The Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a State.” Its assets and debts should not offend constitutional guaranties of state sovereignty. Due to the complexity of the cases, its size, the range of parties involved and the laws make Chapter 9 bankruptcy as one of the most complex and rarest forms of bankruptcy. According to the 10th Amendment, bankruptcy proceedings are not a part of the constitution, and therefore the federal courts cannot force a municipality to liquidate. The Bankruptcy Code imposes limits on Chapter 9 creditors because municipalities are unique entities. Chapter 9 creates a debt resolution plan between the municipality and its creditors, thus providing financial protection.
The Court’s limited power over operations of the debtor in Chapter 9 bankruptcy is discussed in Sections 903 and 904 of the bankruptcy Code. Pursuant to Section 904, the bankruptcy court’s powers are limited to interfere with –
(1) any of the political or governmental powers of the debtor;
(2) any of the property or revenues of the debtor; or
(3) the debtor’s use or enjoyment of any income-producing property” unless the debtor consents or the plan so provides.
As per the provision, the debtor’s day-to-day activities shall not be subject to court approval and the debtor may borrow money without court’s authority. Further, the court cannot appoint a trustee (except for purposes specified in 11 U.S.C. § 926(a)) and cannot convert the case to a liquidation proceeding.
The court is also forbidden from interfering with the operations of the municipality, or with its use of property and revenues. This is because in a chapter 9 case there is no property of the estate and thus no estate to administer. A municipality that has filed for chapter 9 bankruptcy can employ professionals without court approval, and the only court review of fees will be in the context of plan confirmation, when the court determines the reasonableness of the fees.
These restrictions over the power of court are essential to ensure the constitutionality of chapter 9 and to avoid the possibility of the court’s substitution of its control over the political or governmental affairs, or property of the municipality for that of the state and its elected officials. Chapter 9 does not limit the state’s power to control a municipality in exercising its political or governmental powers, including expenditures for such exercise. However, a method of composition of municipal debt prescribed by a state law, or a judgment entered under such state law will not bind any non-consenting creditor.