D.1.2 Process

D.1.2 Process

Few municipal bankruptcies are a smooth sail. The process, however, usually follows a general course. Because the bankruptcy judge retains the ability to dismiss the case at any point, the bankruptcy court can ensure a fair and orderly process which may include the following:

FILING AND AUTOMATIC STAY. The public agency’s filing triggers the “automatic stay” provisions of Chapter 9. These prevent or stay litigation against the public agency and the exercise by creditors of enforcement remedies.

ELIGIBILITY DETERMINATION. The bankruptcy judge must determine whether the public agency has satisfied the eligibility requirements described above. The public agency’s assertion of eligibility may be, and often is, challenged by creditors.

ORGANIZATION. The public agency causes publication of notice of the filing and submits a list of known creditors. Official creditor committees, representing the various types and classes of creditors, are formed.

RESOLUTION OF DISPUTES RELATING TO OBLIGATIONS AND PRIORITIES. A variety of legal questions may be presented. Common issues addressed include:

  1. The proposed assumption or rejection by the public agency of contracts and leases. Agreements entered into through collective bargaining and pension obligations are generally accorded greater protection than other obligations.

  2. The validity of various contracts and claims made.

  3. Special revenue determinations. A number of public agency revenues, including assessments, enterprise revenues and proceeds of dedicated taxes, are not legally available to satisfy claims of the public agency’s general creditors. Obligations payable from sufficient “special revenues” may be treated as secured obligations and collection of such revenues may be excepted from the automatic stay. Payment of operating expenses, however, takes precedence over the payment of debt service even if a debt obligation is secured by a pledge of “gross revenues”. See Section 3.3.6.1, Enterprise Public Revenue Bonds.

  4. Lien determinations. In general “statutory liens” (liens created by state statute as opposed to liens created by contract) securing particular obligations are respected.

PREPARATION AND APPROVAL OF A PLAN OF ADJUSTMENT. The public agency prepares, through negotiation with creditors and creditor committees, a plan of adjustment, which may provide for the reducing or deferring the payment of claims, and must provide a reasonable basis to conclude the public agency will be able to operate on a financially sustainable basis after it has emerged from bankruptcy. The plan is subject to approval by the bankruptcy judge and may be challenged by disadvantaged creditors. Approval of the plan of adjustment is the final step of the bankruptcy process.