Government Working Group Proposal #23
Chapter 9: Inclusion of "Employees" in 11 U.S.C.
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
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
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 Countys 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.
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
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
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)
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.
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 municipalitys 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 years 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.
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.