A receiver supervised by a state court had authority to file a chapter 9 petition for the municipality, over objection from the mayor and city council, according to Bankruptcy Judge Ashely M. Chan of Philadelphia.
Judge Chan’s March 14 opinion recounts the woeful economic decline in the City of Chester, Pa., located on the western shore of the Delaware River south of Philadelphia near the Delaware border. The city of about 32,000 residents was the seat of William Penn’s provincial government and is the oldest city in Pennsylvania.
Judge Chan’s 42-page opinion cites the city’s declining population, declining revenues and eroding tax base. She said that the average household income in Chester is about half the average household income throughout the state. More than 30% of the residents are below the poverty line, she said.
Most prominently, the city was $127 million behind in contributions to pension plans for municipal employees.
Judge Chan cited the state court, which had found “widespread nepotism within the City’s government [along with] a pattern of City officials taking care of their own and intentionally turning their backs on wrongdoing within their departments.”
Chester (not to be confused with West Chester, Pa.) was declared a “distressed city” in 1995 under the state’s Municipalities Financial Recovery Act, known as Act 47. Then the city’s finances worsened. Following a declaration by Pennsylvania’s governor, the state court appointed a receiver for the city in June 2020 under Act 47.
The receiver continued discussions with the holder of one series of unsecured bonds. In the ensuing two years, the receiver also had discussions with other creditors such as labor unions and holders of other bonds. A few months after appointment, the receiver promulgated a recovery plan, required by Act. 47.
In February 2022, the receiver requested and received authorization from the governing state agency under Act 47 to commence a municipal debt adjustment proceeding under chapter 9 of the Bankruptcy Code. The receiver continued negotiations with the bondholder and other creditors until he filed the chapter 9 petition in November 2022.
If there is an objection to the filing of a chapter 9 petition, the bankruptcy court must hold a hearing under Section 921(c) and “may dismiss the petition if the debtor did not file the petition in good faith or if the petition does not meet the requirements of this title.”
The mayor and the city council filed objections, claiming that the receiver was not authorized to file the petition without their assent. The major bondholder likewise objected, claiming that the receiver had not negotiated in good faith.
Section 109(c) lays down the requirements for being a debtor under chapter 9. The entity must be a “municipality” that is “insolvent” and that was “specifically authorized . . . by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter.”
If the debtor, like the receiver, has failed to obtain agreement from a majority of creditors in each class, the debtor must demonstrate under Section 109(c)(5)(B) or (C) that it “has negotiated in good faith with creditors” or that it was “unable to negotiate with creditors because such negotiation is impracticable.”
In January 2023 after the petition had been filed, the state court approved the receiver’s most recently modified recovery plan, with modifications related to the receiver’s power after confirmation.
Concerning the receiver’s authority to file the petition over the mayor’s and the council’s objections, Judge Chan cited Act 47, which gives the receiver authority to file a chapter 9 petition and “to act on the municipality’s behalf in the proceeding.” After confirmation, another provision in Act 47 imposes “a mandatory duty” on city officials “to undertake acts set forth in the recovery plan.”
With regard to the objection by elected officials, Judge Chan said that the authority to file is governed by Pennsylvania law. The filing was proper, she said, because it was authorized by the required state official.
Likewise, Judge Chan said that the city was “insolvent” under Section 101(32)(C) because Chester was both “unable” to pay its debts when they came due and “generally” not paying its debts as they came due.
Regarding good faith, Judge Chan said that the receiver had conducted “well documented” meeting with the unions, made proposals and gave the unions time to respond.
The bondholder claimed there was no good faith because the receiver made a “take it or leave it” offer before filing. Judge Chan said the bondholder ignored how the receiver had negotiated two years before filing.
Regarding the time period just before and after filing, Judge Chan said:
[I]t was reasonable for the Receiver to conclude from [the bondholder’s] vigorous opposition to any impairment of its claim, and after three prior unsuccessful attempts at modifying the treatment of the 2017 Bonds, that, while both parties were willing to work together, they were simply too far apart and could not reach terms satisfactory to avoid a bankruptcy filing.
Judge Chan found that the city had negotiated in good faith with the unions, the bondholder and other creditors.
With regard to retirees, the unions said they would not and could not negotiate on their behalf. Judge Chan said that the retirees potentially represented hundreds of millions of dollars in claims. Until she appointed a committee of retirees to serve in the chapter 9 case, she ruled that it was “impracticable for the City to begin prepetition negotiations with its retirees.”
Judge Chan ruled that Chester was eligible for chapter 9 and that the petition was filed in good faith.
A receiver supervised by a state court had authority to file a chapter 9 petition for the municipality, over objection from the mayor and city council, according to Bankruptcy Judge Ashely M. Chan of Philadelphia.
Judge Chan’s March 14 opinion recounts the woeful economic decline in the City of Chester, Pa., located on the western shore of the Delaware River south of Philadelphia near the Delaware border. The city of about 32,000 residents was the seat of William Penn’s provincial government and is the oldest city in Pennsylvania.
Judge Chan’s 42-page opinion cites the city’s declining population, declining revenues and eroding tax base. She said that the average household income in Chester is about half the average household income throughout the state. More than 30% of the residents are below the poverty line, she said.