Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Bondholders’ Rights and Remedies in Workouts

The following discussion summarizes the rights and remedies of municipal bondholders in the Chapter 9 municipal bankruptcy setting. In summary, municipal bondholders enjoy significant protection throughout the Chapter 9 bankruptcy process as compared to corporate debt elimination through Chapter 11.

Role of Creditors

As creditors, bondholders generally have a legally stipulated senior right to payment in full of interest and principal over junior creditors. However, as compared to a Chapter 11 case, the role of creditors in a Chapter 9 case is more limited, and many typical creditor remedies are missing. There is no authority to move for appointment of a trustee or examiner. There is no termination of the exclusivity period that permits the debtor alone to file a plan of debt adjustment, so creditors cannot propose competing plans of adjustment. There is no right of conversion to Chapter 7 liquidation, since total liquidation and cessation of business is not possible for a municipality. Nor can creditors file an involuntary Chapter 9 case against a municipality.

Furthermore, there is no first meeting of creditors, where a U.S. trustee questions the debtor about liabilities and assets under oath. However, in each Chapter 9 case, there is a creditors’ committee that has powers and duties that are very similar to those in a Chapter 11 case. These powers and duties include selecting and authorizing the employment of attorneys, accountants, ...