Jefferson County Bondholders Take Fee Fight to Higher Court

The indenture trustee for Jefferson County, Alabama bondholders recently appealed a bankruptcy court ruling that allowed the county to pay their bankruptcy lawyers out of the revenue from the municipal sewer system, which also backed the bonds. The bankruptcy court’s opinion was the third issued in the case addressing sewer system revenues and the various parties’ interests in those funds. 

In a lengthy opinion, Judge Bennett held that the fees of the bankruptcy lawyers were payable from sewer revenues ahead of payments to bondholders. Certain amounts would be considered operating expenses for the sewer system, which were contractually allowed to be paid. Others, the court held, would be categorized as necessary operating expenses under section 928(b) of the Bankruptcy Code.

The effect of categorizing certain expenses as necessary operating expenses is to give such amounts priority over the bondholders’ lien on the revenues in the bankruptcy case. As this decision alters the contractual...


Judge Orders Detroit Bankruptcy Filing Withdrawn

On Friday, Michigan State Circuit Court Judge Rosemarie Aquilina ordered the city of Detroit’s emergency manager, Kevyn Orr, to withdraw a federal bankruptcy petition filed on behalf of the city earlier this week, calling the law which allowed Michigan Gov. Rick Snyder to authorize the filing “unconstitutional.” The ruling was issued as part of a lawsuit  filed by  two retirement systems for the city to block the Chapter 9 filing.

On Thursday, July 18, 2013, the city of Detroit filed for the largest municipal bankruptcy in history, with an estimated $18 billion of debt. Mr. Orr, an attorney brought in by Gov. Snyder, recommended the filing. Mr. Orr has stated that he hopes to have Detroit emerge from Chapter 9 by later summer or early fall.  He previously characterized Detroit’s general obligation bonds as unsecured debt.




Detroit Files for Chapter 9

The city of Detroit filed for bankruptcy protection in the Bankruptcy Court for the Eastern District of Michigan on Thursday. Detroit’s bankruptcy is the largest Chapter 9 case in U.S. history. The filing comes just over three months after Governor Rick Snyder appointed Emergency Manager Kevyn Orr to try to solve the city’s apparently intractable debt woes.

As Orr stated in a declaration filed with the Court, “[a]fter decades of fiscal mismanagement, plummeting population, employment and revenues, decaying city infrastructure, deteriorating city services and excessive borrowing that provided short term band-aids at the cost of deepening insolvency, the city of Detroit today is a shadow of the thriving metropolis that it once was.” The city’s debt had swollen to over $18 billion by Orr’s count, with 38 cents of every city dollar going to service legacy debt. The city’s filing will give it an opportunity to formulate a proposal to make its debt burden more manageable.

A fight over the...


Jefferson County Files Plan of Adjustment

On Sunday, Jefferson County, Alabama filed its plan of adjustment and disclosure statement, officially initiating the end game of its Chapter 9 bankruptcy. The county and its stakeholders have been working towards the filing for months, with the county and the holders of much of its sewer system-related debt reaching a compromise that forms the basis for and is incorporated into the plan.

The plan will cut Jefferson County’s sewer system-related debt by $1.3 billion, to approximately $1.9 billion. In turn, the county will issue new warrants in an amount sufficient to make payments of approximately $1.835 billion to those creditors. The plan increases county sewer rates to ensure that the sewer system will generate adequate funds to service indebtedness, maintain operations, meet capital needs for the foreseeable future, and preserve county services. JPMorgan, who was alleged to have acted improperly in arranging risky securities deals that pushed the county into bankruptcy, will...


When is a Political Subdivision Not a Political Subdivision? When the IRS Says So

The IRS has issued a Technical Advice Memorandum that could significantly impact the ability of special districts to issue tax-exempt debt and to seek bankruptcy relief under Chapter 9.

The memorandum concludes that a community development district formed under the Florida Uniform Community Development District Act of 1980 (the “Florida Act”) was not a “political subdivision” for purposes of Treasury Regulation Section 1.103-1(b). This section defines “political subdivision” as “any division of any State or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit.”

“Community development district” is defined in Section 190.003(6) of the Florida Act in part as “a local unit of special-purpose government which is created pursuant to this act and limited to the performance of those specialized functions authorized by this act….” 

The IRS concluded that due to the low number of registered voters within...


CalPERS Seeks to Disqualify Counsel for National Public Finance Guarantee

In the continuing saga of Chapter 9 petitions in San Bernardino and Stockton, California, the cities' largest creditor, CalPERS, has petitioned the Bankruptcy Court to disqualify counsel for National Public Finance Guarantee (NPFG), the cities’ bond insurer.

CalPERS alleges that Winston & Strawn, counsel for NPFG, hired lawyers from K&L Gates that had previously worked on CalPERS matters, causing a conflict of interest.  

NPFG wants CalPERS to take a cut in the payments otherwise allowed to CalPERS.  They hired Winston & Strawn to represent it in the Chapter 9 cases, but certain of those lawyers had worked on CalPERS matters.  

A hearing is set for June 5, 2013, on the San Bernardino's eligibility for Chapter 9 (Stockton was already approved as a Chapter 9 case) and motions made by CalPERS and two city employee unions seeking relief from the automatic stay to sue in state court.


California Public Policy Center Estimates CA Debt in Excess of $1.1 Trillion

A recent study by the California Public Policy Center concluded that the combined debt owed by California’s state and local government entities is likely to exceed $1.1 trillion dollars. The CPPC totaled the debt of state government ($132.6 billion), public school districts ($49.7 billion), city governments ($68.1 billion), county governments ($22.1 billion), redevelopment agencies and “special districts” ($110.4 billion) and unfunded state and local government pension obligations (from $265.1 to $586.4 billion). 

In addition to the eye-popping total, the report also raises interesting points about the nature and amount of the state’s debt.

CPPC argues that current estimates of California’s pension obligations vastly underestimate the scale of the amount of unfunded obligations. State estimates generally assume a rate of return on pension fund investments of 7.5%. CPPC believes a rate of 5.5% or even 4.5% is more realistic. Correcting for this error adds $321.3 billion to pension...


Will Traditional Chapter 11 Investors Find a Role in Chapter 9?

Most Chapter 11 cases have a “playbook.” Depending on the industry and reasons for a company’s downfall, there is usually a debt-for-equity swap, a distribution to unsecured creditors and/or a sale. The threat of litigation, or even liquidation, works to keep all parties “honest” and at the negotiating table. One of the benefits of Chapter 11 is the fact that the “rules of engagement” are well-known by the sophisticated players, and the Bankruptcy Code and an extensive body of case law guide the parties.

Chapter 9 lacks much of this clarity, making it a scarier place for traditional funds to invest. 

Similarly, the nature of municipal debt, traditionally considered lower risk because of a dedicated revenue stream for repayment, the taxing power of municipalities or the fact that the bonds were insured, is changing. Projects supporting revenue streams have failed, the tax base is shrinking and insurers are becoming more aggressive regarding their contractual rights both in Chapter 9...


Jefferson County Bankruptcy Court Rules That Automatic Stay Applies to Action Even Though the County is Not a Named Defendant

On April 15, 2013, the United States Bankruptcy Court for the Northern District of Alabama ruled that the automatic stay applied to a lawsuit pending in the New York state court even though the County was not a named  defendant because of the “sameness” of another action currently pending in New York state court in which the County is a named defendant.

The lawsuits pending in New York state court stem from Jefferson County’s issuance of warrants secured exclusively by revenue generated by its Sewer System which were underwritten by JPMorgan and its affiliate. The County also entered into several interest rate swap transactions with JPMorgan related to these warrants. Between 2002 and 2005, the County and JPMorgan made several agreements with Assured and Syncora Guarantee in which Assured and Syncora issued policies that insured against the County’s failure to pay principal and interest on the warrants. Assured also reinsured over $360 million in policies originally issued by Syncora...


MuniBK News Roundup

Trial Date Set for Stockton Eligibility

After months of legal wrangling, the legal issues surrounding whether Stockton is eligible to file for Chapter 9 protection will come to a head in a four-day trial beginning on March 25. The trial essentially pits the interests of CalPERS, which contends it is entitled to continue to receive full payment under California law against certain bondholders and bond insurers, who contend that CalPERS’ claim should be treated as an unsecured claim and, therefore, receive the same treatment as the bondholders. 

While the similarity of the claims of creditors should be an issue reserved for confirmation of any plan of adjustment, the creditors seem poised to try to make it a central issue to Stockton’s eligibility to be a Chapter 9 debtor, as Stockton  is required to prove it has satisfied the state and federal hurdles to a Chapter 9 filing. Absent a last minute settlement, the outcome of the trial, which presiding Judge Christopher Klein has promised will...


New Ruling: Chapter 9 Debtor is Not Required to Seek Court’s Permission to Enter into Settlement with Creditors

On February 5, 2013, the United States Bankruptcy Court for the Eastern District of California ruled that a Chapter 9 debtor does not need court approval to enter into a settlement with a creditor. According to the court, Section 904 of the Bankruptcy Code “gives a chapter 9 debtor the freedom to decide whether to ignore or to follow the Rule 9019 compromise-approval procedure.” However, the court warned that debtors may need to account for compromises entered into without court approval during the plan confirmation proceedings. 

The Bankruptcy Court’s decision resolves the dispute that arose between the city of Stockton and a group of its bondholders. The city sought a ruling from the Bankruptcy Court that it was free to settle a pending damages lawsuit for $55,000 without filing a motion pursuant to Rule 9019 of the Bankruptcy Rules. The bondholders objected to the city’s assertion that it was not bound by Rule 9019 of the Bankruptcy Rules, claiming that Rule 9019 applies to all...


Goodwin Procter Partner Lew Feldman Comments on California Redevelopment Bonds in The Bond Buyer

Goodwin Procter partner Lew Feldman was recently quoted in an article in The Bond Buyer entitled, “California Preventing Former RDAs From Spending Bond Proceeds” by Keeley Webster.

The article reports that according to data compiled by a local official, about $1.5 billion in California redevelopment agency bond proceeds are in limbo. State government and local officials are engaged in a debate as to whether agencies had any right to issue the bonds as they were issued in the period after Governor Brown announced his proposal to eliminate redevelopment but before lawmakers passed the legislation to do so.

To read the full article, click here.


City of Stockton Seeks End Run Around Bankruptcy Settlement Rules

A fight is brewing between the city of Stockton, California and its largest bond creditors focused on the city’s ability to settle claims without receiving the approval of the Bankruptcy Court as required by Rule 9019 of the Federal Rules of Bankruptcy Procedure. 

The argument began when the city asked the Bankruptcy Court to declare that Rule 9019 did not apply to its settlement of a claim by an individual for excessive force by the police department. While the city’s request arose from its efforts to settle a relatively modest claim, the bond creditors objected to the sweeping nature of the relief sought and its potential implications for the city’s ability to settle other claims without court or creditor oversight. 

The core of the dispute centers around whether the court oversight required under Rule 9019 improperly limits the city’s statutorily-prescribed freedom to control its property and revenue under Section 904 of the Bankruptcy Code.  Section 904 prohibits the Bankruptcy Court...


CalPERS’ Attempt to Pursue San Bernardino Outside Chapter 9 Denied

In a recent bench ruling, the Bankruptcy Court for the Central District of California denied the attempt of the California Public Employees’ Retirement System (“CalPERS”) to obtain relief from the automatic stay to permit CalPERS to pursue the city of San Bernardino in state court for overdue pension payments. 

The stay motion drew objections from not only the city, but also from a number of the city’s largest creditors, including Ambac Assurance Company and Wells Fargo, NA. CalPERS argued that the city’s payments were mandated by state statute, so CalPERS should not be constrained by the automatic stay, and should be free to commence state court litigation to compel the overdue payments. The city and certain of its creditors countered that allowing CalPERS to proceed would, among other things, jeopardize the city’s reorganization efforts.

The dispute was closely watched due to its potential implications with respect to other pending Chapter 9 cases. A CalPERS’ victory could have allowed...


CalPERS Slams San Bernardino Bankruptcy as “Sham”

CalPERS has fired back at the city of San Bernardino and its pendency plan for operating during the Chapter 9 case, calling it  “criminal” and a “sham.” A copy of the pendency plan can be found here. Since filing for bankruptcy, the city has stopped making its bi-weekly payments to CalPERS. As a result, San Bernardino now owes CalPERS approximately $8 million. 

While CalPERS may cast aspersions on the city’s motivation, financially, the city is faced with either making the CalPERS payment or making its payroll. Even though the hit to CalPERS is 0.00329% of its overall portfolio, CalPERS has a legitimate concern that any acquiescence to San Bernardino’s refusal to pay will set a negative precedent for future Chapter 9 cases. As there are pending municipal bankruptcies underway throughout the state, CalPERS does not want to undermine its position that it is a priority creditor for the municipalities of California. 

The legal issue is whether the pensions of government workers take...


Can Detroit Get Its Groove Back?

Detroit is in a state of crisis. In addition to the “traditional” municipal financial woes of decreasing revenue, legacy pension burdens, and an increased demand for services, Detroit has several more practical and unique problems. 

First, according to the Wall Street Journal, there has been a mass exodus from the city of Detroit. Almost 25% of Detroit’s total population left the city between 2000-2010. The resulting smaller tax base has led to a “top line” revenue problem for the city. 

This exodus has also contributed to a second problem. From a land mass perspective, Detroit is simply too large with only 713,000 residents spread across 139 square miles. This geographic sprawl makes providing basic municipal services inordinately expensive. There are neighborhoods with literally more abandoned houses and buildings than residents.

Consequently, Detroit mayor, former NBA star Dave Bing, has proposed plans for the revitalization of certain areas, including the city’s waterfront, in the...


Pension Wars Round 3: Bondholders Enter the Ring

Last week, MuniBK reported on the objections to San Bernardino’s Chapter 9 petition filed by the San Bernardino Public Employees Association and CalPERS.

The city’s bondholders did not object to the filing, and now the holders of more than $100 million of the bonds, originally issued to fund San Bernardino’s obligations to CalPERS, have filed a pleading supporting the city’s eligibility for Chapter 9.  

It appears that these bondholders and bond insurers do not want to give CalPERS two proverbial bites of the apple: one to see how a pendency plan will treat the CalPERS’ obligations and another to later contest overall eligibility based on dissatisfaction with the treatment of those obligations under any proposed plan.

In their filing, the bondholders also urged the Bankruptcy Court to allow the Chapter 9 process to move forward quickly. A brief news report on the filing can be found here


Will Municipalities Get Pushed Off the Fiscal Cliff?

As lawmakers discuss ways to avoid the so-called “fiscal cliff,” their short-hand for the parade of budgetary horribles (increased taxes and forced service cuts) that will take place on January 1, absent bi-partisan Congressional action, investors may want to consider the potential impact on municipal bonds.  Since Congress, in part, will focus on ways to raise revenue (taxes) without across-the-board tax increases, the tax exempt status of municipal investments may come into question. 

Generally speaking, under the current framework, interest earned on municipal bonds is exempt from federal and state taxation. This is in contrast to investments in corporate bonds or even treasury bills, making municipal bonds a more attractive (and potentially more lucrative) investment. If this preferential tax treatment is reduced or eliminated, it would not only make investments in municipal bonds less attractive to individual investors, but also reduce the appetite for investments in mutual funds...


MuniBK Bond Buyer Conference Panel Recap

The Bond Buyer’s 22nd Annual California Public Finance Conference took place last week in San Francisco. Chief Judge Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, participated in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”   The panel also included Bill Nolan of FTI, and MuniBK Blog contributors Manny Grillo and Lew Feldman.

Copies of the materials distributed by the panelists at that meeting can be found here. Video of the roundtable discussion will be posted soon on MuniBK.

The panelists discussed topics including:

• Limitations of the Bankruptcy Code in offering Chapter 9 relief to municipalities;
• Precedential impact of any Bankruptcy Court Chapter 9 decision on other pending municipal bankruptcy cases;
• The ability of states to “step in” and offer distressed municipalities other alternatives;


Stockton Bankruptcy Judge to Speak at the Bond Buyer’s California Public Finance Panel

Chief Justice Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, will be participating in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know” at The Bond Buyer’s 22nd Annual California Public Finance Conference on Thursday, October 18, from 7:30-8:30 am PST.  

Chief Justice Klein will be joined by speakers Lew Feldman, Partner, Goodwin Procter LLP; Emanuel Grillo, Partner, Goodwin Procter LLP; and William Nolan, Senior Managing Director – Corporate Finance, FTI Consulting, Inc. 

The panel will be recorded and portions thereof will be featured on blog.MuniBK.com in the near term.