Prepetition Planning for Municipalities Filing under Chapter 9 of the Bankruptcy Code

Prepetition Planning for Municipalities Filing under Chapter 9 of the Bankruptcy Code

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.

 Access the full version of "Prepetition Planning for Municipalities Filing under Chapter 9 of the Bankruptcy Code" with your lexis.com ID. Additional fees may be incurred.

 If you do not have a lexis.com ID, you can purchase this commentary and additional Emerging Issues Commentaries from the LexisNexis Store.

Lexis.com subscribers can access the complete set of Emerging Issues Analyses for Bankruptcy Law and the Bankruptcy Area of Law page.

For more information about LexisNexis products and solutions connect with us through our corporate site.

For more information about LexisNexis products and solutions connect with us through our corporate site.

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.