WASHINGTON — The National Association of Bond Lawyers has updated its bankruptcy guide for members with new information drawn from the relatively high number of municipal bankruptcy filings in the last few years.
The updated guide, released on Thursday, states that it is "a primer prepared for the bond practitioner" on Chapter 9, the only form of bankruptcy available to municipalities.
Patrick Darby, a partner with the law firm of Bradley Arant Boult Cummings who is one of the seven authors, said the new guide is designed to incorporate major municipal bankruptcy cases like those in Jefferson County, Ala., where Darby served as debtor's council, as well as Detroit, Stockton, Calif. and Vallejo, Calif. that all happened after its last update in 2012.
Municipalities filing Chapter 9 bankruptcy "were fairly rare" before the last five years and that since then "a lot of big cases have been filed and some law has been made," he said.
"Detroit brought some new clarity to confirmation standards, Jefferson County brought some clarity to the law governing special revenue bonds," and "Detroit and the California cases all further developed and clarified the law surrounding eligibility," Darby explained.
The guide is divided into seven main chapters, with the two final ones providing future considerations and further reading suggestions for lawyers and city officials.
It starts with a description of state law alternatives to Chapter 9 and then launches into a history of the bankruptcy provision. From there, it delves into: how a municipality can qualify for the bankruptcy protection; how revenue and general obligation bonds are treated under proceedings; what specific case management aspects lawyers need to keep in mind; the requirements for a judge approving a Chapter 9 case; and the steps for dismissing a Chapter 9 filing.
While lessons taken from the recent cases were included throughout the document, the authors made some noteworthy changes to portions of the guide discussing Chapter 9 eligibility, the treatment of special revenue bonds, and proceedings for bankruptcy cases.
A municipality must satisfy five requirements to be eligible for Chapter 9 proceedings. It must be considered a municipality, be authorized to pursue Chapter 9 under state law, be insolvent, and want to implement a plan to adjust its debts. It also must either, have an agreement among creditors holding a majority of the claims to enter into the plan, or show that an agreement is not obtainable.
The Detroit case is cited as an example of one way a municipality can satisfy the last requirement for eligibility. In that case, the court found that negotiating with the city's creditors was "impracticable" because the creditors' asserted their position was "immutable," or unable to be changed. In addition, the retirees and other bondholders were too large in number and did not have a formal representative to unify them, the authors wrote in the guide.
The other recent cases also provided clarification of the eligibility requirements. For example, the Jefferson County case is used as evidence that the court puts the burden of proof for proving eligibility on the municipality.
The updated guide examined the results of the Jefferson County case to advise lawyers on the important place special revenue bonds have in Chapter 9 filings. The revenue bonds are unique in that their holders are entitled to pre-bankruptcy debt agreements even after the municipality files for Chapter 9. Section 902(2) of the bankruptcy code defines the special revenue bonds as those from: the operation or ownership of transportation or utility projects; special excise taxes; incremental taxes attributable to a special project; certain municipal functions; or taxes levied to finance a specific project.
Another advantage to holders of revenue bonds is that an automatic stay on a number of other liens does not apply to paying back the revenue bonds. Some municipalities had argued they would liable for pledged revenues held or received before a Chapter 9 case, but would not be required to pay special revenues while the case is proceeding.
But the court in Jefferson County rejected that argument and established that the municipalities are required to pay the net revenues during the entire life of the case.
Similarly, the Detroit case gave a number of clarifications on how Chapter 9 cases should proceed. It drew attention to specific steps the Detroit court considered, such as fee monitoring on both the debtor and creditor sides for professional services and expenses, retaining feasibility experts to advise on Detroit's capabilities to make its payments while continuing to operate, maintaining jurisdiction for an extended period after the Chapter 9 confirmation, and considering specific circumstances that could lead to different percentages of recovery among different classes of bondholders.
The guide's authors concluded that "the future of municipal bankruptcy law is uncertain," but wrote that it is "undeniable" that Chapter 9 should now be of interest to a wider range of people who should take notice of the "roadmap" provided from recent cases that shows more specifically the capabilities of Chapter 9 proceedings.