Chapter 9

This section aims to protect a municipality that is financially disturbed against its creditors while developing and negotiating a debt adjustment scheme. Typically, reorganization of municipal bonds will either increase debt maturities, reduce capital or interest amounts or refinance debts by acquiring a fresh loan.

While chapter 9 is considerably distinct, in some ways it is comparable to other sections because no legislation provides for the winding-up of municipal property and distributing the profits to creditors. The 10th amendment to the Constitution and the reservation of the States of sovereignty regarding their inner business would certainly be infringed by this liquidation or dissolution. In fact, the insolvency tribunal is usually less involved in the management of a municipal bankruptcy situation than is the situation in commercial reorganizations under chapter 11 owing to the serious constraints places on its powers in chapter 9 instances (as called for in the Tenth Amendment, and judgments of the Supreme Court in instances of national insurance laws). In Chapter 9 instances, the tasks of a bankruptcy court are usually restricted to the endorsement of a request (if the debtor is qualified), confirmation of a debt adjustment scheme and enforcement of that scheme. However, as a practical issue, in order that courts protect court instructions and eliminate various forums for decision-making matters, the municipality may agree to practice jurisdiction in many traditional fields of bankruptcy supervision.

In order to guarantee the Constitutionality of Chapter 9, the constraints imposed by 11 USC § 904 are required. Therefore, the option for the tribunal to replace its authority over the debtor’s political or governmental relations with that of the State and elected municipal authorities, is avoided.

  • Courts’ Limited Power 
    • Unless the debtor consents or a plan provides for this, section 904 restricts the authority of the bankruptcy court to “interfere with–(1) the debtor’s political or governmental powers; (2) any debtor’s property or income, or (3) debtor use or enjoy incoming property.”
    • The court can not interfere with the debtor’s activities or the use of its estate and profits by the debtor,  at least in portion because there are no ownership of the property and therefore no assets to administer in a situation of chapter 9. Chapter 9 may also hire experts without court permission and, where the Court determines the reasonability of the charges, the only Court assessment of the charges shall be made in the framework of plan confirmation.
  • Role of the US Administrator of Bankruptcy
    • The U.S. treasurer (or North Carolina or Alabama bankruptcy administrator)’ function is typically more restricted in a Chapter 9 situation than in Chapter 11. Although a creditor commission is appointed by the U.S. trustee, the US trustee shall not examine the debtor at a shareholders meetings (no trustees meet), has no power to proceed to the appointment of a trustee or examiners, or to re-supervise the case, and does not monitor the management of the situation. Moreover, the trustee of the United States does not monitor the debtor’s economic activities or revise the professional charges maintained. 
  • Creditors’ Roles 
    • Chapter 9 limits the position of creditors more than in other instances. There are no first creditors, and no conflicting schemes can be put forward by creditors. When certain conditions are reached, the scheme of the debtor shall be binding on dissident creditors. The debtor in Chapter 9 is free to act without court constraints.
    • However, there is a creditors ‘ panel for each situation of section 9, which has authority and responsibilities very comparable to those of a commission in a situation of section 11. These powers and responsibilities include choosing and allowing one or several lawyers, accountants or other representatives to represent the Committee; advising the debtor on management of the situation; researching the debtor’s deeds, behavior, property, liabilities, and economic status; engaging in the implementation of the scheme.