By Lynn M. Brimer, Meredith E. Taunt and Mallory A. Field
Reprinted with permission from the American Bankruptcy Institute (ABI) Journal, Vol. XXXIII, No. 2, February 2014.
Unlike the corporate debtor seeking to reorganize in a chapter 11 bankruptcy, a municipality seeking chapter 9 protection must meet strict eligibility requirements. (1) Insolvency is one of the key eligibility requirements that a municipality must establish prior to the entry of an order for relief in a chapter 9 proceeding. Given the vast financial difficulties plaguing many municipalities throughout the U.S., bankruptcy courts are seemingly poised to author customized interpretations of insolvency as it pertains to potential chapter 9 debtors. As a result, bankruptcy courts have been forced to re-examine the traditional definition of “insolvency” as that term is applied in a chapter 9 proceeding.
In his recent opinion regarding eligibility, Hon. Steven W. Rhodes found that the city of Detroit was eligible as a debtor pursuant to chapter 9 due in large part to the court’s conclusion that Detroit is in a state of “service-delivery insolvency.”(2) While the concept of service-delivery insolvency is by no means novel, the parameters of such a state of insolvency are an important development to meet the needs of the new chapter 9 debtor. Read the full article.