In re City of Harrisburg, PA

• Citation: 66 Collier Bankr.Cas.2d 1427,55 Bankr.Ct.Dec. 239,465 B.R. 744
• Decision Date: 05 December 2011
• Docket Number: No. 1:11–bk–06938MDF.,1:11–bk–06938MDF.
• Parties: In re CITY OF HARRISBURG, PA (By the City Council), Debtor.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Middle District of Pennsylvania

465 B.R. 744

55 Bankr.Ct.Dec. 239

66 Collier Bankr.Cas.2d 1427

In re CITY OF HARRISBURG, PA (By the City Council), Debtor.

No. 1:11–bk–06938MDF.

United States Bankruptcy Court, M.D. Pennsylvania.

Dec. 5, 2011.

Mark D. Schwartz, Bryn Mawr, PA, for Debtor.

OPINION

MARY D. FRANCE, Chief Judge.

The City of Harrisburg, by its City Council, filed a petition for relief under Chapter 9 of the Bankruptcy Code. The Commonwealth of Pennsylvania (the “Commonwealth”), the County of Dauphin (“Dauphin County”) and the City of Harrisburg by the Honorable Mayor Linda D. Thompson (the “Mayor”) and other creditors and interested parties objected to the filing.¹ For the reasons set forth below, the Objections were sustained at the hearing held on November 23, 2011, and the petition was dismissed.²

I. Procedural History

The City Council for the City of Harrisburg (“City Council” or “Petitioner”) filed its petition on October 11, 2011. A Statement of Qualifications under Section 109(c) was filed by Mark D. Schwartz, who had been retained as counsel by the Petitioner. Pursuant to 11 U.S.C. § 921(b), the Honorable Theodore A. McKee, Chief Judge, United States Court of Appeals for the Third Circuit, designated the undersigned to preside over the within case. On October 13, 2011, the Mayor filed an Emergency Motion to Request Status Conference, which was granted by the Court, and a conference was set for October 17, 2011. On October 14, the Commonwealth filed an Objection to the petition asserting that the City of Harrisburg was not specifically authorized to be a debtor as required by 11 U.S.C. § 109(c)(2). On the same date, the Court entered an order requiring publication of a notice of the commencement of the case as mandated by 11 U.S.C. § 923 and setting a deadline of November 21, 2011 for filing objections to the petition.

At the status conference on October 17, the Court declined to immediately dismiss the petition in the absence of notice to all parties that the Commonwealth's objection to the filing would be heard on that date. At that time no other party had filed an objection to the petition, although both the Mayor and Dauphin County represented to the Court that they also would be requesting dismissal of the petition. The Court stated that it would address the preliminary legal issue of whether City Council was specifically authorized by the Commonwealth to file a bankruptcy petition as required by 11 U.S.C. § 109(c)(2) and whether City Council was authorized under the Third Class City Code and other relevant law to file on behalf of the City.

On October 19, 2011, the Court entered an order modifying the deadlines for filing objections to the petition. The October 19 Order also vacated provisions of the October 14 Order directing advertisement of the commencement of the case. A hearing on objections to the petition was scheduled for November 23, 2011, and a briefing schedule was issued. At the hearing the parties stipulated to the admission of all exhibits submitted by the parties with their briefs. After hearing argument from the Objectors and from City Council and attorney Neil Grover on behalf of Debt Watch Harrisburg ³ in support of the petition, the Court rendered an oral opinion and entered an Order dismissing the case.

II. Facts

Two threshold issues were presented by the filing of the Chapter 9 petition: (1) whether the City Council, without the concurrence of the Mayor or without review by the City Solicitor, had the authority to commence a bankruptcy case on behalf of the City of Harrisburg and (2) whether the City of Harrisburg was specifically authorized under state law to be a debtor under the Bankruptcy Code. The facts relevant to these discrete issues are not in dispute.

On October 1, 2010, the Mayor filed a Request for Municipal Financial Distress with the Department of Community and Economic Development, Commonwealth of Pennsylvania (“DCED”). On December 15, 2010, the Secretary of DCED made a finding of “municipal financial distress” under the Municipalities Financial Recovery Act, Act of 1987, P.S. 246, No. 24, 53 P.S. § 11701.101 et seq. (hereinafter “Act 47”). Under the provisions of Act 47, a coordinator was appointed by the Secretary of DCED to prepare a financial recovery plan to address the City's financial problems.⁴ The coordinator presented the Act 47 recovery plan on June 13, 2011, but on July 19, 2011, City Council voted not to adopt the plan. Under the terms of Act 47, the Mayor then prepared and submitted her own a financial recovery plan, but it also was rejected by City Council.

In the meantime, on June 30, 2011, the last day of the legislative year, legislation was signed by the Governor, which made various amendments to the state Fiscal Code. Act of April 9, 1929, P.S. 343, No. 176, as amended by Act 26 of June 30, 2011, No. 907 (hereinafter “Act 26”), 72 P.S. § 1601–D.1(A). The sixty-one page act includes subjects as diverse as the funding of agricultural research and extension services, amendments to the creation of Neighborhood Improvement Zones, caps on certain tax credits for employers within a Keystone Special Development Zone, extension of the authority of the State Workers' Insurance Board to invest in equities, removal of a cap on the amount of proceeds from the sale of data that the Pennsylvania Health Care Cost Containment Council may retain, retention and disposition of funds in the Tobacco Settlement Fund, and direction to the Department of Agriculture to conduct an annual audit of funds distributed from the Pennsylvania Race Horse Development Fund.⁵ The provision relevant to the issues before the Court, Section 1601–D.1 of Act 26, restricts the ability of a financially distressed city of the third class, as defined in Act 47, to file a petition for relief under Chapter 9 of the Bankruptcy Code. As set forth in the section's scope at subsection (A) of § 1601–D.1, this restriction “applies to a city of the third class which is determined to be financially distressed under Section 203 of [Act 47].” 72 P.S. § 1601–D.1(A). Subsection (B) of § 1601–D.1, entitled “Limitation on Bankruptcy,” provides that:

[n]otwithstanding any other provision of law, including Section 261 of [Act 47], no distressed city may file a petition for relief under 11 U.S.C. Ch. 9 (relating to adjustment of debts of a municipality) or any other federal bankruptcy law, and no government agency may authorize the distressed city to become a debtor under 11 U.S.C. Ch. 9 or any other federal bankruptcy law. 72 P.S. § 1601–D.1(B) (2011). Act 26 further provides that if a city files for bankruptcy, “all Commonwealth funding to the city shall be suspended.” 72 P.S. § 1601–D.1(C). The ban on bankruptcy filings by a financially distressed third class city expires on July 1, 2012. 72 P.S. § 1601–D.1(D).

On October 11, 2011, a majority of the members of City Council adopted a Resolution ⁶ authorizing the City of Harrisburg to file “a municipal debt adjustment action” under the Bankruptcy Code. In the Resolution, City Council stated that Harrisburg was designated as a distressed city under Act 47 on December 15, 2010. It further stated that City Council is the “governing body” as defined in Act 47 and, therefore, is empowered to file a bankruptcy petition on the City's behalf. See 53 P.S. § 11701.261(b). City Council also stated in the Resolution that the City of Harrisburg was qualified to be a debtor under Chapter 9 because the City was in “imminent jeopardy of an action by a creditor, claimant or supplier of goods or services which is likely to substantially interrupt or restrict the continued ability of [the municipality] to provide health or safety services to its citizens”; “[o]ne or more creditors of the municipality have rejected the proposed or adopted plan, and efforts to negotiate a resolution of their claims have been unsuccessful for a ten-day period”; “[a] condition substantially affecting the municipality's financial distress is potentially solvable only utilizing a remedy exclusively available ... through [municipal bankruptcy]”; and “[a] majority of the current ... governing body of a municipality determined to be financially distressed has failed to adopt a plan or to carry out the recommendations of the Act 47 coordinator.” ⁷ Resolution p. 2–3.

Objections to the petition were filed by the Commonwealth, the Mayor, Dauphin County, and nine other interested parties.⁸ Briefs were filed, argument was heard on November 23, 2011, and an oral decision was rendered. This Opinion is issued in support of the Order dismissing the case.

III. Discussion

Objectants assert that the City of Harrisburg is not eligible to be a debtor under Chapter 9 of the Bankruptcy Code as provided in 11 U.S.C. § 109(c). The Mayor argues that City Council lacked the authority to retain separate counsel to file the petition and that City Council's actions violated the Harrisburg Code.

To be eligible for Chapter 9 relief, a petitioning municipality must meet the five criteria listed in § 109(c). The burden of establishing eligibility is on the debtor. In re Valley Health Sys., 383 B.R. 156, 161 (Bankr.C.D.Cal.2008); see also In re Barnwell County Hosp., 459 B.R. 903, 911 (Bankr.D.S.C.2011); In re Pierce County Housing Authority, 414 B.R. 702, 710 (Bankr.W.D.Wash.2009); In re Alleghany–Highlands Economic Development Authority, 270 B.R. 647, 649 (Bankr.W.D.Va.2001). If the petitioner is unable to demonstrate that all elements have been satisfied, the petition must be dismissed. In re New York City Off–Track Betting Corp., 427 B.R. 256, 264 (Bankr.S.D.N.Y.2010) (citing Int'l Ass'n of Firefighters, Local 1186 v. City of Vallejo (In re City of Vallejo), 408 B.R. 280, 289 (9th Cir. BAP 2009); In re Valley Health Sys., 383 B.R. at 160. However, the criteria are to be construed broadly to enable municipalities to obtain the relief available under federal law. Hamilton Creek Metro. Dist. v. Bondholders Colorado Bondshares...