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A Chapter 9 petitioner must satisfy each of the mandatory provisions of 11 U.S.C.S. § 109(c)(1)-(4), and one of the requirements under § 109(c)(5) to be eligible for relief under the Bankruptcy Code. If a petitioner fails to meet the eligibility requirements of § 109(c), the bankruptcy court must dismiss the petition under 11 U.S.C.S. § 921(c). The burden of establishing eligibility under § 109(c) rests on the debtor. In determining whether the debtor has met its burden, the bankruptcy court is to construe broadly § 109(c)'s eligibility requirements to provide access to relief in furtherance of the Code's underlying policies.
Plaintiff, a creditor holding a $4 million judgment against a county for violating the Fair Housing Act (FHA), moved per 11 U.S.C.S. § 921(c) to dismiss a Chapter 9 bankruptcy filed by the county on the ground that it was not eligible to be a Chapter 9 debtor per 11 U.S.C.S. § 109(c) for various reasons including that it was not "insolvent" for purposes of § 109(c)(3) and/or 11 U.S.C.S. § 101(32)(C).
Did the county fail to prove that it was “insolvent” for purposes of § 109(c)(3) and/or 11 U.S.C.S. § 101(32)(C), thereby warranting the dismissal of the Chapter 9 bankruptcy petition filed by it?
The court granted dismissal. Noting that a Chapter 9 debtor had to satisfy all of the criteria in § 109(c)(1)-(4) and at least one criterion in § 109(c)(5), the court held that debtor was a “municipality” per state law per § 109(c)(1), was specifically authorized to seek relief per § 109(c)(2), had shown per § 109(c)(4) a desire to adjust debts, and had met both § 109(c)(5)(C) and (5)(D). However, dismissal was proper as debtor did not prove that it was “insolvent” per § 109(c)(3) and § 101(32)(C). First, while debtor had listed $550,000 in unpaid medical indigency claims, a county indigency fund seemed to have funds adequate to pay the entire sum. Second, it was not clear that payment of those claims in fact was “due.” The court also rejected as inadequately supported a claim that debtor’s alleged inability to pay the judgment and other county expenses rendered it insolvent. Nor was it persuaded that an expenditure to satisfy the judgment would violate.