Chapter 9, Title 11, United States Code

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. 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. The term 'municipality' denotes "a political subdivision or public agency or instrumentality of a State," but does not include a state itself.^[1] States are therefore unable to file for bankruptcy even though they have defaulted in their obligations.

History

Recent Chapter 9 filing counts

Year	Filings
2012	20
2013	9
2014	12
2015	4
2016	8
2017	7
2018	4
2019	6
2020	4
2021	4
2022	3

The first municipal bankruptcy legislation was enacted in 1934 during the Great Depression.^[2] 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.^[2] 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.^[2]

From 1937 to 2008 there were fewer than 600 municipal bankruptcies.^[3] As of June 2012, the total was around 640.^[4] In 2012 there were twenty chapter 9 bankruptcies in the United States, and nine petitions have been filed in 2013.^[5] Since 2010, 81 petitions have been filed.^[6]

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.^[7] During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.^[8][9] The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District.^[10]

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).^[11] This revised act was upheld as constitutional by the Supreme Court in United States v. Bekins.^[12]

Chapter 9 was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.^[13] 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.^[14]

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),^[15] 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.^[16]

Collective bargaining

Municipalities' ability to re-write collective bargaining agreements is much greater than in a corporate Chapter 11 bankruptcy^[17] and can trump state labor protections,^[18] allowing cities to renegotiate unsustainable pension or other benefits packages negotiated in flush times.^[19]

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.^[20] 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.^[21][22]

Inclusion of states in Chapter 9

Main article: State defaults in the United States

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.^[23] The last U.S. state default took place in 1933, when Arkansas defaulted on its bonds.^[24]

Certain politicians and scholars have argued that the law should be amended to allow states to file for bankruptcy.^[23][25][26] 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.^[27] 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.^[24]

Notable Chapter 9 bankruptcies

Municipality	Type	Year	Population	Value	Description	Status	Sources
San Jose Unified School District	School District	1983				Completed	[28]
Washington Public Power Supply System	Electric district	1983		$2,250,000,000	The agency over-invested in nuclear power, attempting to building five such plants at one time, while new conservation measures reduced demand	Completed
Copperhill, Tennessee	City	1988	360			Completed	[29]
Hamilton Creek Metropolitan District (Summit County, CO)	Municipal corporation	1989		$2,000,000	The District was unable to pay back bonds intended to fund a housing project	Completed	[30]
Richmond Unified School District	School District	1991			After 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 municipality	[31]
Bridgeport, Connecticut	City	1991	141,600		In 1991, the petition for relief filed by the city of Bridgeport, Connecticut, was denied. The case was dismissed because the bankruptcy court concluded that Bridgeport, although financially distressed, was not insolvent within the meaning of the eligibility criteria of Chapter 9.	Denied by courts	[32]
Lipscomb, Alabama	City	1991	2,800			Completed	[33]
North Bonneville, Washington	City	1991	400			Completed	[34]
North Courtland, Alabama	City	1992	970			Completed	[35]
Orange County, California	County	1994	2,500,000	$1,700,000,000[36]	County treasurer Robert Citron made risky investments, leading to the county's bankruptcy	Completed	[37][38]
Kinlock, Missouri	City	1994	2,700			Completed	[39]
Pritchard, Alabama	City	1999	28,600		Due to inability to pay pensions. The city would again declare bankruptcy in 2009.	Completed	[40]
Desert Hot Springs, California	City	2001	16,500	$6,000,000	The city lost a housing discrimination lawsuit	Completed	[41][42]
West Jefferson Amusement and Public Park Authority	Parks District	2002			The agency was unable to pay the construction bonds for Visionland amusement park.	Completed	[43]
Millport, Alabama	City	2005	1,100	$3,500,000	The city lost tax revenue after a factory closed	Completed	[44]
Los Osos Community Services District	Sewer District	2006	16,500		This sewer district in Los Osos, California was unable to pay debt for a wastewater facility	Completed	[45]
West Contra Costa Healthcare District, San Pablo, California	Hospital District	2006		$50,000,000		Completed	[46]
Moffett, Oklahoma	City	2007	120		The state revoked the town's ability to issue traffic tickets as it had operated as a speed trap.	Completed	[47]
Valley Health Systems District, Hemet and Sun City, California	Hospital District	2007		$100,000,000		Completed	[48]
Gould, Arkansas	City	2008	830		The town spent money that should have been withheld to pay employee income taxes.	Completed	[49]
Vallejo, California	City	2008	115,900		The city was unable to meet pension obligations.	Completed	[50]
Pierce County Housing Authority, Pierce County, Washington	Housing District	2008			The housing authority was unable to pay mold-related lawsuits	Completed	[51]
Westfall Township, Pennsylvania	Township	2009	2,300		The city lost a lawsuit.	Completed	[52]
Prichard, Alabama	City	2009	22,600		The city was unable to pay pensions. The city has already declared bankruptcy for the same reason in 1999.	Completed	[53]
Sarpy County Sanitation Improvement District, Sarpy County, Nebraska	Sewer District	2009			The sewer district faced decreased housing development and less revenue as a result.	Completed	[54]
New York City Off-Track Betting Corporation	Gambling District	2009			After being unable to pay its debts due to mismanagement, the public corporation was dissolved in 2010	Completed	[55]
Connector 2000 Association, Greenville County, South Carolina	Road District	2010			The road district operated the Southern Connector, a portion of Interstate 185, and went bankrupt after toll collections were less than expected.	Completed	[56]
Hamtramck, Michigan	City	2010	22,400		In 2010, the city of Hamtramck, Michigan requested permission from the Governor under Michigan's authorizing law to file a petition for Chapter 9 Bankruptcy,[57] but was denied. Instead of bankruptcy, the treasury advised that Hamtramck be offered a selection of loan options.[58]	Denied by courts
Washington Park, Illinois	City	2010	4,200		In December 2010, Washington Park briefly emerged from bankruptcy and then filed a new petition for bankruptcy which was rejected by the judge, who stated there was no Illinois state law enabling a municipality to file a Chapter 9 bankruptcy petition.	Denied by courts	[59][60]
Las Vegas Monorail Company, Las Vegas	Private company	2010			The monorail company was ruled to be a private company and not a municipality, so it does not qualify for Chapter 9 bankruptcy.	Denied by courts	[61][62]
Central Falls, Rhode Island	City	2011	19,300		The city was unable to pay its obligations and petitioned to be put into receivership in 2010, as Rhode Island does not generally permit Chapter 9 filings. The state appointed receiver or overseer assumed all financial responsibilities from the mayor. Rhode Island's receivership law was rewritten to allow the receiver the ability to file a petition for Chapter 9 federal bankruptcy and Central Falls has done that.[63]	Completed	[63][64]
Jefferson County, Alabama	County	2011	658,400	$4,000,000,000	Over $4 billion in debt (largest Chapter 9 bankruptcy until 2013 Detroit bankruptcy filing,)[36] from sewer revenue bonds tainted by an interest rate swap bribery scandal with JPMorgan and county commissioner Larry Langford, and bond insurance credit rating collapse in the late-2000s subprime mortgage crisis, followed by the occupation tax being declared unlawful in Alabama.[38][65] (see Jefferson County, Alabama: Sewer construction and bond swap controversy)	Completed
Boise County, Idaho	County	2011	7,000		The County lost a judgement for violating the Fair Housing Act. The bankruptcy petition was dismissed by the judge after concluding the municipality had “sufficient surplus moneys” to satisfy the judgment and continue operations.	Denied by courts	[66][67]
Harrisburg, Pennsylvania	City	2011	49,000		The city was approximately $400 million in debt, due in part to a failed trash incinerator. The bankruptcy judge dismissed the bankruptcy petition on the grounds that not all necessary branches of the municipal government had authorized the filing of the petition.	Denied by courts	[68][69]
Stockton, California	City	2012	291,700			Completed	[70]
San Bernardino, California	City	2012	209,900	$1,000,000,000		Completed	[71]
Mendocino Coast Healthcare District	Hospital District	2012				Completed	[72]
Mammoth Lakes, California	City	2012	8,200		The city lost a $43 million lawsuit, but its bankruptcy case was voluntarily dismissed after Mammoth Lakes reached a settlement.	Withdrawn by municipality	[73]
Detroit, Michigan	City	2013	700,000	$18,000,000,000	The City of Detroit had been in decline for a long time, due to the closure of auto factories, white flight, and other factors, leading it unable to pay its obligations	Completed, under investigation	[74][75][76]
Hardeman County Memorial Hospital, Quanah, Texas	Hospital District	2013				Completed	[77]
Hillview, Kentucky	City	2015	9,000			Completed	[78]
Fairfield, Alabama	City	2020	10,000				[79]
Chester, Pennsylvania	City	2022	32,535				[80]

Note: Population refers to the population served at the time of the bankruptcy and may not be the same as its current population. Dollar values are as reported at the time and do not reflect current value.

Notable defaults that did not result in Chapter 9 bankruptcy

• Cleveland, Ohio, 1978, dispute with city creditors over sale of a utility.^[81]

See also

• Community Act 47, Financially Distressed Municipalities Act, Commonwealth of Pennsylvania.
• Super Chapter 9

References

1. 11 U.S.C. § 101(40))(
2. "Chapter 9 - Bankruptcy Basics". United States Courts. Retrieved 14 November 2019.
3. MuniNetGuide: Vallejo Bankruptcy Filing Garners Attention in Municipal Finance Circles Archived January 6, 2009, at the Wayback Machine
4. Wozniacka, Gosia (2012-06-27). "Stockton bankruptcy is hard hit for city retirees". Boston.com. Retrieved 2013-07-20.
5. USAtoday, July 22, 2013, Page B1, "Detroit woes rattle muni bond market" by Matt Krantz
6. "Chapter 9 municipality bankruptcies U.S. 2022". Statista. Retrieved 2024-09-08.
7. Ashton v. Cameron County Water Improvement Dist., 298 U.S. 513, 534 (1936) (Cardozo, J., dissent)
8. Pub. L. No. 251, 73d Cong., 2d Sess., 48 Stat. 798 (1934).
9. Public Law Research Institute: Municipal Bankruptcy: State Authorization Under the federal Bankruptcy Code Archived 2008-12-12 at the Wayback Machine
10. 298 U.S. 513, 56 S. Ct. 892, 80 L. Ed. 1309 (1936).
11. 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).
12. 304 U.S. 27 (1938)(holding the Municipal Corporation Bankruptcy Act constitutional under both the Fifth and the Tenth Amendments)
13. 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).
14. 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)
15. Chapter 9 incorporates the provisions of numerous sections from other chapters of the Bankruptcy Code. See Title 11, United States Code, Section 901.
16. John Knox; Marc A. Levinson (2009). Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress (PDF). Orrick, Herrington & Sutcliffe, LLP. pp. 21–22. Archived from the original (PDF) on 2014-08-23. Retrieved 2013-07-21.
17. In re City of Vallejo, 08-26813-A-9 (E. Dist. Calif.).
18. "Contracts Now Seen as Being Rewritable". The New York Times. 2009-03-31.
19. Pamela A. MacLean All Articles (2009-03-17). "In a First, Bankruptcy Judge Rules Calif. City Can Void Union Contracts". Law.com. Retrieved 2013-07-20.
20. See 11 U.S.C. § 109.
21. "Municipal Bankruptcy State Laws". www.governing.com. 25 January 2013. Retrieved 2017-06-12.
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25. "Better off bankrupt". Los Angeles Times. 2011-01-27. Retrieved 2020-05-02.
26. Skeel, David (2011-01-18). "A Bankruptcy Law—Not Bailouts—for the States". The Wall Street Journal. ISSN 0099-9660. Retrieved 2020-05-02.
27. Skeel, David (2012). "States of Bankruptcy". U. Chi. L. Rev. 79: 677.
28. SAN JOSE SCHOOLS CAN CUT PAY, U.S. BANKRUPTCY COURT RULES
29. Bishop-Henchman, Joseph (23 July 2013). "Municipal Bankruptcies Since 1988". Tax Foundation. Retrieved 3 February 2018.
30. HAMILTON CREEK METROPOLITAN DISTRICT v. BONDHOLDERS COLORADO BONDSHARES
31. In re Richmond Unified Sch. Dist., 133 B.R. 221, 224 (Bankr. N.D. Cal. 1991)
32. "Bridgeport – Distressed but not Insolvent". Business-finance-restructuring.weil.com. Archived from the original on 2013-04-08. Retrieved 2013-07-20.
33. Bishop-Henchman, Joseph (23 July 2013). "Municipal Bankruptcies Since 1988". Tax Foundation. Retrieved 3 February 2018.
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40. Analysis of Factors Associated with the Municipal Bankruptcy of Pichard, Alabama
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77. "Chapter 9 Bankruptcy Hits Hardeman County Hospital in Texas". Becker's Hospital Review. 27 March 2013. Retrieved 8 October 2013.
78. Stech, Katy (30 March 2016). "Bankrupt Kentucky City Reaches Repayment Deal". Wall Street Journal. Retrieved 23 April 2022.
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80. "City of Chester, Pa., files for bankruptcy mainly over 3 underfunded pension plans". Pensions & Investments. 2022-11-14. Retrieved 2022-12-14.
81. Three Decades After Cleveland Defaulted on Its Debts, Cities Face Recession Budget Woes Archived 2008-12-17 at the Wayback Machine

External links

• GASB Accounting and Financial Reporting for Chapter 9 Bankruptcies
• Number of Ch. 9 filings by year data from the American Bankruptcy Institute
• Ohio Local Government Fiscal Emergency/Fiscal Watch Law Fact Sheet
• Municipal Bankruptcy in Perspective, A Joint Publication of PAR and BGR
• Michigan Public Act 72 of 1990, Local Government Fiscal Responsibility Act, and the Appointment of Emergency Financial Managers
• Chapter 9, Title 11, United States Code at the Cornell University Law School Legal Information Institute
• Municipal Bankruptcy in Alabama - Kerem Deal^{[permanent dead link]}
• AN EXAMINATION OF MUNICIPAL FINANCE REFORM REGARDING MUNICIPAL BANKRUPTCIES IN THE UNITED STATES - Kerem Deal
• Administrative Office of the U.S. Courts Bankruptcy Basics -- Municipality Bankruptcy