HARRISBURG, Pa. — A federal judge on Wednesday dismissed the Harrisburg City Council’s petition seeking protection from creditors under Chapter 9 of the federal bankruptcy code.
Judge Mary France of the U.S. Bankruptcy Court for the Middle District of Pennsylvania in Harrisburg said a state law restricting bankruptcy options to financially distressed communities under the Act 47 workout program was valid, and that the City Council’s approval of the filing without the mayor’s support was improper.
The ruling will likely clear the way for a state takeover of Harrisburg through establishment of a receivership.
“The city’s admission into the Act 47 [state workout program] gives it no vested right to file for bankruptcy,” France said Wednesday afternoon. The City Council, she added, cannot file independently of the mayor under the city’s Plan A system of government. “For a Chapter 9 bankruptcy to work, all the branches of government must be on the same page. It would be a different outcome if the mayor had been involved,” she said.
Mark Schwartz, the attorney representing the council, said he was unsure about appealing, but added: “These kinds of cases end up in the U.S. Supreme Court. I’m very disappointed.”
Schwartz blamed the lack of support by Mayor Linda Thompson. “She’s sticking up for her political contributors,” he added.
Wednesday’s hearing drew an overflow gathering of lawyers, media, and citizens that required a spillover courtroom. The Walnut Street courthouse is one venue in a multi-pronged tussle over who gets paid how much in the city’s financial recovery. Major creditors, including Assured Guaranty Municipal Corp. and Dauphin County, opposed the bankruptcy filing, as did the state and Thompson, while the council and others favor bankruptcy as a more equitable means of settlement for the city.
Harrisburg is $310 million in debt — more than five times the size of its proposed budget for fiscal 2012 — mostly due to cost overruns related to an incinerator retrofit project. According to bankruptcy court filings, it has skipped $60 million in bond payments.
France, in her third-floor hearing room, said early in the session she would focus on the constitutionality of a state law restricting bankruptcy filings, and whether the City Council’s filing for bankruptcy without mayoral approval violated the law. The state law, which passed in June as a rider to the fiscal code, bans cities of Harrisburg’s size — the capital city’s population is 49,000 — from filing for Chapter 9 protection once they have enrolled in a state workout program for distressed communities, known commonly as Act 47.
“The financial community, which lends money to all municipalities throughout the state, has concerns about fiscal stability, not just Harrisburg, but all distressed communities,” said Neal Colton of Cozen O’Connor, on behalf of the commonwealth.
Clayton Davidson of McNees, Wallace & Nurick PC, represented Dauphin County. He also feared the domino effect of a bankruptcy filing. “When you throw a rock in the pond, how far do the circles go?”
Schwartz, a solo practitioner, said the state law, amended last month after the council three times rejected a proposed recovery plan under Act 47, said the law had legal flaws and was unfairly aimed at Harrisburg. “It’s like a thread and when you pull the thread, the emperor has no clothes,” he said. “It’s like Obama health care; there was no evidence of any legislative intent.”
Schwartz, a former bond banker, said a state takeover is intended only to protect creditors. “This bill was an abortion. The fiscal code implements the budget. Opposing counsel said it was about finances. Why not include it as part of the funeral director’s code or the horse racing code?”
Kenneth Lee of Tucker Arensberg PC, representing Thompson, and Paul Hummer of Saul Ewing LLP, on behalf of Assured Guaranty, said the City Council was out of bounds legally by approving a bankruptcy filing without the mayor’s approval.
France acknowledged the challenges presented by her ruling. “I’m not authorized to say whether this is a good thing or a bad thing for the people of Harrisburg or whether it will solve its financial problems,” she said.
At a press conference outside the courthouse, a group of citizens and business leaders called for an investigation into the state’s level of due diligence regarding the bond financings for the incinerator. Debt Watch Harrisburg, which sees bankruptcy as a more equitable means of distributing assets, called the state takeover an “unconstitutional overreach.”