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Issues in Big Chapter 9 Cases Showing a Red Flag to Would-Be Municipal Bankruptcy Filers?

Providence, RI has become the latest city to get press for flirting with the brink of insolvency and, thus, is starting to generate increasing debate over whether it will file for Chapter 9, municipal bankruptcy, protection. Meanwhile, Detroit—which unlike Providence is in a state that does not permit such a filing without the state's prior consent, continues to be stuck in a debt mire that has led to speculation that Chapter 9 would be its best option eventually.

However, continued problems with two of the most notable municipal bankruptcy proceedings in recent memory could be giving those considering the path cold feet.

In Harrisburg, PA, attorneys representing the Harrisburg City Council saw their appeals to the 2011 filing disallowed by U.S. Bankruptcy Judge Mary France struck down at the federal level early this month. Judge France originally struck down the Harrisburg filing in December on grounds that the city council, which did not have the support of the mayor or the state, was not authorized to file it. Supporters said it would give the city leverage to renegotiate debt largely tied to its massive trash incinerator project debt.

Meanwhile, state-appointed receiver David Unkovic has issued an official recovery proposal that, like the state's earlier plans prior to the defiant council vote to file the eventually disallowed Chapter 9, includes selling the incinerator operation and parking structure as well as raising various taxes and fees. The plan would also require union concessions, similar to the somewhat successful Central Falls, RI bankruptcy case.

But here's the bombshell: Despite the state and the mayor's vitriolic fight to prevent the council's Chapter 9 filing, Unkovic has said publicly that bankruptcy by July may be the only choice for the city if stakeholders don't make concessions and warring city government factions don't agree to work together.

Meanwhile, in Jefferson County, AL, lawsuits from stakeholders tied to the sewer renovation project that eventually sunk the local government's finances are starting to stack up. The new suits come amid reports that bondholders have not been getting even reduced payments since the state-appointed receiver was banished about one month ago—which came shortly after a bankruptcy judge stripped the receiver of his power to raise sewer rates in addition to other decision-making authority—as well as allegations that the county charged improper attorneys' fees. Among the suits that came during the chaotic post-receiver fallout is one from Bank of New York Mellon Corp., a major creditor on the botched sewer venture, demanding all revenue generated by the sewer system.

Bruce Nathan, Esq. of Lowenstein Sandler PC told NACM that each case, especially Jefferson County, was starting to prove very expensive for all parties involved. Nathan called the cases an "eye-opener" to just how convoluted and costly a Chapter 9 can be for stakeholders. As such, the issue will likely vary greatly depending on state laws.

"Chapter 9 is very tough—especially in Jefferson County, you have to wonder at the end of the day if there was a cheaper solution," Nathan said. "The receiver is using it as a threat in Harrisburg. It's going to be around as an option for a while, but it's going to be a state-driven situation. States like Michigan will probably find another way," like appointing a receiver in the case of Detroit.

Brian Shappell, NACM staff writer