The Handbook of Municipal Bonds

CHAPTER 9

Chapter 9: The Last Resort for Financially Distressed Municipalities

James E. Spiotto Partner Chapman and Cutler LLP

 

 

 

In instances of extreme financial distress, a municipality may consider instituting a proceeding for municipal debt adjustment under Chapter 9 of the Bankruptcy Code or face acrimonious lawsuits which are both injurious to the municipality and unproductive in providing an economic solution to the problem. However, as graphically illustrated in Exhibits 9.1 through 9.5, municipalities have sought the protection of the bankruptcy courts over the years. The appendix to this chapter provides a list of the municipal bankruptcy cases filed through February 8, 2007. The purpose of this chapter is to explain the structure and significance of a Chapter 9 filing.

Our system of federalism grants local governmental bodies the independence and the freedom to be able (with the consent of their citizens) to finance various necessary improvements through the issuance of municipal bonds. Under virtually every other form of government, the local governmental body, regardless of the merits of such proposals, must first request approval and financing from the central government before the local government is able to proceed with such commonplace municipal improvements as bridges, sewers, roads, and public buildings. Our Founding Fathers ordained that certain independence and power should be given to the states and their local governmental bodies.²¹⁷ Thereafter, during ...