Time for an Update: A New Framework for Evaluating Chapter 9 Bankruptcies

April 1, 2015

Municipal bankruptcies have been making national news since the “Great Recession.” Municipalities like Stockton, Vallejo, and Jefferson County gained notoriety for the record scale of their bankruptcy filings, only to be surpassed by Detroit shortly thereafter as the largest and most populous municipal bankruptcy filing. Historically, municipal bankruptcy occurred infrequently, leaving the nuances of many critical issues, including insolvency, asset utilization, and good faith, unexplored in case law. For example, how should a bankruptcy court analyze Detroit’s cityowned art museum that houses billions of dollars of art when bondholders, pensioners, and other unsecured creditors have unpaid claims? And how should a court determine if the city’s debt adjustment plan is fair at the confirmation phase, when recent proposals have left certain unsecured creditors receiving pennies on the dollar while others receive full value?

This Note proposes that courts differentiate between one-time event bankruptcies and structurally imbalanced bankruptcies to evaluate the creditor notice, insolvency, and good faith provisions. It suggests that utilization of nonessential assets should be considered in the insolvency and good faith analyses. Finally, this Note offers heuristics and examples to provide texture for the analysis of future filings.

April 2015

No. 5