It is the duty of a financially insolvent municipality to seek protection under Chapter 9 of the Bankruptcy Code. Prior to enactment of Chapter 9 provisions, creditors of municipalities had the only remedy to pursue an action of mandamus and compel the municipality to raise taxes. According to the bankruptcy Code, a municipality is a “political subdivision or public agency or instrumentality of a State.” It includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts. A municipality’s assets and debts should not offend constitutional guaranties of state sovereignty.
A municipality can commence reorganization of its debts by filing a voluntary petition for bankruptcy under Chapter 9 of the Bankruptcy Code. Debt collection activities will be automatically stayed upon filing of the petition. All the officers/officials of the municipality will be protected under Chapter 9. A Chapter 9 petition concerning an unincorporated tax or special assessment district that does not have its own officials will be commenced by the filing of a voluntary “petition by the district’s governing authority or the board or body having authority to levy taxes or assessments to meet the obligations of such district.
The Chapter 9 petition should also be accompanied by a list of creditors. The bankruptcy court also has discretion to grant a different time for filing of the list of creditors. Chapter 9 filing is done in the federal judicial district in which the municipality is geographically located. The bankruptcy court deals with Chapter 9 in a very distinct manner. In a Chapter 9 bankruptcy, the chief judge of the Court of Appeals of the place where the bankruptcy court is located will select the bankruptcy judge. This is because Chapter 9 cases can be very complex and may involve elements of politics. The Bankruptcy Code imposes limits on Chapter 9 creditors because municipalities are unique entities. The court will also have no power to convert the case into another type of bankruptcy or appoint a trustee.
