Chapter 9 of the Bankruptcy Code provides exclusive relief for Municipalities that are financially unwell. It provides an opportunity for such municipalities to reorganize their debts. According to Bankruptcy Code § 904, in the absence of municipality consent, the court shall have no power to interfere with:
- Any political or government power of the municipality;
- Any property or revenue of municipality; or
- Any income-producing property of the municipality.
These limitations enable the municipality to exercise their day-to-day administration and activities without any impediment or court’s consent. Moreover, the municipality can borrow money for their internal purpose without any type of court approval. Furthermore, a municipality debtor has power to employ professionals for their internal administration. However, the reasonableness of fees for these experts is subject to an evaluation by the court during the time of plan confirmation.
Pursuant to the Bankruptcy Rules, the Secretary of the U.S. Treasury may, or if requested by the court shall, intervene in a chapter 9 case. The representatives of the state in which the debtor is located may also intervene in a chapter 9 case. This is because, there may be a good deal of interest in a municipality’s Chapter 9 case from entities wanting to appear and be heard. Further, the Bankruptcy Code permits the Securities and Exchange Commission to appear and be heard on any issue and gives parties in interest the right to appear and be heard on any issue in a Chapter 9 bankruptcy case. Here, the parties interest shall include employees of the municipality, special tax payers, securities firms, banks situated in the municipality, local residents, and non-resident owners of real property.
The Tenth Amendment of the US Constitution reserves certain powers to the states with regard to the management of their internal affairs. Chapter 9 of the bankruptcy code recognizes this special power and restricts the bankruptcy court’s power to control the internal activities of a municipal debtor. Therefore, in a Chapter 9 bankruptcy case, the court has incapacity to pursue all general remedial actions.
The bankruptcy court cannot take over the operations of a municipal debtor, eliminate its governing board members, direct the proceedings of the governing board, or appoint a receiver or trustee to administer the affairs of the municipality. The limitations in the Bankruptcy Code § 904 are essential to ensure the constitutionality of Chapter 9 bankruptcy provisions.