BRADENTON, Fla. - A steep legal judgment pushed a small Kentucky city to file for Chapter 9 bankruptcy in a move the winner of the court case said was unnecessary.

Hillview, which has about 8,000 residents, filed a petition Thursday in the U.S. Bankruptcy Court's Western District of Kentucky, making it the 65th municipality to seek bankruptcy protection in more than six decades, and the first filing since Detroit in 2013.

Truck America Training LLC won an $11.4 million judgment for breach of contract against the city after years of protracted litigation over a land sale.

Hillview's decision to seek bankruptcy relief in the face of the judgment is "tragic and unnecessary," said the firm's attorney, Brian Meldrum of Stites & Harbison PLLC.

"Truck America has made numerous fair settlement offers, dating from the trial itself up to and including the evening before the city filed its bankruptcy petition," Meldrum said Friday. "Hillview has rejected all of them."

The city in Bullitt County about 17 miles south of Louisville listed assets of under $10 million and liabilities between $50 million and $100 million in its bankruptcy petition.

Hillview is not the first municipality to file for Chapter 9 protection in the wake of a court judgment, according to bankruptcy expert James Spiotto, managing director of Chapman Strategic Advisors.

Boise County, Idaho filed for bankruptcy in 2011 after losing a court case that awarded a $4 million judgment plus $1.4 million in attorney's fees. Mammoth Lakes, Calif., filed in 2012, after losing a court case to a developer that resulted in a $43 million judgment.

Spiotto said neither community ended up filing a plan of adjustment.

In Boise County, the court determined that the county was not insolvent and had the funds to satisfy the judgment.

In Mammoth Lakes, a settlement was negotiated with the developer and the case was dismissed. The amount of the settlement was not filed with the court.

"Chapter 9 is a way of bringing things into clearer focus," Spiotto said.

Hillview's unsecured claims include $1.39 million of outstanding general obligation bonds issued in 2010, and $1.78 million of debt that is part of a pool bond issued by the Kentucky Bond Corp. in 2010 and operated by the Kentucky League of Cities.

The judgment against Hillview became final March 25 after the Kentucky Supreme Court declined to review the case.

Mayor Jim Eadens referred requests for comment to city attorney Tammy Baker. Baker did not respond to inquiries from The Bond Buyer.

Meldrum said Truck America's most recent settlement offer was to accept approximately 40 cents on the dollar, adding that he believed the city could have bonded the payment over time "without major tax increases or severe cost-cutting measures."

"That Hillview's leaders opted to become the first city to file Chapter 9 in Kentucky history, rather than settling with Truck America at a steep discount, is reckless and short-sighted," Meldrum said.

Hillview had total revenues of $2.7 million in fiscal 2014, and a fund balance of $659,723 at the end of the year, according the city's 2014 audit.

In addition to the judgment accumulating interest at 12% per year, the audit said that the city had no insurance coverage available for the breach of contract lawsuit.

In Hillview's case, the city could classify the court judgment differently from its bond debt, as long as the treatment is not arbitrary, Spiotto said.

That's what Medly, Fla., did in its 1968 bankruptcy case when the town came up with a plan to pay trade and other debts over time but opted to continue to pay bond debt on time to preserve future access to the capital markets, he said.

On Friday, Standard & Poor's lowered its rating on Hillview's GO debt five notches to B-minus from BB-plus. The lower rating was placed on CreditWatch with negative implications.

"The downgrade and CreditWatch placement follow the city's move to file for Chapter 9 bankruptcy," said analyst Scott Nees. "The CreditWatch with negative implications reflects our view of the situation as Hillview waits for the bankruptcy court to either approve or deny the bankruptcy petition."

If the petition is approved, S&P said it would lower the rating due to the likely increased probability of default.

In February, Standard & Poor's downgraded Hillview's GO bonds four notches to BB-plus, and maintained a negative outlook, citing the judgment, and a going concern opinion in the city's fiscal 2014 audit. S&P's analysis of the city's financial condition included an examination of whether the Hillview could issue bonds to pay the Truck America judgment.

"We believe the city has legally available options apart from bankruptcy," S&P said in the February analysis.



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.