Kathryn DavisMy last blog post gave a brief overview of a Chapter 9 bankruptcy.  In this post, I will discuss a couple of “local” Chapter 9 filings and some noteworthy issues that arose in those cases.

Bankruptcy for Municipalities

As I noted in my last post, a Chapter 9 bankruptcy is available to financially stressed municipalities.  In the over 60 years since Congress first provided a way for municipalities to file bankruptcy, less that 500 municipalities have actually filed petitions.  Interestingly, two of those more recent petitions have originated from Alabama.  The City of Prichard filed for Chapter 9 protection in 2009 in the Bankruptcy Court for the Southern District of Alabama.  Two years later, in 2011, Jefferson County, Alabama filed in the Northern District.

Prichard, AL Bankruptcy

The City of Prichard filed for Chapter 9 protection in great part due to large pension obligations the city owed to former employees.  Prichard had also filed for bankruptcy in 1999, also due to issues with the employee’s pensions as well as unpaid bills. In the 1999 case, a $16 million increase to the pension fund was set forth in their bankruptcy plan.  However, this increase was not implemented by the city and their pension problem just grew larger.  In 2009, there was no more money in the pension fund and the city stopped issuing pension checks to the former employee retirees.  Litigation arising out of this caused the city to file another Chapter 9 in 2009.

The following year, a group of City of Prichard employees filed a motion to dismiss the Chapter 9 case because the creditors said that Prichard was not authorized to file for Chapter 9 under the Alabama Code.  They argued that the Alabama Code required a municipality to have “refunding or funding bond debt” to be authorized to file.  The bankruptcy court agreed and dismissed that case.  The City of Prichard appealed that decision to the United States District Court, which then asked the Alabama Supreme Court to answer the question of whether Prichard was eligible to file for Chapter 9 protection even though it did not have any debt in the form of these bonds.  The Supreme Court ruled that the City was eligible to file its bankruptcy.  The Supreme Court of Alabama noted that the statute in question also authorizes “each county, city or town, or municipal authority organized under Article 9, Chapter 47 o f [Title 11] ” to file for federal bankruptcy protection, and that the legislature clearly intended every municipality to be able to file under Chapter 9.  Subsequently, the bankruptcy judge withdrew the order to dismiss the case.

Jefferson County, AL Bankruptcy

The other recent Alabama municipal bankruptcy was Jefferson County, Alabama’s 2011 filing.  This was the largest Chapter 9 filing until 2013 when Detroit filed.  The county had over $4.2 billion in liabilities.  This debt was caused by a variety of issues, including allegations of bribery and corruption.  The debt was mainly non-recourse warrants issued to finance a sewer system.

As in Pritchard’s bankruptcy, creditors moved to dismiss the case on the same grounds as in the Prichard case.  The creditors thought that Jefferson County was not authorized to file under the Alabama Code.  Judge Bennett, in the Bankruptcy Court for the Northern District in Birmingham, rejected this argument and ruled that Jefferson County was authorized to file under the Alabama Code.  After the Alabama Supreme Court ruled in City of Prichard v. Balzer, discussed above, any doubts about the decision were quieted.

Though Chapter 9 bankruptcies are not frequent, Chapter 9 is an important and necessary form of bankruptcy protection.  If you have questions about your personal financial situation and want to know what Chapter of bankruptcy is right for you, please call one of our offices and set up a free consultation today.

Kathryn Davis
Written by Kathryn Davis

Kathryn Davis is an attorney at the Bond & Botes Law Offices in Huntsville and Decatur, Alabama. She holds a Bachelor of Arts from Auburn University, and a Juris Doctorate from Samford University, Cumberland School of Law. She is passionate about utilizing the bankruptcy process to help clients navigate through what is usually some of the lowest points in their lives. Read her full bio here.

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