The nation’s cities, towns and other municipalities have certainly not been immune from the effects of the economic downturn. An option that may be available to municipalities facing dire financial circumstances is to file for bankruptcy under Chapter 9 of the Bankruptcy Code, which allows an eligible municipality to adjust its debts in a bankruptcy case. Chapter 9 is in many ways similar to Chapter 11 of the Bankruptcy Code. However, it has some significant constitutionally based differences due to the Tenth Amendment of the United States Constitution, which protects state sovereignty. As a result, while many of the provisions of Chapter 11 apply in Chapter 9, many do not. Since bankruptcy filings under Chapter 9 are exceedingly rare compared to filings under Chapter 11, each decision under Chapter 9 takes on great importance.
A recent decision1 by a California bankruptcy judge may make Chapter 9 a more viable alternative for struggling municipalities. In this case, a bankruptcy judge confirmed that a Chapter 9 debtor has the authority to reject its existing collective bargaining agreements as part of its effort to adjust its debt, and that state law that might have further limited the municipality’s negotiating flexibility did not apply. As the amounts due under such agreements are often a large part of a municipality’s financial obligations, the ability to modify such claims is significant.
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