Chapter 9 of the U.S. Bankruptcy Code provides a legal mechanism through which municipalities may be protected from their creditors as they attempt to develop and negotiate a plan to adjust their debts. There is no provision for liquidation of a municipality's assets to satisfy creditors, there is no "bankruptcy estate," and the bankruptcy court has limited authority over the conduct of the municipality during the pendency of the case. Despite this seemingly dramatic increase in chapter 9 filings, chapter 9 is, and has been, a relatively seldom used provision of the Bankruptcy Code, generally averaging fewer than 10 filings per year. Many of those filings have been by small government agencies such as municipal utilities, school districts, or single-purpose entities (e.g., a hospital or convention center). Reports of significantly decreased revenues and increased expenses in both cities and states as well as predictions of a significant number of municipal bond defaults in the coming years have sparked interest in municipal bankruptcy, as well as calls for allowing states to use the Bankruptcy Code as a means of adjusting their own debts. A municipality must be specifically authorized by its state to file under chapter 9. Most people, hearing the term "municipality," probably think of cities and towns. Section 101(40) of the Bankruptcy Code states that the term "means political subdivision or public agency or instrumentality of a State." Since 1994, municipalities have only been eligible to file under chapter 9 if they were specifically authorized to do so by their states. Simply being a municipality that is authorized by its state to file under chapter 9 is not sufficient for being an eligible chapter 9 debtor. To be eligible for chapter 9 protection, an insolvent municipality must be filing for such protection in good faith. Retention of Control

There are several ways in which the municipal debtor retains control in a chapter 9 case. In this way it is similar to a chapter 11. The bankruptcy court cannot interfere with the municipality's political or governmental powers, its property or revenues, or its use or enjoyment of its income-producing property. Assumption and Rejection of Executory Contracts

Chapter 9 includes § 365 among the sections of the Bankruptcy Code that are applicable in a municipal case. However, in evaluating assumption or rejection of a collective bargaining agreement (CBA), the courts use a higher standard. Section 1113, which is not among the Bankruptcy Code sections named in § 901(a) as applicable in chapter 9, was added to the Bankruptcy Code following the U.S. Supreme Court's 1984 holding in National Labor Relations Board v. Bildisco and Bildisco . Adjustment of Debts

In a chapter 9 case, only the debtor has the right to file a plan of adjustment. General obligation bonds do not enjoy such protection under bankruptcy law; however, a municipality's ability to adjust those debts may be limited by state law. To be confirmed, a plan cannot require the municipality to take an action that is prohibited by law. This provision may also limit a municipality's ability to adjust its existing pension obligations through chapter 9. Section 943 directs the court to confirm a plan if it complies with the requirements of the Bankruptcy Code; the expenses incurred in connection with the case and the plan of adjustment are disclosed and are reasonable; the debtor is not legally prohibited from taking actions necessary to carry out the plan; holders of administrative claims receive cash equaling their claims, unless they agree otherwise; the debtor has, or will, obtain any regulatory or electoral approval required under nonbankruptcy law for carrying out the plan; and the plan is both feasible and in the best interest of creditors.
As cities and states have experienced varying degrees of financial difficulties in recent years, "municipal bankruptcy" has been mentioned relatively often in the popular press. The term is somewhat misleading, both in the word "municipal" and in the word "bankruptcy."
Many people think only of cities when they hear the word "municipal." Upon learning that in the context of the U.S. Bankruptcy Code the term means more than just cities, some think that states may use the provisions of the Bankruptcy Code for municipal debtors: chapter 9. However, states are currently not eligible to be debtors under the Bankruptcy Code. The Code's definition of "debtor" includes only persons and municipalities. Its definition of "municipality" includes cities and counties as well as other political subdivisions, public agencies, and instrumentalities of a state. However, a municipality may not file under chapter 9 unless specifically authorized to do so by its state. To be eligible for chapter 9, a municipality must be insolvent.
Chapter 9 is titled "Adjustment of Debts of a Municipality." The Bankruptcy Code does not provide for the liquidation of a municipality's assets and distribution thereof to the creditors. Instead, it provides a legal mechanism through which municipalities may be protected from the claims of their creditors as they attempt to develop and negotiate a plan to adjust their debts. In this way, chapter 9 has similarities to chapter 11 reorganizations. However, a municipality retains more control in a chapter 9 case than does the debtor in a chapter 11. The oversight and involvement of the bankruptcy court is quite limited. The court cannot interfere with the municipality's political or governmental powers, its property or revenues, or its use or enjoyment of its income-producing property.
There are only a few sections of the Bankruptcy Code that were specifically written in chapter 9; however, many other sections of the Code are explicitly made applicable to a chapter 9 case. Among these is § 365, which allows executory contracts to be assumed or rejected in a bankruptcy proceeding. Collective bargaining agreements (CBAs) are executory contracts. The expense incurred in meeting the obligations of CBAs may be a substantial budget consideration for many municipalities. While chapter 11 includes a section that specifically addresses the standards that must be met before a court can allow rejection of a CBA, no such section exists in chapter 9. Instead, based on two chapter 9 cases (In re County of Orange, California and In re City of Vallejo, California) it appears that municipalities may reject CBAs if they meet the less stringent standards established in National Labor Relations Board v. Bildisco and Bildisco.
Although of current interest, chapter 9 is a provision of the Bankruptcy Code that is rarely used. Since 1979, the number of chapter 9 filings per year has averaged less than 10. Most of those have been by small government agencies such as municipal utilities, school districts, or single-purpose entities.
Although chapter 9 has provided significant relief in the two major cases named above, it is not a panacea for a municipality's financial problems. It can be a lengthy and expensive procedure. Additionally, the debtor's ability to adjust debts, particularly pension or general obligation debt, may be limited by the state's constitutional or statutory restrictions since a plan of adjustment cannot require the municipality to take an action that is not lawful.