City of Harrisburg, PA files for Chapter 9 Municipal Bankruptcy Relief

While still in its early stages, the City of Harrisburg, PA's recent Chapter 9 Bankruptcy filing represents a rare move by a municipality to seek the protection of the Bankruptcy Code. The City Council authorized the filing of the Chapter 9 case, while the mayor and other city officials opposed, and continue to oppose, the move.  Chapter 9 is designed to provide a municipality with "breathing room" from its creditors' collection efforts, which will then enable the municipality to formulate a plan of debt adjustment acceptable to a majority of its creditors.  A municipality in Chapter 9 has the ability to adjust debts and other obligations, with a plan of debt adjustment ultimately resulting in the unpaid claims of creditors being reduced and/or extended or restructured, including those unpaid pre-petition claims of a utility or other creditor.
 
Utilities do not have the same rights to adequate assurance of payment in Chapter 9 as they do in Chapter 11.  In Chapter 11, a debtor must provide a form of adequate assurance of payment that is satisfactory to the utility and is limited to a very small list of options (cash deposit, letter of credit, surety bond, certificate of deposit, prepayment or any other form that is mutually agreed upon by the parties).  However, in Chapter 9, the form of adequate assurance is not limited and may include granting of an administrative priority claim.  Further, the requirement that the offer of adequate assurance be "satisfactory to the utility" is not included in Chapter 9.  In addition, Chapter 9 gives the municipality the option of assuming or rejecting executory contracts.  Such contracts could include a whole range of potential obligations, from ongoing service contracts to vendor agreements and, possibly, collective bargaining agreements with its public employee unions.
 
Weltman, Weinberg & Reis Co., LPA will continue to monitor this case and provide additional updates as events dictate.

If you have any questions on this matter, please contact Mr. Scott D. Fink, Esq. Scott is an associate in Bankruptcy focused on the Consumer Bankruptcy and Commercial Bankruptcy Groups.