Frank Shafroth is director of the Center for State and Local Leadership at George Mason University.
The bankruptcy process will be costly for Hillview, Ky., said George Mason University's Frank Shafroth, a state and local government finance expert.

BRADENTON, Fla. – A federal judge in Kentucky has set a hearing date to decide if the city of Hillview can go forward with its bankruptcy petition.

U.S. Bankruptcy Judge Alan C. Stout scheduled an evidentiary hearing for Dec. 9 to determine if the city is qualified for relief and to consider an objection to the petition filed by the city's largest creditor, Truck America.

The truck driver training company won an $11.4 million judgment for breach of contract against the city after years of protracted litigation over Hillview's refusal to sell the company land under a lease-purchase deal.

The city of 9,000 residents near Louisville filed for reorganization on Aug. 20, saying it did so to stop $3,759-a-day in interest from mounting on the jury-imposed award, and that it will not restructure its bond debt.

With accrued interest payment on the judgment has risen to about $15 million, according to court documents.

The city's fiscal 2016 budget is $3.38 million.

Proceeding through the bankruptcy process will be costly for the small city, said Frank Shafroth, assistant professor and director of the Center of State and Local Leadership at George Mason University.

The process imposes political and physical costs, including legal and court expenses, that could be difficult to absorb if the city does not have a broad tax base, he said.

"It diverts all your attention from what you are trying to do," Shafroth said. "You've got to come up with a lot of money."

The court must determine that the city is insolvent, and meets other requirements of the bankruptcy code in order for Hillview to proceed.

Truck America has argued against Chapter 9 for Hillview in part because the city admitted that it is fiscally sound. The company also said that Hillview did not negotiate in good faith - as required by the code - to settle its judgment.

Hillview admitted that it filed "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," the company said in an Oct. 1 filing. "That is simply not a legitimate Chapter 9 objective."

City attorney Tammy Baker has said that the city intends to develop a plan of adjustment to deal with the judgment, but not to restructure any of its bonds.

Hillview owes $1.39 million on outstanding general obligation bonds, and $1.78 million as part of a pool bond issued by the Kentucky Bond Corp.

In a court filing Aug. 28, Mayor Jim Eads said the city is fiscally sound and would pay its bond debt and other bills as they came due.

Eads also said the city made several offers to reduce the judgment amount and failed to work out an acceptable plan through mediation.

"I believe that we did everything humanly possible to try to work this out, but we will not commit to something that is too much and that we believe will impair the city too much as far as our obligations to provide care and services to our citizens," he said.

After the city filed for bankruptcy, Standard & Poor's lowered its rating on Hillview's GO debt to B-minus from BB-plus and placed the rating on CreditWatch with negative implications.

S&P also said that if the court approves the city's petition, it would lower the rating again based on the increased probability of default.

Hillview is the first municipality in Kentucky to file for bankruptcy. It is also the first city to declare bankruptcy since Detroit in July 2013.

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