New York City-based law firm Cravath, Swaine and Moore LLP will advise Harrisburg’s City Council on its options for either filing for bankruptcy or entering into Pennsylvania’s distressed communities program, called Act. 47.

The council Tuesday evening selected Cravath to review the city’s finances and liabilities and illustrate how a possible Chapter 9 filing could help or hurt the state’s capital city. Cravath also represents the New York City Off-Track Betting Corp. in its Chapter 9 filing.

Harrisburg has not made debt-service payments this year on $282 million of outstanding incinerator debt that it guarantees. Meeting payroll has been a dramatic event as Mayor Linda Thompson implements layoffs and spending cuts to help balance a $64.7 million fiscal 2010 budget.

Cravath will advise the council on a pro-bono basis. The firm plans to delve into Harrisburg’s finances and suggest different options for the city. The City Council approved the selection in a vote of six to zero. Council President Gloria ­Martin-Roberts, who has said that Chapter 9 is just one of many options Harrisburg should explore, was absent for the vote as she is recuperating from surgery.

“We thought long and hard about what made sense for Pennsylvania’s capital city and decided that this firm has a long tradition to pro-bono service for challenging issues,” Richard Levin, partner at Cravath, said in a telephone interview. “We haven’t done one this significant in a while. We figured this is an appropriate place to put our pro-bono commitment.”

Levin was one of the primary authors of the 1978 Bankruptcy Code when he was counsel to a subcommittee of the House Judiciary Committee from 1975 to 1978. In addition, he served as counsel for city of Gardena, southeast of Los Angeles, to help it address outstanding bonds and avoid a Chapter 9 filing, he said.

Municipal bankruptcy filings are not as common as corporate bankruptcy claims. Chapter 9 filings can end up costing a municipality more time and money that it anticipated, as in the ongoing Vallejo, Calif., case. That city has been in bankruptcy since May 2008 and is dealing with counter-suits from labor unions.

Levin pointed out that bondholders and creditors could be persuaded to take a cut in a Chapter 9 negotiation as a local government has only so much taxing power.

“Just simply ordering somebody to pay doesn’t get payment,” Levin said. “The reason why we have a bankruptcy system at all is to accommodate and figure out ways to solve these problems in a constructive way that gets the bondholders as much as the city is able to pay and doesn’t require the city to become a black hole.”

TD Bank NA, trustee of the incinerator bonds, and Assured Guaranty Municipal Corp., insurer of the bonds, filed suit on Sept. 13 against the city and the Harrisburg Authority, the issuer.

Thompson has said that a possible bankruptcy filing would be the last, worst-case solution for Harrisburg. The mayor Wednesday pledged to help Cravath with any information it needs for its ­evaluation.

“The mayor believes the city’s decisions need to be based on facts and the best interest of its residents and that the firm will help clear the air of many of the misconceptions about bankruptcy, ”  Thompson spokesman Chuck Ardo said in a statement.

The firm will also weigh in on Harrisburg’s options if it were to enter into Act 47. Levin and his team will educate themselves on Pennsylvania law in order to offer its advice, he said. State officials are currently reviewing Harrisburg’s Act 47 application, which Thompson filed on Oct. 1. A second public hearing on the issue is set for Nov. 17.

Westfall Township, Pa., which has a $1 million annual budget, filed Chapter 9 last year after a judge ruled the municipality must pay $20.8 million to a real-estate developer.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.