• Flint the Next Domino to Fall
  • August 18, 2014 | Author: Milan Kubat
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Brooklyn Heights Office
  • The proliferation of Chapter 9 bankruptcy filings for municipal bankruptcies does not seem to be ending. In the last three years, towns such as Jefferson County, Alabama (2011), Stockton, California (2012), San Bernadino, California (2012), Mammoth Lakes, California (2012) and Detroit, Michigan (2013), the largest ever, have all filed for Chapter 9. Soon, Flint, Michigan may be joining that list. From 1990 - 2012 there were only about 215 Chapter 9 filings, however the average between 2009 - 2013 is higher than between 1990 - 2009. Although the amount of filings, and certainly the size of the municipalities filing has risen, a municipal bankruptcy is very rare when looking at the overall number of filings per chapter.

    Certainly there are benefits to a municipality filing Chapter 9 bankruptcy. A Chapter 9 gives the municipality the ability to hold off collection efforts of creditors, time to adjust and plan for repaying creditors on a more efficient basis, and gives the local government the ability to adjust debts, reducing some creditors' claims, eliminating some claims all together or extending/restructuring them. Another positive to filing Chapter 9 is that the municipality is given the ability to assume or reject executory contracts. These contracts range from long term to potential obligations, which include service contracts with third party vendors, contractual agreements with utilities, and collective bargaining agreements with public employee unions. This repayment plan will allow the municipality to continue to deliver services like police and fire protection, garbage/refuse removal, public school and hospital operations, water and sewage services, and other services that are provided daily to citizens of the municipality.

    Flint was a major player in the auto industry for decades. The home and birthplace of General Motors, the population was largely part of the industrial and manufacturing industry. Much like Detroit but to lesser scale, the city has been blighted by population depletion and property abandonment. As such, a formerly bustling city of over 200,000 residents has fallen to below 100,000. As with Detroit, this growing flight of residents away from Flint has caused the city a large budget deficit. An aging population in addition to a large exodus has meant that cuts in city services and increases in fees for services has been one of the main outlets for the city government. Also like their big brother Detroit, the main sticking point has become public employee retirement plans. Flint's desire to restructure health care benefits for retirees would solve a large part of the budgetary issues the city is facing, and could be resolved through a Chapter 9. Detroit is currently in this process and awaiting all the votes of city workers to perfect the Chapter 9 plan to alter health care benefits for current and former employees. The public pensions Flint is absorbing could very well be the main reason for the city to file Chapter 9.

    For Flint to even do this, however, they must first meet the requirements of eligibility in a Chapter 9. Section 109(c) of the Bankruptcy code provides the requirements for filing a Chapter 9. The debtor must:

    • Establish it is a municipality
    • Have specific authorization to file
    • Is insolvent
    • Want to adjust its debts through a plan
    • Meet the creditor negotiation requirements

    Flint will have no problem establishing that it is a municipality and Section 109(c)(1) is easily met. Section 109(c)(2) is trickier. A Chapter 9 debtor municipality must be authorized by state law to be able to file bankruptcy. The allowance of Chapter 9 filings varies state by state. Twelve states specifically allow it, while 12 other states conditionally allow bankruptcy for a municipality only if a state or public official takes action, three states allow a minimum set of municipalities to file, and 23 states do not allow the filings at all.
     
    Michigan conditionally allows the filing of a Chapter 9. Michigan law allows a municipal government to which an emergency manager has been appointed to be a Chapter 9 debtor if the governor approves of the emergency managers recommendation that a municipality should file for Chapter 9. This was done in Detroit when Governor Rick Snyder gave the city authorization to file Chapter 9 on July 18, 2013.

    Section 109(c)(3) provides that the city needs to be insolvent. Being insolvent is defined by the bankruptcy code as:

    Financial condition such that the municipality is: Generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute or unable to pay its debts as they become due. For the last several years the city of Flint has been running a large budget deficit. To correct this, the city is attempting to cut benefits to retired public employees. This argument is in front of a state court judge, and if the judge rules against the city, Flint will likely meet the standards of insolvency as they will no longer be able to sustain the costs of health care for its employees and retired employees.

    Section 109(c)(4) provides that the city needs to desire to adjust its debt through a plan. Should the state court rule against Flint's proposition to restructure retiree health care benefits, the only option for the city to attempt this restructuring is through Chapter 9. Flint's hand will be forced and the need to file will be paramount.

    Section 109(c)(4) provides that the municipality must negotiate with its largest creditor(s). Flint is attempting to do this with the health care benefits litigation.

    More and more it appears that municipalities are looking to the bankruptcy code for relief. Flint, Michigan may well be looking to federal law to extricate itself from legislation and provisions that were enacted during prosperous times.