Eligibility For Chapter 9—Over Objections Of Mayor & City Council? (City Of Chester, PA)

By: Donald L Swanson

City of Chester is the oldest city in Pennsylvania, incorporated as a borough in 1701 and as a city in 1866, and is located on the Delaware River between Philadelphia and Wilmington.

Unfortunately, the City is also in Chapter 9—having filed bankruptcy on November 10, 2022.[Fn. 1]

The City’s bankruptcy filing causes a ruckus because:

• the City’s court-appointed Receiver files the bankruptcy; but
• the City’s Mayor and City Council oppose the filing.

The City’s Mayor and City Council, along with a bond creditor, move to dismiss the City’s bankruptcy case, alleging that the City is not eligible for Chapter 9 relief.

Court Ruling

On March 14, 2023, the Bankruptcy Court sides with the City—declaring the City to be eligible for Chapter 9 relief and denying the motions to dismiss, because:

• the City’s Receiver is authorized by Pennsylvania law to file the bankruptcy; 
• the City meets all Bankruptcy Code requirements for Chapter 9 eligibility; and
• the City filed the bankruptcy in good faith.[Fn. 2]

What follow’s is a summary of the Court’s rationale for its ruling.

Legal Standards

Eligibility criteria for Chapter 9 are to be “construed broadly” but with the burden proof on debtor.

Under § 109(c) of the Bankruptcy Code, the City may be a Chapter 9 debtor if it:

• is a municipality;
• is specifically authorized by proper legal authority to be a Chapter 9 debtor;
• is insolvent;
• desires to effect a plan to adjust such debts; and
• has negotiated in good faith with creditors and has failed to obtain their agreement, or such negotiation is impracticable.

The Bankruptcy Court finds that the evidence establishes each of the eligibility standards. 

But there is one more hurdle: even if a municipality is eligible under § 109(c), a case may be dismissed (under § 921(c)) if the case is not filed in good faith.

• This assures that Chapter 9 is being used for a proper reorganization purpose; but
• There is a strong presumption in favor of good faith when the eligibility criteria are met.

On the good faith question, the Court considers:

• whether the City’s financial problems are of a type contemplated by Chapter 9;
• whether the reasons for filing are consistent with Chapter 9;
• the extent of the City’s prepetition efforts to address issues;
• the extent that alternatives to Chapter 9 were considered; and
• whether the City’s residents would be prejudiced by denying Chapter 9 relief.

Fact Findings

The Bankruptcy Court’s opinion makes the following findings of fact under the foregoing legal standards.

–A downward spiral

The City has economic challenges dating back to the 1950s, including a declining population (from 66,039 in 1950 to 32,535 in 2021), declining revenues, and high expenditures.  

In 1995, faced with multi-million dollar deficits and past due obligations, the City is designated a distressed city under state law. 

From 1996 to 2006, the City’s finances continue to deteriorate, and it needs borrowed money to meet payroll and deliver basic services.

Efforts at finding other sources of revenue do not pan out.  For example:

• In 2008, Harrah’s Casino opens with significant host revenues to the City—but those revenues decline over time; and
• In 2009, Delaware County provides financing for a world class soccer stadium in the City—but economic development expectations haven’t materialized.  

As a result:

• from 2013 to 2019, the City runs annual deficits in its general fund between $2.2 million and $8.7 million and cannot pay all of its minimum pension obligations;
• on April 13, 2020, Pennsylvania’s Governor issues a Declaration of Fiscal Emergency for the City—because the City can’t ensure that vital services will be provided.
• in June 2020, a Receiver is appointed to run the City; and
• in August 2020, efforts to restructure the City’s bonds fail.

Then, in June 2021, the Receiver obtains state court approval of a recovery plan that addresses organizational, financial and operational issues.  Nevertheless:

• The City’s pensions remain severely underfunded (the City spends more on healthcare for retirees than it does on healthcare for current employees); and
• the City cannot pay its debts when due.   

–Going into bankruptcy

Here are important dates and bankruptcy developments.

• January 14, 2022: Receiver requests authority from the State of Pennsylvania for the City to file Chapter 9—such authority is granted in writing
• June 10, 2022: bond creditor reaches out to Receiver with a restructure proposal—Receiver ultimately rejects the overture.
• September 13, 2022: Receiver tries to get concessions from unions, retirees, bondholders and other creditors to forestall a bankruptcy filing—but such efforts fail.   
• November 8, 2022: Receiver contends that City’s elected officials are impeding implementation of the recovery plan and tries to remove them from the City’s day-to-day operations. 
• November 10, 2022: the City files Chapter 9 bankruptcy, declaring that it (i) is not paying debts when due, and (ii) will soon run out of cash.

–Tax revenue problems

 Regarding tax revenues:

• the City’s residents are already subject to a heavy tax burden and can’t afford to pay more; and
• median home values from 2016 to 2020 are:
  • in Chester—$70,300 (with only 37.1% of the population living in owner-occupied housing);
  • in Pennsylvania—$187,500; and
  • in Delaware County—$247,900.

–Negotiation problems

The City contends that, although negotiations with creditor constituencies were constructive:

• it was unable to reach a comprehensive restructuring deal with creditors; and
• a centralized forum (i.e., Bankruptcy Court) is needed for further negotiations.

–Eligibility objections

Two objections to the City’s Chapter 9 eligibility are filed:

• elected officials object, contending that (i) they “did not authorize” the bankruptcy filing, and (ii) the City does not yet want a plan of debt adjustment, since the City Council did not “adopt a resolution expressing [this] desire”; and
• a bond creditor objects, contending that the City did not engage in meaningful or good faith negotiations, despite the creditor’s “willingness to discuss.”

The City responds:

• elected officials lack standing to object; and
• bond creditor’s objections, (i) ignore two years of failed negotiations and the impracticability of getting to a resolution, and (ii) overlook the City’s need to act quickly.

–Elected officials problems

Meanwhile, a state court determines that elected officials are a problem:

• their actions lack transparency;
• they have a duty to cooperate with the Receiver but refuse to do so—ignoring or countering his directives;
• they overlook such basic problems as the City’s continuing multi-year defaults on obligations; and
• they take care of their own and ignore wrongdoing, like:
  • allowing unauthorized payroll payments to an incarcerated employee;
  • allowing friends to improperly boost their pensions; and
  • allowing widespread nepotism in City government.

Conclusion

The Bankruptcy Court’s opinion, on eligibility of the City of Chester for Chapter 9 relief, provides a roadmap and guidepost for other municipalities and their creditors to use in evaluating Chapter 9 eligibility issues.

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Footnote 1.  The City of Chester’s bankruptcy proceeding is Case No. 22-13032 in the United States Bankruptcy Court for the Eastern District of Pennsylvania.  

Footnote 2.  The Bankruptcy Court’s opinion appears at Doc. 266 on the Bankruptcy Court’s electronic docket for its In re City of Chester bankruptcy case.

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