Oppormunities in Chapter 9: What Distressed Investors Should Know?

OpporMUNIties in Chapter 9: What Distressed Investors Should Know?

The Bond Buyer California Public Finance Conference October 18, 2012

Lewis Feldman Partner, Goodwin Procter LLP Emanuel Grillo Partner, Goodwin Procter LLP Chief Judge Christopher Klein U.S. Bankruptcy Court for the Eastern District of California William Nolan Senior Managing Director – Corporate Finance, FTI Consulting Municipal Bankruptcies: Chapter 9 Filings Cities, towns and counties are shown in red. Utility authorities and other municipalities are displayed in black.

NORTH WASHINGTON DAKOTA MONTANA NEW HAMPSHIRE MINNESOTA VERMONT MAINE $ WISCONSIN SOUTH $ DAKOTA OREGON

IDAHO WYOMING MICHIGAN NEW YORK $ $ IOWA NEBRASKA $ $ $ MASSACHUSETTS ILLINOIS INDIANA OHIO PENNSYLVANIA NEVADA $ NEW JERSEY RHODE ISLAND UTAH COLORADO $ CONNECTICUT KANSAS WEST $ VIRGINIA DELAWARE

IOWA KENTUCKY VIRGINIA MARYLAND CALIFORNIA $ $ $ DISTRICT OF NORTH TENNESSEE COLUMBIA $ OKLAHOMA $ CAROLINA ARKANSAS ARIZONA NEW MEXICO $ SOUTH$ $ CAROLINA GEORGIA $ TEXAS $ MISSISSIPPI ALABAMA

LOUISIANA

FLORIDA

Source: Governing. This map shows all municipalities filing for Chapter 9 bankruptcy protection since 2010, along with local governments voting to approve a bankruptcy filing. Information current as of September 11, 2012.

MUNICIPAL BANKRUPTCIES: CHAPTER 9 FILINGS

Cities, towns and counties are shown in red. Utility authorities and other municipalities are displayed in black.

Legend: Alabama California Jefferson County Mendocino Cost Recreation and Park District Status: Filed for bankruptcy Fort Bragg, CA Date: 11/9/2011 Status: Filed for Bankrupcy Debt or Deficit Amount: More than $4 billion Date: 12/29/2011 The county has laid off about 500 workers since declaring for bankruptcy in November 2011. A federal judge ruled in March Stockton that the bankruptcy was allowed under state law. Status: Filed for bankruptcy Date: 6/28/2012 Arkansas Debt or Deficit Amount: $26 million Centerton Municpal Property Owners’ Improvement Stockton, Calif., filed for bankruptcy after being unable to reach District No. 3 – Versailles an agreement with its creditors. The city must pay steep Fayetteville, AR pension and payroll costs while taking in less money from Status: Filed for bankruptcy property taxes. Date: 10/12/2011 Mammoth Lakes Sylamore Valley Water Association Public Facilities Board Status: Filed for bankruptcy of Izard County Date: 7/3/2012 Mountain View, AR Debt or Deficit Amount: $43 million Status: Filed for bankruptcy Mammoth Lakes, a small California resort town, voted to file for Date: 4/19/2012 bankruptcy July 3. The city has been unable to pay a $43 million legal judgment resulting from a 1997 property development dispute.

MUNICIPAL BANKRUPTCIES: CHAPTER 9 FILINGS

California (cont.) New York San Bernardino Suffolk Regional Off-Track Betting Corporation Status: Filed for bankruptcy Hauppauge, NY Date: 8/1/2012 Status: Filed for bankruptcy after initial filing in 2011 was Debt or Deficit Amount: $46 million rejected San Bernardino City Council voted to file for bankruptcy Date: 5/11/2012 protection after learning the city had only $150,000 left in its The New York State Legislature changed the state's laws to bank accounts. allow Suffolk OTB to file for bankruptcy after the agency's previous filing was rejected. Suffolk OTB, which manges six Georgia branches, reported a $5.1 million net operating loss for 2011. Hospital Authority of Charlton County Folkston, GA Oklahoma Status: Filed for bankruptcy Rural Water District No. 1, Cherokee County Date: 4/30/2012 Ft. Gibson, OK Status: Filed for bankruptcy Idaho Date: 1/23/2012 Boise County Status: Bankruptcy filing rejected Pennsylvania Date: 9/8/2011 Harrisburg Debt or Deficit Amount: $5.4 million Status: Bankruptcy filing rejected, defaulted on payments A federal judgment ordered the rural county to pay $5.4 million Date: 3/10/2012 in damages and attorney fees to developer Oaas-Laney for Debt or Deficit Amount: More than $300 million allegedly violating the federal Fair Housing Act. The county Harrisburg skipped about $5 million in debt payments in later filed for bankruptcy, but failed to prove it was insolvent. March. Much of the city's debt is related to a failed waste-to- energy plant. Lost Rivers District Hospital Arco, ID Rhode Island Status: Filed for bankruptcy Central Falls Date: 3/10/2010 Status: Filed for bankruptcy Date: 8/1/2011 Missouri Debt or Deficit Amount: $21 million of outstanding debt, plus Lake Lotawana Community Improvement District unfunded pension liabilities Lee's Summit, MO State-appointed receiver Robert Flanders filed for bankruptcy Status: Filed for bankruptcy protection and has since cut pensions for retirees. Date: 8/27/2010 South Carolina Nebraska Barnwell County Hospital Sanitary and Improvement District #512 of Douglas Barnwell, SC County Status: Filed for bankruptcy Omaha, NE Date: 10/5/2011 Status: Filed for bankruptcy Date: 11/1/2011 Bamberg County Memorial Hospital Bamberg, SC Status: Filed for bankruptcy Date: 6/20/2011

Goodwin Procter, LLP

MUNICIPAL MARKET: ISSUER CONCENTRATION

FIVE STATES DOMINATE THE $3.7 TRILLION MUNICIPAL BOND MARKET

Of the $3.71 trillion in total outstanding debt sold, the top 10 states and their municipalities account for $2.15 trillion, or 58%. The top five states alone – California, New York, Texas, Illinois and Florida, account for almost 46 % of the entire market.

Amount Outstanding Amount Outstanding Investors Investors State ($ Billions) State ($ Billions) California 585.7 Oregon 37.4 New York 373.6 Alabama 36.5 Texas 320.0 Nevada 33.4 Illinois 190.8 DC 30.5 Florida 182.5 Mississippi 26.1 Pennsylvania 148.4 Utah 24.8 New Jersey 135.5 Kansas 24.2

Ohio 113.4 Iowa 21.2 Massachusetts 107.1 Oklahoma 20.5 Puerto Rico 105.1 Nebraska 18.4 Michigan 88.7 New Mexico 17.9 Washington 83.9 Hawaii 16.5 Georgia 79.1 Rhode Island 15.0 Colorado 69.9 Montana 14.2 Virginia 66.5 Arkansas 13.0 Arizona 61.7 New Hampshire 12.2 Indiana 61.1 Alaska 11.8 North Carolina 60.3 West Virginia 11.8

Missouri 58.9 Idaho 11.5 Minnesota 55.8 Delaware 9.3 Tennessee 50.5 Maine 8.8 Maryland 50.3 South Dakota 7.8 Connecticut 47.8 Vermont 6.1 Wisconsin 47.3 North Dakota 4.1 South Carolina 40.9 Wyoming 4.0 Kentucky 38.5 Virgin Islands 2.5 Louisiana 38.3 Guam 2.0 Total (including other territories) 3,712.4 SOURCE: Bloomberg Visual Guide to Municipal Bonds, “Bloomberg Brief: Municipal Market” (June 21, 2011)

MUNICIPAL BONDS OUTSTANDING IN AUGUST 2011 WHERE IS THE MONEY COMING FROM?

Municipal Bonds Outstanding in August 2011: Where Is The Money Coming From? Primarily Private in Blue and Primarily Public in Green Amount Outstanding % of Outstanding % of Total Type of Revenue ($ Billions) Market Monetary Defaults State General Fund or Ad Valorem property tax (GO) 727 20 Ad Valorem property tax (school districts) 426 12 Hospital revenues 270 7 3 Water and sewer revenue 260 7 Higher education revenues 215 6 Miscellaneous taxes 204 6 Housing revenues 187 5 18 Nuclear, public power, solid waste and municipal utility 185 5 system revenues Economic or corporate-backed industrial development 134 4 9 Government-backed leases, public facility leases 128 3 Tobacco settlement 106 3 Toll-backed roads/bridges/tunnels 101 3 Airport revenues 86 2 Land-secured 62 2 33 Public transport revenues 54 1 Long-term care revenues 46 1 15 Cultural and human service provider charities 22 1 2 Other 455 12 TOTALS 3,668 100 80

SOURCE: Bloomberg Visual Guide to Municipal Bonds, “Bloomberg Brief: Municipal Market” (June 21, 2011)

NUMBER OF BORROWERS WHO DEFAULTED ON MUNI BONDS AND THEIR INDUSTRY DISPERSION 2007 – 2010

Number of Borrowers Who Defaulted on Muni Bonds and Their Industry Dispersion (2007 – 2010) Primarily Private in Blue and Primarily Public in Green All Monetary and Technical Defaults: 737 Monetary Defaults: 392 % of Total Issuers / Borrowers with Monetary Issuer / Borrower Category Defaults Land-secured 33 Housing 18 Long-term care 15 Economic or corporate-backed industrial 9 development Hospitals 3 Government-backed leases, public facility leases 3 Charter schools 3 Cultural and human service provider charities 2 Universities 2 Local public utilities 2 Private schools 1 Public Education 1 Native American 1 GO 1 Public transportation 1 Toll roads/bridges/tunnels 1 Parking facilities 1 Other 3 TOTAL 100

SOURCE: Bloomberg Visual Guide to Municipal Bonds, “Bloomberg Brief: Municipal Market” (June 21, 2011)

Goodwin Procter MUNICIPAL BANKRUPTCY AND RESTRUCTURING

Municipalities and state governments are in crisis. The prolonged economic downturn, followed by a weak economic recovery and exacerbated by the historic unwillingness of local governments to address legacy liabilities, has led many cities to seriously consider the once unthinkable prospect of municipal bankruptcy.

The potential impact of municipal bankruptcies reaches far beyond the municipality itself. Unions, pension funds, bondholders and bond insurers, as well as vendors and other parties need to understand municipal bankruptcies and restructurings and how each could affect their interests.

With this comes a host of legal questions and challenges. Goodwin Procter’s Public Finance and Financial Restructuring Groups have formed an interdisciplinary Municipal Bankruptcy and Restructuring Practice to advise on issues of public finance, restructurings and Chapter 9 of the U.S. Bankruptcy Code. Our combined experience makes us uniquely positioned to effectively advise any stakeholder in a municipal bankruptcy.

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Attorneys in our industry-leading Public Finance Practice are well-versed in For more information on our Municipal the issues affecting the public sector. We’ve structured over $75 billion in Bankruptcies Practice, please contact: public financings by bringing expertise, tenacity and efficiency to projects Lewis G. Feldman, Partner throughout the country. Our representation spans from state agencies to 213.426.2688 underwriters and financial advisors, and from school districts to developers [email protected] and investors. Manny C. Grillo, Partner 212.813.8880 We have experience in public financings for all project classes including: [email protected] • Public capital improvements • Redevelopment Deborah Schrier-Rape, Partner 858.202.2751 • Project infrastructure [email protected] • Municipal facilities • Single family and multifamily housing Gina Lynn Martin, Partner • Urban landfill projects 617.570.1330 [email protected] • Hotel development Bruce J. Graham, Partner Bankruptcy and workouts 213.426.2658 [email protected] From troubled entities and international insolvencies to failed start-ups, our financial restructuring attorneys work with debtors, creditors and committees Douglas A. Praw, Partner 213.426.2664 in high profile and middle-market restructurings. We implement transactional [email protected] solutions and litigation strategies that produce creative, successful reorganizations both within and outside of formal bankruptcy or insolvency Meagan E. Costello, Associate cases. 212.813.8854 [email protected] We represent every type of major stakeholder in out-of-court restructurings and formal bankruptcy proceedings. We negotiate to preserve, maximize and enforce creditors’ rights and remedies; debtors’ protection against creditors; rights to collateral; and valuations of secured and unsecured claims.

Our deep restructuring experience, coupled with the expertise of our public finance attorneys, means our team is uniquely qualified to advise on issues related to Chapter 9 of the U.S. Bankruptcy Code. Scan with your smartphone’s barcode Munibk Blog reader app to visit our Municipal Bankruptcy Blog. Illustrating our commitment to the issues affecting distressed municipalities, MuniBK provides links to current developments in pending municipal bankruptcies, interviews with people at the forefront of municipal distressed situations and other helpful articles and analysis from Goodwin Procter attorneys.

For content, analysis and commentary on the intersecting issues of public finance, restructurings and Chapter 9 of the United States Bankruptcy Code, please visit our MuniBK Blog at http://blog.munibk.com/.

October 2012

Boston | Hong Kong | London | Los Angeles | New York | San Diego | San Francisco | Silicon Valley | Washington DC | www.goodwinprocter.com © 2012 Goodwin Procter LLP. All rights reserved. This informational piece may be considered advertising under the ethical rules of certain jurisdictions. Goodwin Procter LLP principal law office address: 53 State Street, Boston, MA 02109, (617) 570-1000. Prior results do not guarantee similar outcome.

DIP LOANS: A NEW POCKETBOOK FOR DISTRESSED MUNICIPALITIES?

By: Manny Grillo

In most large bankruptcy reorganizations, the entity filing for protection (known in bankruptcy lingo as the debtor in possession or “DIP”) requires new funding to finance the costs of the Chapter 11 case. Known as “DIP Loans,” this type of financing is almost always secured by senior liens on the debtor’s assets. Special opportunity investment funds dominate the landscape and provide much of the capital for these loans. In recent weeks, municipalities, such as Scranton, Pennsylvania, facing significant short-term liquidity crises, have started to reach out to hedge funds as possible lending sources. This raises the question as to whether municipalities will seek DIP Loans in Chapter 9 municipal bankruptcy cases, and, if so, on what basis?

While not all of the provisions of the Bankruptcy Code apply in Chapter 9 cases, Section 901 of the Bankruptcy Code, makes Sections 364(c) and (d) of the Bankruptcy Code applicable to Chapter 9 municipality bankruptcy cases. Under these provisions, a debtor may borrow money on a senior secured (and even a priming) basis. Therefore, a court could grant an order authorizing a municipal debtor to borrow money and grant senior security interests in its assets.

Municipalities typically borrow funds on a variety of bases and Scranton recently issued a tax anticipation note (TAN), a practice it has used in the past, to cover payroll as part of its recovery plan. Unlike an “all assets” superpriority lien that is common with DIP Loans in Chapter 11 reorganization proceedings, it remains to be seen what will happen if Scranton’s economic recovery plan and the anticipated tax revenue to support the TANs falls short of expectations. Will Scranton or another municipality look to the investment funds experienced in the distressed lending arena to provide DIP Loan financing? Can the investment funds get comfortable with any pledge of collateral for the DIP Loan that a municipality may make?

As part of these transactions, DIP Lenders typically ask for a variety of other protections such as budgets and performance covenants based upon these budgets. While courts can order debtors to comply with such provisions in most Chapter 11 cases in which DIP Loans are authorized, potential DIP Lenders in Chapter 9 cases should realize that the court’s power over a municipal debtor may be limited. Under Section 904, absent the municipal debtor’s consent, the court may not “interfere” with any of the “property or revenues of the debtor” or its “use or enjoyment of any income producing property.”

While a debtor might consent to the terms of the DIP Loan when made, will the municipality consent to the type of actions lenders are normally permitted to take upon default? When underwriting a DIP Loan, DIP lenders carefully scrutinize their ability to exercise remedies against their collateral. Will a bankruptcy court allow a DIP Lender to do that in a municipal case? We may find out sooner rather than later.

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ARE PENSION WARS COMING IN CALIFORNIA MUNICIPAL BANKRUPTCIES?

By: Manny Grillo and Lew Feldman

On September 12, 2012, CalPERS’ general counsel released a public statement setting forth CalPERS’ legal position on the limitations of the power of the bankruptcy courts to interfere with the relationship between the state of California and its municipalities regarding the payment of retirement and other benefits to state employees.

Pensions and other benefits remain at the forefront of the municipal financial crisis in California, and it appears that CalPERS may be setting the stage for forthcoming legal battles in the Stockton case, and perhaps others. CalPERS has previously proudly boasted that Vallejo did not take CalPERS on with respect to pension benefits, but only healthcare retiree benefits.

For months, commentators have predicted a looming constitutional battle over pension benefits. The acuteness of the pension crisis was made plain in a Stanford Institute for Economic Policy Research Report, published earlier this year, which concluded that aggregate pension costs have expanded at a rate of 11.4% per year and pension expenditures represent 10.1% of total municipal spending.

Whether Stockton, San Bernardino or another municipality will undertake a war of attrition against CalPERS over pension benefits remains to be seen.

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BUILDING CONSENSUS IN A MUNICIPAL BANKRUPTCY

By: Meagan Costello

Throughout the United States, many municipalities are facing severe financial distress and being forced to examine Chapter 9 (http://www.law.cornell.edu/uscode/text/11/chapter-9) -- the section of the Bankruptcy Code governing municipality eligibility -- as a means of eliminating debt and restructuring their obligations.

While the causes of financial distress vary among municipalities, municipal creditors are often composed of the same groups, a mix of “ordinary people” such as pensioners and civil servants, combined with sophisticated financial institutions and bondholders.

Add these diverse constituencies to the current political environment, mix in the fact that municipalities must often raise taxes to raise revenue, and the result is often a prolonged political battle that provides little progress towards a real solution.

It is often overlooked that the Bankruptcy Code itself attempts to alleviate the potential for stalemate and assuage fears that if bankruptcy is “too easy” there will be a rash of unnecessary municipal filings. The Bankruptcy Code does this by generally requiring municipalities to work with their creditors as a prerequisite to filing for protection under Chapter 9.

Chapter 9 (http://www.law.cornell.edu/uscode/text/11/109) requires the municipality to demonstrate that prior to filing for bankruptcy, it:

 Obtained the agreement of certain creditors to the restructuring plan; or  Negotiated with creditors but was unable to reach a resolution; or  Show that although it did not negotiate with its creditors, engaging in the process would have been impractical.

Additionally, some states, such as California (http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501- 0550/ab_506_bill_20111009_chaptered.html) , require a municipality to attend mediation with its creditors before filing for Chapter 9 protection (unless a state of emergency exists.) Failure to adhere to these requirements can result in dismissal of the bankruptcy petition.

This pre-filing negotiation process is intended to expedite the Chapter 9 process and maximize its efficiency. Creditors should use this process wisely and recognize that, no matter what the cause of a municipality’s financial woes, all parties will need to compromise their claims for a prompt and efficient resolution.

Fundamentally, all restructurings are simply a matter of math: the assets of the debtor must be valued, measured against the claims asserted, and then distributed accordingly. The more quickly major constituencies (including the taxpayers) accept the inevitable, the faster municipalities can move forward with reorganization, emerge from Chapter 9 protection and establish a new sense of normalcy.

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CALIFORNIA PREREQUISITES TO MUNICIPAL BANKRUPTCY FILINGS: WORKING OR NOT?

By: Douglas Praw

Historically, a municipality could file for protection under Chapter 9 of the United States Bankruptcy Code without seeking prior state approval or satisfying any pre-conditions. As a response to the City of Vallejo’s 2008 bankruptcy filing, the California state legislature passed AB 506, which became effective on January 9, 2012. AB 506 permits a financially troubled city or agency to file for bankruptcy protection, but it must satisfy a prerequisite before doing so.

The entity must either: (1) engage in a neutral evaluation process with its creditors with the help of a mediator for a minimum of 60 days, or (2) declare a fiscal emergency.

By promoting the use of a neutral evaluator, the legislation encourages the municipality to work with its creditors to craft a settlement or readjustment plan that has the requisite support to be approved.

The fiscal emergency alternative requires a resolution of the majority of the governing body of the agency or municipality. It must be accompanied by findings that the financial status is jeopardizing the health, safety or well-being of the residents or constituents of the entity. In addition, the resolution must state that the body is unable to pay its obligations within the next 60 days.

In both cases, the goal is to promote a more efficient resolution that will accelerate completion of the bankruptcy process if it remains necessary. But, is AB 506 working?

The City of Stockton chose to engage a neutral evaluator. After 60 days of working with former United States Bankruptcy Judge Ralph R. Mabey of Salt Lake City, the City of Stockton elected to extend the negotiation period for an additional 30 days. In the end, the City filed for bankruptcy protection.

The City of San Bernardino did not engage a neutral evaluator, instead opting to declare a fiscal emergency and then immediately filing for bankruptcy protection.

Both cities’ bankruptcy plans are being challenged for a host of different reasons, implying that AB 506 may merely be a speed bump on the road to bankruptcy – slowing the process but not helping municipalities avoid bankruptcy or making the process more efficient.

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CHARACTERISTICS OF “NEUTRAL EVALUATORS”: THE CALIFORNIA EXPERIENCE TO DATE

By: Deborah Schrier-Rape

In October 2011, California passed AB 506 which established prerequisites before a municipality is eligible to file for protection under Chapter 9 of the United States Bankruptcy Code. Under AB 506, any entity seeking to file under Chapter 9 must first engage a mediator to negotiate with creditors for a 60-day neutral evaluation process, unless it declares that a “fiscal emergency” prohibits engaging in such a process.

Mammoth Lakes and Stockton are the first instances in which this mediator process has been put into practice. Both cases offer insight into the type of individuals likely to be chosen as neutral evaluators, how these neutral evaluators function and the efficacy of the AB 506 process.

Mammoth Lakes Once it became clear that Mammoth Lakes would be unable to satisfy its outstanding debts, it sent a letter to interested parties requesting their participation in the neutral evaluation process. About half of the interested parties agreed to participate, although Mammoth Lakes Land Acquisition LLC (MLLA), Mammoth Lakes’ single largest creditor, chose to abstain. District Court Judge David Coar was selected as the neutral evaluator.

Judge Coar has had a multi-faceted legal career as an associate professor and associate dean of DePaul University College of Law; a U.S. Trustee; a Bankruptcy Judge; and a District Court Judge for the District Court for the Northern District of Illinois.

The 60-day neutral evaluation period concluded without resolution, but the town was able to establish a framework for a potential plan of reorganization.

When Mammoth Lakes entered Chapter 9, the presiding bankruptcy court judge appointed Judge Elizabeth Perris, Chief Judge of the Bankruptcy Court for the District of Oregon, to serve as judicial mediator to continue the pre-petition mediation process in parallel to the bankruptcy proceeding. Within a month of filing, the mediation process resulted in a settlement between Mammoth Lakes and MLLA. Because MLLA chose not to participate in the AB 506 process, it is unclear whether the pre-bankruptcy negotiations played any critical role in the settlement.

Stockton Nearly all of the invited interested parties agreed to participate in Stockton’s neutral evaluation process and selected Judge Ralph Mabey to serve as mediator. Like Judge Coar, Judge Mabey has had an accomplished and varied legal career. In addition to serving as a United States Bankruptcy Judge, Judge Mabey is a professor at the Reuben Clark Law School, Brigham Young University and has served as Chair of the American College of Bankruptcy.

Like Mammoth Lakes, Stockton’s neutral evaluation process ended with a Chapter 9 filing, but this does not mean that the process was a failure. It may have set the groundwork for a more efficient bankruptcy process, providing an opportunity for the parties to clarify their positions and discover potential common ground. Whether the pre-bankruptcy negotiations were effective in shortening the Chapter 9 process remains to be seen.

Judge Mabey has also appointed Judge Perris to be the judicial mediator in the Stockton bankruptcy case. Like Mammoth Lakes, the mediation will run in parallel to the Chapter 9 bankruptcy proceeding.

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WILL MUNICIPAL BANKRUPTCIES UNSETTLE THE BOND MARKET?

By: Bruce J. Graham

The surge in municipal bankruptcies across the country, including three in California since January, has been unsettling for bond market participants. Moody’s Investors Service, a national rating agency, recently announced plans to conduct in-depth reviews of numerous California cities, especially those cities that have declared fiscal crises. The Federal Reserve Bank of New York suggested this month that “municipal defaults are far more common than frequently cited statistics suggest.”

Despite the anxious commentary and intensified scrutiny, it remains unclear whether the increase in municipal bankruptcies has had any material detrimental effect on the issuance or purchase of municipal obligations to date, or if it will in the future. If municipal bankruptcy filings continue to increase, however, the market for municipal debt, particularly obligations secured by an issuer’s general fund, may suffer.

When a city files for bankruptcy under Chapter 9 of the United States Bankruptcy Code http://www.law.cornell.edu/uscode/text/11/chapter-9, it is permitted to restructure and discount its debt, including obligations secured by the city’s general fund. Consequently, in a bankruptcy scenario, investors owning these obligations risk being repaid less than the full value of their investment. In addition, should rating agencies like Moody’s continue to downgrade municipal credit ratings, the cost of borrowing will increase, adding more strain to the bond market.

Despite the tumultuous economic environment, bond yields remain historically low and municipal bonds remain an attractive vehicle for investors seeking tax-exempt returns. If the country continues its economic recovery and municipalities continue to tighten their fiscal belts, the recent flurry of municipal bankruptcies may ultimately prove inconsequential to the overall municipal market.

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CHAPTER 9 VS. CHAPTER 11: A SUMMARY OF KEY DIFFERENCES

By: Gina Martin

In the last year, several municipalities, including Jefferson County, Alabama; Stockton, CA; San Bernardino, CA; and Central Falls, RI, have sought protection under Chapter 9 of the Bankruptcy Code. Chapter 9, enacted solely for municipalities, has many similarities to Chapter 11, enacted for corporations and individuals seeking to reorganize their debts. There are several key differences between Chapter 9 and Chapter 11. A brief summary of these differences is set forth below.

Chapter 9 filings are still relatively rare. However, if you find yourself involved in a Chapter 9 case, it is important to recognize that the processes procedures and rights in Chapter 9 cases can vary significantly from Chapter 11 reorganizations.

Bankruptcy Concept/ Chapter 11 Chapter 9 Applicable Provision Voluntary/Involuntary Petition/ §303 Involuntary or voluntary filing to commence Must be voluntary case Eligibility/§109 Generally, eligibility is not challenged in A municipality must demonstrate that it is eligible to be a debtor Chapter 11 as the party is presumed to be pursuant to Section 109(c), including that it is insolvent; generally eligible to file (exceptions to eligibility include eligibility of a municipality to file for Chapter 9 protection is insurance companies, insured banks, contested by one or more creditors stockbrokers and commodity brokers) Use, Sale or Lease of Property §363 Debtor cannot use, sell, or lease property Debtor can use, sell or lease its property without bankruptcy court outside of the ordinary course without oversight bankruptcy court approval Post-petition effect of security Property acquired by the estate or by the Pre-petition security interest in special revenue bonds retained interest debtor after the commencement of a case is post-petition (special revenue bonds are given greater protection § 552 not subject to any lien resulting from a security in Chapter 9 than general obligation bonds) agreement entered into pre-petition Recourse claims A claim secured by a lien on property of the Special revenue bondholders do not have recourse against the §1111/§927 estate is allowed pursuant to Section 502 debtor pursuant to §1111(b) regardless of whether the holder of such claim had recourse against the debtor Retention of Professionals § 327 Bankruptcy Court approval is required to retain Bankruptcy Court approval to retain and/or pay professionals is and pay professionals not required Avoidance of Preferential Transfers Payments to creditors on account of an While preferential transfers can be avoided, there is an exception §547/§926(b) antecedent debt made within 90 days of for payments or transfers of property made to bondholders petition date (one year if an insider), while debtor is insolvent can be avoided by trustee/debtor-in-possession (subject to applicable defenses) Exclusivity to File a Plan Debtor has exclusive right to file a plan for first Only debtor has right to file plan – no deadline unless Bankruptcy §1121/§941 120 days of case (subject to termination or Court orders one extension for cause) Right to Reject Collective Limitations/protections regarding a debtor’s No such limitations or protections. Section 1113 does not apply in Bargaining Agreement right to reject a collective bargaining agreement Chapter 9 §1113 Payment of Insurance Benefits to Section 1114 imposes certain requirements on No requirements imposed on a municipality. Section 1114 does Retired Employees a debtor seeking to modify retiree benefits not apply in Chapter 9 §1114 Priority Wage and Severance Claim Claims for wages, salaries, or commissions, No priority for wage claims. Section 507(a)(4) does not apply in § 502(a)(4) including severance entitled to priority up to Chapter 9 $11,725 FOR MORE ANALYSIS AND COMMENTARY VISIT MUNIBK at http://blog.munibk.com/

LEWIS G. FELDMAN PARTNER

Los Angeles | 213.426.2688 [email protected]

AREAS OF PRACTICE Lewis G. Feldman is a partner in Goodwin Procter's Business Law Department and a member of the Real Estate, REITs & Real Estate Capital Markets Group and Municipal Bankruptcy Group. He is a former member of the firm's Executive Committee, serves as the Chair of Goodwin Procter's Los Angeles office and heads the firm's Public/Private Development Practice. Mr. Feldman is considered to be among the nation's leading real estate and public finance attorneys, specializing in structuring, entitling and executing large-scale financings for real estate industry participants and the public sector.

WORK FOR CLIENTS Mr. Feldman has advised clients on more than $70 billion in debt and equity financings for market-rate and affordable apartments, master-planned residential communities, industrial and manufacturing facilities, urban entertainment centers, primary, secondary and university educational facilities, retail malls, hospitals, mixed-use projects, destination resorts and hotels, brownfield remediation, green building, mitigation banks, transportation projects and all forms of public infrastructure.

PROFESSIONAL ACTIVITIES Mr. Feldman is an active participant in many of the industry's most eminent associations and groups, including the Board of Directors of the University of California, Los Angeles, Ziman Center for Real Estate, of which he is a founding member; the University of Southern California, Lusk Center for Real Estate; the City of Hope Cancer Center's Los Angeles Real Estate Industry Council; the United Way of Greater Los Angeles; the Urban Land Institute; the National Association of Real Estate Investment Trusts; the National Association of Bond Lawyers; California's Coalition for Adequate School Housing; and the International Council of Shopping Centers. Additionally, Mr. Feldman is an active member of the Urban Land Institute's Public Private Partnership Council and participates on the boards of the Milken Institute California Center Advisory Council and the Los Angeles County Housing Development Corporation. He also serves on the Board of Trustees of the Carlthorp School.

Mr. Feldman participates on the USC Gould School of Law's Real Estate Law and Business Forum Planning Committee (2009, 2010) and is a member of Law and Politics magazine's Blue Ribbon Panel - the committee tasked with evaluating nominees for the 2010 edition of Southern California Super Lawyer. Additionally, he is on the editorial board of the firm's Real Estate Group's newsletter REsource: A Goodwin Procter Publication for the Real Estate Industry; is a founding editor of Goodwin Procter's Sustainable Development blog; and is a member of Real Estate Forum's Editorial Advisory Board. LEWIS G. FELDMAN

MEDIA AND PRESENTATIONS Mr. Feldman is a frequent lecturer and author on real estate and finance matters. He has been a featured speaker for the Beverly Hills Bar Association, the Building Industry Association, the California Association for Local Economic Development, the California Redevelopment Association, the Council of Development Finance Agencies, the National Federation of Municipal Finance Analysts, The League of California Cities, the Los Angeles County Bar Association, the USC Gould School of Law, the UCLA School of Law, the UCLA Anderson School of Management, the UCLA Ziman Center for Real Estate, the Milken Institute, the National Association of Bond Lawyers, the Pacific Coast Builders’ Conference, the USC Lusk Center for Real Estate’s Economic Forecast and the Urban Land Institute. In addition, he has served as an arbitrator for the American Arbitration Association and serves as an expert witness in high-stakes real estate and public finance litigation matters.

Articles and comments by Mr. Feldman have appeared in numerous publications, including American Infrastructure, The American Lawyer, Bloomberg, The Bond Buyer, The California Real Estate Journal, Commercial Property News, Construction Today Quarterly, The Daily Deal, Fixed Income Daily, Forbes, Fortune Magazine, Infrastructure Solutions, The Los Angeles Business Journal, The Los Angeles Daily Journal, The Los Angeles Times, the NAREIT Report, The New York Times, POWER Magazine, Real Estate Forum (including the July 2005 cover story), Real Estate Southern California, Retail Traffic Magazine, The Sacramento Bee, The San Diego Tribune, The San Jose Mercury News, The San Francisco Recorder, The San Francisco Chronicle, Urban Land Magazine, The Ventura County Star, The Wall Street Journal, The Washington Post and Western Cities Magazine. Mr. Feldman is a frequent contributor to Goodwin Procter’s Municipal Bankruptcy Blog, reporting on a range of topics currently affecting distressed municipalities.

In addition, Mr. Feldman has appeared on Fox Business News’ “Money for Breakfast” with Alexis Glick, CNBC’s “Closing Bell” with Maria Bartiromo and KNX AM 1070’s “Business Hour with Frank Mottek.”

PROFESSIONAL EXPERIENCE Prior to joining Goodwin Procter, Mr. Feldman was the managing partner of the Century City office of Pillsbury Winthrop Shaw Pittman, where he headed that firm's National Public Finance Practice and its Los Angeles Real Estate practice.

RECOGNITION Mr. Feldman has been recognized by the California Real Estate Journal as one of "California's Dealmakers" (2008) and was recognized by the Los Angeles Daily Journal as one of the "Top 100" leaders in the California legal community (2008). He is listed in Chambers USA: America's Leading Lawyers for Business, Best Lawyers in America in the real estate category (2000- 2012), Lawdragon's "Top 500 Lawyers in America," The Legal 500 (2008,2009), the "Leading 500 Dealmakers in America" (2007) and is individually rated "AV" (highest) by Martindale-Hubbell.

Other notable honors include recognition in the Los Angeles Business Journal's "Best of Bar" and "Who's Who in Law" (2007); the Los Angeles Daily Journal's "Leading Rainmakers in California" and "Top 100 Lawyers in California" (2006 and 2007); Real Estate Southern California's "Top Southern California Real Estate Lawyers" and American Lawyer Media's "Top 100 Attorneys" in Los Angeles County (2004-2006). He has also been recognized by Law & Politics magazine as a "Southern California Super Lawyer" (1st Edition through 2009).

Mr. Feldman also served as Bond and Disclosure Counsel to the City of Oxnard on the City's Gas Tax Revenue Certificates of Participation (2007 Street Improvement Program), which received The Bond Buyer's "Far West Deal of the Year" award for 2008. He was also lead counsel to the California State Treasurer on the State of California's $11 billion Economic Recovery Bonds - the largest public sector bond transaction in American history - and was awarded "Far West Deal of the Year" (2005) by The Bond Buyer.

While attending law school, Mr. Feldman was Executive Editor of the UC Davis Law Review. LEWIS G. FELDMAN

EDUCATION  J.D., University of California, Davis, 1982  B.A., University of California, Santa Cruz, 1978 (with highest honors)

BAR ADMISSIONS  California

EMANUEL C. GRILLO PARTNER

New York City | 212.813.8880 [email protected]

AREAS OF PRACTICE Manny Grillo is a partner in the firm’s Business Law Department and chairs its Financial Restructuring Practice. He is also a member of its Leveraged Finance Practice and co-leader of its Municipal Bankruptcy Group. Mr. Grillo represents secured and unsecured creditors, Chapter 11 debtors and borrowers, as well as both sellers and purchasers in distressed mergers and acquisitions. His practice encompasses both out-of-court debt restructurings and the rehabilitation and liquidation of financially distressed businesses under Chapter 11 of the Bankruptcy Code. Mr. Grillo regularly advises banks, hedge funds, sponsors and other financial institutions regarding insolvency and restructuring matters in complex financings and securitizations. He negotiates distressed financing transactions including debtor in possession loans on behalf of both lenders and borrowers and litigates contested confirmation and financing matters as well as avoidance actions and lender liability claims. Mr. Grillo is a member of the firm’s Opinion Committee and has been a member of its Associate Review Committee and its Committee on Racial and Ethnic Diversity.

WORK FOR CLIENTS Mr. Grillo has represented creditors, debtors and borrowers across a variety of industries. In the financial services industry, he represented a troubled cooperative bank in the restructuring of over $500 million of its debt; an investment fund holding debt secured by life settlement assets in a troubled hedge fund’s chapter 11 cases; and an ad-hoc committee of second lien creditors in the restructuring of over $500 million of secured debt of one of the largest independent futures brokerage and clearing firms. He has represented lenders and borrowers in the real estate industry including the successful bidder in a section 363 sale for one of the nation’s largest real estate brokerage firms; the controlling mezzanine lender in its successful foreclosure on a portfolio of hospitality assets with a value in excess $1.5 billion; the sponsor of a portfolio of hospitality assets concentrated in the southeastern United States in the successful restructuring of $600 million of debt; mezzanine and mortgage lenders for both commercial and multifamily residential properties and lenders to Native American gaming facilities. He has represented junior capital lenders to troubled borrowers in prepackaged bankruptcy cases and periodically in their exercise of remedies. In addition, he has represented individual creditors and ad hoc groups of creditors in some of the country’s largest bankruptcy cases, including Lehman Brothers Holdings Inc., Northwest Airlines, Delphi Corporation and Silicon Graphics, Inc. He negotiated the unique DIP loan equity kicker in the NextWave Telecom cases that provided the DIP lender with a premium payable in reorganized NextWave securities at confirmation after NextWave’s litigation with the FCC in the United States Supreme Court.

PROFESSIONAL ACTIVITIES Mr. Grillo is a member of the American Bankruptcy Institute and the Turnaround Management Association. EMANUEL C. GRILLO

MEDIA AND PRESENTATIONS Mr. Grillo has been the keynote speaker at the annual DebtWire Restructuring Conference. In addition, he commented and co-authored articles on municipal bankruptcies for American City & County and for Goodwin’s MuniBK blog. He has authored or co-authored a number of articles on topics for a variety of publications, including “Disaggregating Assets from Liabilities to Maximize Value” in the New York Law Journal; “Bankruptcy Blues: Changes to the US Bankruptcy Reform Act Will Affect Troubled Portfolio Companies and their Debtholders” in Private Equity Manager; “From First Dibs to the Last in Line” in the National Law Journal, “Application of Bankruptcy Laws to Limited Liability Companies” in New York Limited Liability Companies and Partnerships (West’s New York Practice Series). In addition, he has been a speaker and presenter for the Practising Law Institute and Report on Business television network in Canada.

PROFESSIONAL EXPERIENCE Prior to joining Goodwin Procter, Mr. Grillo was a partner at Torys LLP in New York City. Before that, he was a partner at Salans/Christy & Viener. He began his career as an Honors Program Attorney in the Office of the United States Trustee for the Southern District of New York of the U.S. Department of Justice.

EDUCATION  J.D., Fordham University School of Law, 1991  B.S.F.S., Georgetown University, 1988

BAR ADMISSIONS  New York

COURT ADMISSIONS  U.S. District Court for the Southern District of New York  U.S. Court of Appeals for the District of Columbia Circuit  U.S. District Court for the Eastern District of New York

Chief Judge Christopher Klein

Christopher M. Klein is the Chief Judge of the United States Bankruptcy Court for the Eastern District of California. He earned JD and MBA degrees at the University of Chicago, where he was Executive Editor of Law Review, and BA and MA degrees at Brown. He is admitted to the bar in California, the District of Columbia, Illinois, and Massachusetts.

After completing service in the U.S. Marine Corps as an artillery officer in Vietnam and judge advocate, he was a trial attorney in the U.S. Department of Justice, in private practice with Cleary, Gottlieb, Steen & Hamilton, and Deputy General Counsel-Litigation of the National Railroad Passenger Corporation. In 1988 he was appointed a United States Bankruptcy Judge for the Eastern District of California. He was appointed to the Bankruptcy Appellate Panel in 1998 and served for ten years.

From 2000-2007, Judge Klein was a member of Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States and the Advisory Committee on the Federal Rules of Evidence. His bankruptcy-related publications include: Principles of Preclusion and Estoppel in Bankruptcy Cases, 79 Am. Bankr. L.J. 839 (2005) (co-author); Bankruptcy Rules Made Easy(2001): A Guide to the Federal Rules of Civil Procedure that Apply in Bankruptcy, 75 Am. Bankr. L.J. 35 (2001).

William J. Nolan

William Nolan is a senior managing director in the FTI Consulting Corporate Finance/Restructuring practice and is based in Charlotte. Mr. Nolan has worked in all areas of corporate recovery, including working with senior management in business turnarounds and corporate bankruptcy. He has more than twenty years of diverse financial consulting and management experience.

Mr. Nolan has considerable experience working with senior management teams in the areas of financial and operational restructuring, loan workouts and business planning. He has assisted management in developing business plans, devising short to medium term financial strategies and projections for use in troubled debt restructures, and implementing controls over cash expenditures, overhead and operating costs.

Mr. Nolan’s diverse background extends into financial services; manufacturing; restaurants; healthcare, and real estate wherein he has served as advisor to companies, and advised secured creditors, and unsecured creditors committees in out-of-court and in bankruptcy distressed situations. Mr. Nolan has considerable mortgage banking experience and has been very active in the reorganization of many sub-prime lending concerns.

Mr. Nolan also has extensive experience in working in international insolvencies and workouts. As a member of PricewaterhouseCoopers’ (PwC) United Kingdom insolvency practice, Mr. Nolan gained experience in the specialized area of UK insolvency, working as a receiver and administrator. Mr. Nolan’s UK experience included managing and selling companies, including companies associated with Polly Peck International, one of the UK’s largest ever insolvencies. Prior to its acquisition by FTI Consulting, Mr. Nolan served as a partner in the U.S. division of PwC’s Business Recovery Services group. Prior to joining PwC, Mr. Nolan held an executive financial management position with the Pizza Hut division of PepsiCo. As a financial manager of over 300 Pizza Huts in the state of Ohio, Mr. Nolan was responsible for identifying under- performing stores and working with local management to improve their performance as well as developing and implementing plans to eliminate excess operating costs and preparing and executing annual operating and financial budgets.

Mr. Nolan co-authored two articles in the American Banker entitled “The Fight for Survival: Sub- prime Lending, Where to From Here” and “At What Point Are Servicing Rights Born?” Mr. Nolan holds an M.B.A. in finance from the Wharton School of Business at the University of Pennsylvania and a B.S. in economics from the University of Delaware. He is a member of the American Bankruptcy Institute, the Association of Insolvency & Restructuring Advisors and the International Bankruptcy Association. Mr. Nolan served as treasurer of the Delaware Valley Chapter of Turnaround Management Association.