance Attorneys Municipal Bankruptcy: A Guide for Public Finance Attorneys OCTOBER 2011 NATIONAL ASSOCIATION OF BOND LAWYERS NOTICE The following is provided to further legal education and research and is not intended to provide legal advice or counsel as to any particular situation. None of the National Association of Bond Lawyers, the Municipal Law Committee or the Bankruptcy Project Subcommittee takes responsibility for the completeness or accuracy of this material. In addition, this publication is introductory in nature and therefore does not address all aspects surrounding the topic of municipal bankruptcy or the related issues summarized or examples given herein. You are encouraged to conduct independent research of original sources of authority. If you discover any errors or omissions, please direct those and any other comments to the President of NABL, the Chair of the Municipal Law Committee or the Chair of the Bankruptcy Project Subcommittee. Copyright © 2011 National Association of Bond Lawyers All Rights Reserved Municipal Bankruptcy: A Guide for Public Finance Attorneys National Association of Bond Lawyers Municipal Law Committee Bankruptcy Project Subcommittee October 2011 Authors W. Clark Watson Balch & Bingham LLP Birmingham, Alabama Ann Fillingham Dykema Lansing, Michigan George E. Henderson Fulbright & Jaworski L.L.P. Austin, Texas Michael P. Coury Butler Snow Memphis, Tennessee Copyright © 2011 National Association of Bond Lawyers All Rights Reserved Table of Contents Page CHAPTER 1: MUNICIPAL FINANCIAL DISTRESS AND ALTERNATIVES TO BANKRUPTCY ............................................................................................................................. 4 I. SOURCES OF FISCAL/FINANCIAL PROBLEMS AFFECTING MUNICIPALITIES..............................................................................................................4 A. Common Sources of Financial Distress ...................................................................5 B. Financial Distress vs. Financial Crisis .....................................................................6 II. OPTIONS FOR MUNICIPALITIES OTHER THAN CHAPTER 9 ..................................7 A. Revenue Solutions; Bonding and Taxing ................................................................7 B. Negotiated Debt Modifications, Waivers and Forbearance Agreements .................8 C. Structured State-Law Intervention Options ...........................................................10 D. Judicial Receivers ..................................................................................................13 CHAPTER 2: AN OVERVIEW OF THE HISTORY, POLICIES AND STRUCTURE OF THE BANKRUPTCY CODE (WITH EMPHASIS ON CHAPTER 9). ............................................... 17 I. UNITED STATES CONSTITUTIONAL PROVISIONS .................................................17 II. THE DEVELOPMENT OF BANKRUPTCY LEGISLATION FOR NON-MUNICIPAL DEBTORS .........................................................................................................................18 A. From 1800 to 1938 .................................................................................................18 B. The Bankruptcy Code of 1978 ...............................................................................22 III. BASIC POLICIES OF (NON-MUNICIPAL) BANKRUPTCY LAWS ...........................26 A. Protection of Creditor Interests ..............................................................................26 B. Relief of Debtors ....................................................................................................27 C. Fair and Efficient Management of the Bankruptcy Process ..................................27 IV. THE DEVELOPMENT OF MUNICIPAL BANKRUPTCY LAWS ...............................28 i A. Legislation in the Shadow of the Contract Clause and the Tenth Amendment .....28 B. Mixing Bankruptcy Policy and Municipal Bankruptcy Policy ..............................34 V. APPLYING THE CODE IN A CHAPTER 9 CASE.........................................................36 CHAPTER 3: ELIGIBILITY OF MUNICIPALITY FOR BANKRUPTCY PROTECTION .... 38 I. DEFINITION OF MUNICIPALITY .................................................................................38 II. ELIGIBILITY REQUIREMENTS ....................................................................................39 A. Specific Authorization to be a Chapter 9 Debtor. ..................................................40 B. Insolvency. .............................................................................................................43 C. Desire to Effect a Plan. ..........................................................................................44 D. Negotiation with Creditors; Impracticability. ........................................................45 CHAPTER 4: THE BOND ISSUE IN CHAPTER 9 ................................................................... 50 I. GENERAL OBLIGATION BONDS VERSUS REVENUE BONDS ..............................50 II. THE BOND DOCUMENTS..............................................................................................51 III. PAYMENT CONSIDERATIONS IN CHAPTER 9 .........................................................53 A. Revenue Pledges ....................................................................................................53 B. Gross Pledge versus Net Pledge ............................................................................54 C. Preference Exception .............................................................................................55 D. Preservation of Nonrecourse Status. ......................................................................55 E. Automatic Stay Exception. ....................................................................................56 CHAPTER 5: COMMENCEMENT OF THE CHAPTER 9 CASE AND PRE- CONFIRMATION CONSIDERATIONS .................................................................................... 57 I. PROCEDURAL REQUIREMENTS FOR FILING ..........................................................57 II. MANAGEMENT OF THE DEBTOR ...............................................................................61 III. OFFICIAL COMMITTEES...............................................................................................62 ii IV. OBTAINING CREDIT UNDER SECTION 364 ..............................................................66 V. PRELIMINARY DISMISSAL ISSUES: BAD FAITH AND INELIGIBILITY ..............67 VI. EMPLOYMENT OF PROFESSIONALS .........................................................................69 VII. AUTOMATIC STAY ........................................................................................................69 VIII. ADEQUATE PROTECTION. ...........................................................................................73 IX. CHAPTER 5 AVOIDANCE POWERS ............................................................................74 X. TREATMENT OF SECURED CLAIMS ..........................................................................75 XI. EXECUTORY CONTRACTS AND UNEXPIRED LEASES..........................................78 A. Municipal Leases ...................................................................................................78 B. Contracts and Leases Not Excluded by §929 ........................................................79 XII. REJECTION OF COLLECTIVE BARGAINING AGREEMENTS AND PENSION BENEFIT PLANS .............................................................................................................81 A. Collective Bargaining Agreements. .......................................................................81 B. Pension Benefit Plans. ...........................................................................................82 CHAPTER 6: THE PLAN FOR ADJUSTMENT ....................................................................... 84 I. WHAT IS A PLAN FOR ADJUSTMENT? ......................................................................84 A. Comparison of Plans in Chapter 9 and Chapter 11 Cases .....................................84 B. Content of the Chapter 9 Plan ................................................................................86 C. Filing the Plan. .......................................................................................................87 D. The Disclosure Statement ......................................................................................87 E. Modification of the Plans. ......................................................................................89 II. CONFIRMATION OF THE PLAN...................................................................................89 A. Debtor Compliance ................................................................................................90 B. Good Faith .............................................................................................................90 iii C. Government Regulatory Approvals .......................................................................91 D. Acceptance by Classes ...........................................................................................91 E. Plan Compliance ....................................................................................................92 F. Reasonable Payments are Disclosed ......................................................................93 G. No Legal Inhibition ................................................................................................93 H. Payment of Administrative
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