The first installment of this two-part series on municipal bankruptcy published on March 4, 2010, provided a basic overview of Chapter 9. Among the concepts raised in that column were the operation of an automatic stay to permit a municipality to obtain a “breathing spell” from its creditors, the right to reject collective bargaining agreements, and the ability for a municipality to reduce debt through a plan of adjustment. Part I also noted the overarching constitutional limitation that the Tenth Amendment imposes on federal courts under Chapter 9. Because states retain the exclusive right to control the affairs of their municipalities pursuant to the Tenth Amendment, bankruptcy courts have far less supervisory authority and power over a municipality than it does with respect to corporate and individual debtors.
Notwithstanding the Tenth Amendment, in a Chapter 9 case a bankruptcy court serves as a gatekeeper, scrutinizing the bankruptcy petition of a municipality at the outset of a case to ensure that the municipality is eligible to file under Chapter 9 and did so in good faith. To be eligible, a Chapter 9 debtor must (1) qualify as a municipality, (2) have specific state authorization to file bankruptcy, (3) be insolvent, (4) desire to effect a plan to adjust its debts, and (5) have actually negotiated or attempted to negotiate in good faith with its creditors.
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