D.1.1 Eligibility
To seek protection under Chapter 9, however, a public agency must satisfy the eligibility criteria established by Chapter 9 and by state law. Chapter 9 protection is not available to states themselves but is open to any “political subdivision or public municipality or instrumentality of a state.” The Internal Revenue Service defines an instrumentality as an “organization created by or pursuant to state statute and operated for public purposes.”214 To be eligible, however, a local public agency must:
- Be “insolvent”. Insolvency is determined under general bankruptcy law principles and requires that the public agency be not able to pay undisputed debts as they become due or be unable to make such payments in the near future (e.g., in the current or immediately ensuing fiscal year). Likely financial failure “down the road” is not sufficient.
- “Desire to effect a plan to adjust its debt”. A plan does not need to be in existence as a precondition to a Chapter 9 filing, but the public agency must be able to show that it intends to develop and effect one.
- Demonstrate that a Chapter 9 filing is necessary. The public agency must prove one of the following:
- It has obtained the agreement of creditors holding a majority in amount of claims of each class the public agency intends to impair.
- It has negotiated in good faith and is unable to reach such an agreement.
- Negotiations are impracticable (e.g., because of the number of creditors).
- A creditor is attempting to gain a preference over other creditors.
- It has obtained the agreement of creditors holding a majority in amount of claims of each class the public agency intends to impair.
- Be authorized to file for bankruptcy under state law. Laws of the State of California impose preconditions and some other states do not allow municipal bankruptcy filings.
California Government Code Sections 53760 et seq. permits Chapter 9 filings by any “county, city, district, public authority, public agency or other entity . . . that is a municipality as defined in the [the federal bankruptcy code] or that qualifies as a debtor under any other federal bankruptcy law applicable to local public entities,” but specifically excludes school districts. California Government Code Section 53760 provides further that a local public agency may only file a petition under Chapter 9 if it has either:
- Participated in a neutral evaluation process, or
- Declared a fiscal emergency through adoption of a resolution by majority vote of its governing board.
Government Code Section 53760.3 provides a detailed process for a “neutral evaluation”, including notice to interested parties and discussions overseen by a neutral expert. Government Code Section 53760.5 requires that a “fiscal emergency” declaration be made only following a noticed public hearing and a finding that the local public agency will be unable to pay its obligations within the next 60 days.