by Francis J. Lawall and J. Gregg Miller
This Emerging Issues Analysis
is adapted from the Collier Monograph "Debt Adjustments for Municipalities
under Chapter 9 of the Bankruptcy Code," by Francis Lawall and J. Gregg
Miller. The authors emphasize that in the planning stage, counsel must identify
the chapter 9 eligibility requirements and formulate a strategy to meet them,
and then construct an achievable endgame such that negotiations with creditors
and plan drafting can proceed.
Excerpt:
Immediately upon undertaking
the representation of a debtor municipality, counsel must (i) consider how to
meet the chapter 9 eligibility requirements, and (ii) determine the range of
values the debtor is able, and may be required, to provide to creditors in
order to obtain plan approval, whether consensually or through
"cramdown." Counsel should consider starting by preparing an outline
of the several requirements imposed under both the Bankruptcy Code and
applicable state law as preconditions to the eligibility of the municipality to
obtain an order for relief. Major eligibility requirements include (i)
prepetition negotiations with creditors (unless negotiation would be
impracticable), (ii) insolvency and (iii) state law authorization to file the
chapter 9 petition. As preparations proceed, it may be prudent to document in
some detail the different negotiations with creditors, to ensure that such
negotiations are substantive and meaningful, and to alert the municipality that
an officer may have to testify in bankruptcy court regarding the negotiations.
Counsel may also have to work with experts in accounting, finance and taxation
to assist in developing a restructuring plan, or at least an outline of a plan,
that identifies an available range of values to fund a plan that could be
confirmed by a bankruptcy court over the objection of creditors, if necessary.
Once developed, counsel should discuss those values with the debtor. Through
this process, the upper limits of the range of values that can be offered in
negotiations with creditors can be identified. The same experts will likely be
needed to establish the insolvency of the debtor within the meaning of chapter
9.
In summary, it is very important as part of prepetition planning that counsel
first identify the chapter 9 eligibility requirements and formulate a strategy
to meet them and, if necessary, prove them, and second, construct an achievable
endgame which can be explained to, and supported by, the client, such that
negotiations with creditors and plan drafting can proceed.
In addition to the legal issues arising under chapter 9, counsel must deal with
the practical requirements of a municipal bankruptcy. Because a municipality,
by definition, is a creature of the political process with significant and
varied constituencies maintaining a voice in the proceedings, attention must be
paid to forging not only a consensus among financial constituencies, but also a
consensus among political constituencies. Such a consensus is unlikely to be
complete, but in any event, an individual or management team must be identified
to lead the process. An argument could be made that a state appointed receiver,
a plan coordinator or other representative who is designated to lead the
chapter 9 process could offer a potential solution to multiple problems.
Although not likely to be popular with local officials, a state appointed
receiver may well serve to alleviate some of the political fallout that those
local elected officials might suffer in the event of a chapter 9 filing.
Moreover, the state's broader powers and resources may need to be called upon
to help effect a long-term restructuring plan for the municipality. Finally, a
receiver could serve to consolidate authority in a potentially more independent
decision maker.
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Francis J. Lawall, a
partner in the Philadelphia office of Pepper Hamilton LLP, concentrates in
national bankruptcy and reorganization matters throughout the United States. He
has broad experience in the reorganization of companies plagued with massive
toxic tort liabilities, as well as companies in the textile, automotive,
clothing and construction materials industries. He also represents creditors'
committees in energy, healthcare, automotive and steel companies cases as well
as buyers and sellers of assets in and outside of bankruptcy proceedings. As
part of his practice, Mr. Lawall has counseled financially distressed
municipalities and has lectured and published on numerous issues, including
preferences, reclamation, the role of creditors' committees and related issues.
Mr. Lawall is highly rated in Chambers USA: America's Leading Lawyers for
Business (2005-2011), is listed in The Best Lawyers in America and
was selected for inclusion on the 2012 Pennsylvania Super Lawyers list.
Mr. Lawall received his B.A. (economics) from Temple University in 1981, his
M.A. (economics) from Temple University in 1982 and his J.D. from Temple
University Law School in 1985.
J. Gregg Miller is of counsel in the Philadelphia office of Pepper
Hamilton LLP. Since joining the firm in 1969, Mr. Miller has concentrated his
practice primarily in the areas of bankruptcy and reorganization law. In April
2009, Mr. Miller filed a chapter 9 petition for Westfall Township (Pike
County), Pennsylvania. The U.S. Bankruptcy Court for the Middle District of
Pennsylvania confirmed the municipality's chapter 9 plan for adjustment of
debts 11 months later, in March 2010. This was the first successful
reorganization of a municipality under chapter 9 in the history of the
Commonwealth of Pennsylvania. Mr. Miller has represented creditors, or groups
of creditors, and debtors in various kinds of workouts and bankruptcy
proceedings. He has experience in health care bankruptcies, mass toxic tort
bankruptcies and construction bankruptcies. In health care bankruptcies, he has
represented a hospital as debtor in possession, indenture trustees, secured
creditors and physician practice groups. In mass tort bankruptcies, he has
represented four asbestos manufacturers and distributors of insulation products
as debtors in possession in chapter 11 proceedings. In construction bankruptcies
and workouts, he has represented sureties, banks, contractors, subcontractors
and suppliers. Mr. Miller served as co-chairman of the American Bankruptcy
Institute's Insurance, Construction and Surety Subcommittee of the Business
Reorganization Committee from 1998 to 2006. He is a member of the Consumer
Bankruptcy Assistance Project in Philadelphia, which provides direct, pro bono
legal representation to indigent people who seek to obtain the protection of
the bankruptcy court, and was president of its board of directors from 2006 to
2008. Mr. Miller is highly rated in Chambers USA: America's Leading Lawyers
for Business, is listed in The Best Lawyers in America and was
selected for inclusion on the 2011 Pennsylvania Super Lawyers list. Mr.
Miller received his undergraduate degree from Yale College in 1966, and his
LL.B. from the University of Pennsylvania Law School in 1969.