Municipality Reorganization
A San Jose bankruptcy lawyer defines Municipality Reorganization
Municipality reorganization in bankruptcy law is slightly different than both individuals filing for bankruptcy or business entities filing for bankruptcy. Chapter 9 of the Bankruptcy Code is applicable only to municipalities, therefore chapter 9 governs the municipality reorganization. The code defines a municipality as a “political subdivision or public agency or instrumentality of a state.” 11 USC 104(b). The definition is broad enough to allow cities, townships, and public improvement districts to file chapter 9 bankruptcy. Municipality reorganization is different in the sense that the 10th Amendment of the Constitution protects municipalities from certain Bankruptcy Code provisions. The 10th Amendment provides for state autonomy, thereby affording a municipality reorganization plan much more independence than other reorganization plans found in the Bankruptcy Code. An example of such independence with municipality reorganization is the lack of any provision calling for a liquidation of municipality assets.
Other differences between Chapter 9 and other Bankruptcy chapters deal with the voluntary aspect of filing. With a municipality reorganization there can be no involuntary bankruptcy. In addition, there is no meeting of the creditors with a municipality reorganization and creditors cannot propose competing plans with the municipality. The filing of a chapter 9 bankruptcy, however, does create the automatic stay, similar to other bankruptcy chapters.
An important tool available to the municipality in a municipality reorganization is the ability to use its broad powers to raise taxes, use its property, and make necessary expenditures. Another aspect of municipality reorganization is the ability of the municipality to reject collective bargaining agreements and retiree benefit plans without having to follow the usual procedures required in Chapter 11. Further, during municipality reorganization the municipality has authority to borrow money and obtain credit. The court does not have any power to supervise the amount of debt the municipality may incur.
The bankruptcy court, however, does have the power to dismiss a municipality reorganization plan if it finds that the petition was not filed in good faith or if the petition fails to meet the requirements of chapter 9. A municipality reorganization is discharged after a) confirmation of the plan; b) deposit by the municipality of consideration to be distributed; and c) a finding by the court that the security deposited by the municipality is valid. The most recent well known municipality bankruptcy was Vallejo, California, which took place in 2009.
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