Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress (Second Edition)

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Introduction

In May 2008, the City of Vallejo, California, filed for protection under chapter 9 of the United States Bankruptcy Code, followed in 2011 by Jefferson County, Alabama, in 2012 by the City of Stockton and the City of San Bernardino, California, and by Detroit, Michigan in 2013. No significant city or county filings have occurred since then, but municipalities ^[1] have been increasingly squeezed between the cost of providing basic services and flat or declining revenues, exacerbated by the COVID-19 pandemic and the loss of sales and other taxes and other types of revenues. In the face of these pressures, the possibility that some may want or need to seek chapter 9 ^[2] protection has increased.

We intend this pamphlet to provide an overview of chapter 9 for those who manage and govern municipalities. We offer some thoughts on how to avoid filing as well as how to successfully navigate a bankruptcy case and emerge in stronger financial health. It does not attempt to provide an exhaustive technical exposition of the law; due to its size and format, this pamphlet only briefly summarizes, and in some cases omits entirely, areas that in particular cases might be very significant, but which we feel would not be of interest to the majority of our audience.

Accordingly, this pamphlet does not purport to provide legal advice or serve as a template for a practitioner seeking to advise a client considering a chapter 9 filing or to prosecute the case once there. Rather, what we hope to provide is a basic framework for those considering the chapter 9 alternative and enough background to enable decision makers and managers to ask informed questions of their advisors and appropriately consider the alternatives. Bankruptcy is a complex area of the law, and the adage “don’t try this at home” should be heeded. Any municipality seriously considering a chapter 9 filing should obtain expert legal counsel as well as financial advisory help.

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^[1] Throughout, we use the term “municipality” to refer to a local government entity that may file a chapter 9 case. The term covers a wide variety of local governments that may or may not be considered “municipalities” under state law.

^[2] The observant reader will note that “chapter” is not capitalized when referring to the chapters of the Bankruptcy Code. This is the standard convention.