BRADENTON, Fla. - Hillview, Ky., may not be authorized to file for bankruptcy under state law, according to the city's largest creditor.
Truck America LLC,
While Boise County, Idaho faced a similar conflict that was resolved, Truck America's attorney wrote that Kentucky courts would likely require that the Legislature amend state law to authorize municipal bankruptcy.
Among other reasons for opposing Hillview's filing, the company said the city did not negotiate in good faith to settle its court-awarded $11.4 million claim over a contract dispute as required by the bankruptcy code.
"Hillview did not file Chapter 9 in good faith to adjust its debts, or to ameliorate bona fide financial distress," the company's filing said. "Rather, it admits to being 'fiscally sound' and filed this case for the specific purpose of minimizing the amount it will be required to pay one creditor—Truck America—on account of a judgment affirmed by Kentucky's appellate courts."
Impairing a single creditor is not a legitimate Chapter 9 bankruptcy objective, the company said.
Hillview filed for bankruptcy on Aug. 20 saying it did so to stop interest from mounting on the judgment.
City officials have also said they do not intend to restructure any other debts, including $3.17 million of bonds.
In Thursday's filing, Truck America argued that the city also failed to follow the state constitution, which requires that municipalities raise taxes in order to pay authorized indebtedness such as the judgment within 40 years.
Hillview also has the capacity using taxes, fees, and bonding to generate revenue to pay the judgment, the company said.
The litigation between Hillview and Truck America over a soured real estate contract began in 2005, and ended with the company winning a court award of $11.4 million plus post-judgment interest at the rate of 12%. The city appealed, and the case was settled March 25 when the Kentucky Supreme Court declined to review it.
As of April 1, the judgment plus interest totaled $15 million.
Over the course of the litigation, Hillview made four settlement offers ranging from $10,000 to $2 million, according the company.
The case also underwent mediation with the judge in Detroit's Chapter 9 case, retired U.S. Bankruptcy Judge Steven Rhodes, who in April reportedly recommended that Hillview issue $5 million of bonds to settle the judgment and to assign the company "the proceeds of any malpractice claims owned by Hillview against its former city attorney."
Hillview rejected the mediator's proposal saying that the debt service on the bond issuance was prohibitive, according to Truck America.
In a statement to the court in August, Mayor Jim Eadens said that the city is exploring malpractice claims against its former attorney. He did not provide any details.
Hillview's case has been assigned to Bankruptcy Judge Alan C. Stout.
Stout, in determining the city's eligibility, will look at whether the city's filing was a ploy, if it was done in good faith, and the reasoning behind it, said municipal restructuring expert James Spiotto, managing director of Chapman Strategic Advisors.
"The fact that there was some mediation may show good faith" on the city's part, he said.
Spiotto has said that other Chapter 9 filings have resulted from judgment awards, including Boise County's case in 2011. There, he said, the court determined that the county of about 7,000 residents was not insolvent and had the funds to satisfy the judgment.
Hillview, a city of about 8,000 residents, is about 17 miles south of Louisville.
