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Update: A district court judge in Pennsylvania opted to disallow a municipal/Chapter 9 bankruptcy filing coming from the state’s capital city on grounds that the city council that filed it was not authorized to do so.
Judge U.S. Bankruptcy Judge Judy France said early in the proceedings Wednesday that her decision on the eligibility of Harrisburg’s Chapter 9 filing would hinge largely on a legality issue based on state law. She noted that if a newly enacted Pennsylvania law that bars bankruptcy filings for third-level category cities from filing a Chapter 9 bankruptcy before July 2012 could be considered unconstitutional then the council and, thus, the city could proceed with its bankruptcy filing. She noted that if the state law was deemed within constitutional bounds, the bankruptcy filing would be denied, which would pave the way for the state to take over Harrisburg’s finances in short order. France eventually found the state law (Act 46) to be constitutional, ending the council's hopes of continuing the bankruptcy proceedings and avoiding state conservatorship.
Earlier this fall, Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so said it gives the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit out of proportion to that of investors. At present, debt from the bungled incinerator project quintuples the city’s annual budget. State and mayoral plans to sell off city assets such as parking garages and the incinerator operation as well as raise taxes were rejected by the council.
The state, mayor and incinerator creditors are among a long line of opponents who have asked the judge to throw away the bankruptcy filing as improper. Should the council “win” the right to continue the bankruptcy on the basis of constitutionality, several more lawsuits almost certainly will subsequently challenge the filing in the coming weeks and months.
The case could be a watershed moment in Chapter 9 law as many believe it could increase the cost of credit for cities of similar sizes and debt and could set a virtual roadmap or set of precedents for municipalities trying to get out of paying creditors over failed gambles of the past. Stay tuned…
Brian Shappell, NACM staff writer