Chapter 9

Municipality Bankruptcy

The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts).

a. Purpose of Municipality Bankruptcy

b. Eligibility

c. Commencement of the Case

d. Assignment of Case to a Bankruptcy Judge

e. Notice of Case/Objections/Order for Relief

f. Automatic Stay

g. Proofs of Claim

h. Court's Limited Power

i. Role of the U.S. Trustee/Bankruptcy Administrator

j. Role of Creditors

k. Intervention/Right of Others to be Heard

l. Powers of the Debtor

m. Dismissal

n. Treatment of Bondholders and Other Lenders

o. Plan for Adjustment of Debts

p. Confirmation Standards

q. Discharge

The first municipal bankruptcy legislation was enacted in 1934 during the Great Depression. Pub. L. No. 251, 48 Stat. 798 (1934). Although Congress took care to draft the legislation so as not to interfere with the sovereign powers of the states guaranteed by the Tenth Amendment to the Constitution, the Supreme Court held the 1934 Act unconstitutional as an improper interference with the sovereignty of the states. Ashton v. Cameron County Water Improvement Dist. No. 1, 298 U.S. 513, 532 (1936). Congress enacted a revised Municipal Bankruptcy Act in 1937, Pub. L. No. 302, 50 Stat. 653 (1937), which was upheld by the Supreme Court. United States v. Bekins, 304 U.S. 27, 54 (1938). The law has been amended several times since 1937. In the more than 60 years since Congress established a federal mechanism for the resolution of municipal debts, there have been fewer than 500 municipal bankruptcy petitions filed. Although chapter 9 cases are rare, a filing by a large municipality can— like the 1994 filing by Orange County, California—involve many millions of dollars in municipal debt.