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News Room

Government Working Group Proposal #23

Chapter 9: Inclusion of "Employees" in 11 U.S.C. § 922(a)

Background

Section 922(a) alters the chapter 9 application of the automatic stay under section 362. In addition to the protections listed in section 362(a), a chapter 9 petition operates as a stay against

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against an officer or inhabitant of the debtor that seeks to enforce a claim against the debtor.

The stay of actions against officers and inhabitants has been referred to since the first municipal bankruptcy legislation in 1937, though it was discretionary with the court up until the 1978 Code. Protection for officers and inhabitants of distressed municipalities was necessary to prevent prepetition creditors from commencing or continuing mandemus actions against them. There is a question, however, whether the statute applies to nonresident employees of a chapter 9 municipality.

Proposal

11 U.S.C. § 922(a)(1) should be amended to provide stay protection to nonresident "employees" of municipalities that have filed for chapter 9 relief. Section 922(a)(1) should read:

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against an officer, employee, or inhabitant of the debtor that seeks to enforce a claim against the debtor

Reasons for the Change

The Commission received this recommendation from a California attorney who represented an individual that had a claim against Orange County as the result of an auto accident. At the time Orange County filed for chapter 9 relief, the attorney came across this lapse in automatic stay protection for nonresident employees of municipalities in chapter 9. Approximately 50 individuals that had been named in various suits pending on the petition date were not protected by the automatic stay. As a result, the County’s attorneys moved under section 105 to extend the stay to protect these individuals.

To the extent section 922(a)(1) protects officers and inhabitants of the municipality, that protection should extend to employees as well. Prepetition municipal creditors should not be permitted to "end run" the automatic stay and continue or commence action to recover against nonresident employees. The policy reasons that favor protecting officers and inhabitants of municipalities in chapter 9 apply equally to nonresident employees.

Competing Considerations

There do not appear to be any competing considerations to this proposal.

Government Working Group Proposal #22

Chapter 9: Treatment of Municipal Obligations in chapter 9

Background

In 1988, Congress passed "An Act to Amend the Bankruptcy Law to Provide for Special Revenue Bonds and for Other Purposes." This legislation, among other things, added a definition for "special revenues" in 11 U.S.C. § 902(2). The purpose of the amendment was to protect the liens on special revenues granted under the revenue bonds. [ FN: 4 Collier on Bankruptcy ¶902.01A, 902-3 (Lawrence P. King et al. eds, 15th ed. 1996).] Five types of special revenue obligations qualify as special revenues under the definition:

1. receipts derived from the ownership, operation or disposition of projects or systems of the debtor that are primarily (or primarily intended) to be used to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems;

2. special excise taxes imposed on particular activities or transactions;

3. incremental tax receipts derived from the benefitted area in the case of tax-increment financing;

4. other revenues or receipts derived from particular functions of the debtor, whether or not the debtor has other functions; or

5. taxes specifically levied to finance one or more projects or systems excluding receipts from general property, sales, or income taxes (other than tax-increment financing) levied to finance the general purposes of the debtor [ FN: 11 U.S.C. §902(2) (1996).]

Substantive protections in chapter 9 for "special revenues" include section 922(d), which exempts special revenues from application of the automatic stay. In addition, section 928(a) exempts special revenues from the lien avoidance provisions on post-petition property in section 552(a). These provisions essentially grant special revenues preferred status because the filing of a chapter 9 petition does not interrupt the payment of, or post-petition security interest in, pledged special revenues.

Proposal

Chapter 9 should be amended to provide comparable protection to all types of tax-exempt obligations sold in the municipal marketplace. The Proposal will not affect the right of a municipality to use special revenues for the provision of necessary municipal services.

Reasons for the Change

chapter 9's grant of preferred status to special revenues is contrary to the credit quality expectations in the municipal marketplace. Many of the municipal obligations currently sold are not payable out of special revenues as defined in chapter 9. For example, generalobligation bonds (secured by a pledge of the municipality’s power to tax without limitation as to rate or amount at the level required to repay the bonds) or tax or revenue anticipation notes (secured by a pledge of the current year’s tax receipts or other identified revenues) are viewed as stronger credit investments than special revenue obligations, which are only secured by a pledge of repayment from a limited source.

The above credit-analysis results in lower borrowing costs for municipalities who issue these types of instruments. Revising the definition of special revenues is designed to ensure that tax-exempt funding arrangements and the credit decisions that went into those funding arrangements are respected in chapter 9. The Proposal will not prevent a municipality in chapter 9 from using these revenues for the provision of necessary municipal services. The Proposal (i) reflects the expectations of the tax-exempt bond market; (ii) will improve issuers’ access to the municipal market; and (iii) will result in lower borrowing costs to issuers.

Competing Considerations

It has been argued that special revenues should be treated differently under chapter 9 because the holders of those obligations have a lien against the dedicated revenue stream. As a result, special revenues should be treated as though they are encumbered by the interest created under the indenture and an intervening chapter 9 petition should not interfere with the operation of these rights. It is a misnomer, however, to classify all other municipal obligations as "unsecured." Tax-backed bonds, for example, are secured by the pledge of a local government to pay those bonds from available tax-derived sources.


 

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