Harrisburg: A Case Study In State Law Barriers To Chapter 9

On November 23, 2011, the Bankruptcy Court for the Middle District of Pennsylvania dismissed Harrisburg, Pennsylvania's Chapter 9 bankruptcy petition because, shortly before the filing, the state legislature expressly prohibited Harrisburg from seeking relief under Chapter 9. Harrisburg's failed attempt to remain in Chapter 9 highlights the political factors and state law constraints that municipalities must consider prior to seeking bankruptcy relief.1 This article will discuss the origins of Harrisburg's debt crisis, the Harrisburg City Council's attempt to file for Chapter 9 without the Mayor's approval, the legal obstacles placed in the path of the City Council's bankruptcy filing, and the lessons that other distressed municipalities and creditors can learn from Harrisburg's experience.

Harrisburg's Debt Crisis and Bankruptcy Filing

Harrisburg's debt crisis stemmed from the city's decision to guarantee revenue bonds tied to a waste-to-energy incinerator owned by the city's public utility, the Harrisburg Authority. As a result, Harrisburg looked to the Pennsylvania Municipalities Financial Recovery Act2 or "Act 47" for relief. Act 47 both provides for state government aid to distressed municipalities and governs access to Chapter 9 of the Bankruptcy Code. For a city to receive state aid under Act 47, the Commonwealth of Pennsylvania must first determine that the city is financially distressed, in which case Pennsylvania appoints a coordinator to develop a fiscal recovery plan. As Harrisburg's fiscal crisis mounted, the Mayor sought an Act 47 financial distress determination. Pennsylvania designated Harrisburg as financially distressed in October 2010. The Commonwealth then appointed an Act 47 coordinator, who submitted a detailed fiscal recovery plan.

The City Council repeatedly rejected this plan, however, arguing that it prioritized the interests of creditors over the needs of the citizenry. The City Council favored a Chapter 9 filing as an alternative to the creditor-friendly Act 47 plan, and in June of 2011, the City Council voted to prepare for a possible Chapter 9 filing. In response, on June 30, 2011, the Pennsylvania General Assembly passed "Act 26." Act 26 provides that prior to July 1, 2012, "no distressed city [of the third class] 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 . . ."3 Act 26 was specifically designed to prevent...

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