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‘State Agency’, ‘Governmental Unit’ and ‘State Instrumentality’: Handing Off the Hot Potato in Kentucky’s Fiscal Crisis

On Behalf of | Sep 18, 2018 | Bankruptcy, Debt, Firm News, Municipalities, News

By: Laura Day DelCotto

The Sixth Circuit Court of Appeals has certified the following question of law to the Kentucky Supreme Court:  “Whether Seven Counties Services, Inc.’s participation as a department in and its contributions to the Kentucky Employees Retirement System are based on a contractual or a statutory obligation.”

Sounds fairly simple.  Yet, the issues raised by the Sixth Circuit in this long-running Chapter 11 bankruptcy case go well beyond what one may read out of that question.  The Kentucky highest Court’s answer will impact every other quasi-governmental agency and entity as to whether it properly belongs in a Chapter 9 municipal bankruptcy filing, or in a Chapter 11 filing, because the Supreme Court is being asked to delve into the definitions of state control and what is an “instrumentality of the state.”

On the one hand, what does it really matter now to Seven Counties? It filed a Chapter 11 case in 2013, and the parties have been fighting now for 5 years about whether it was “eligible” for Chapter 11 relief.  The lower courts all have said yes, it was.  The Commonwealth has spent millions of dollars in legal fees on that issue, represented by a non-Kentucky law firm. Since the main consequence of the legal issue being challenged by the Commonwealth is about whether Seven Counties could “reject” its KERS pension participation, my view is that this is much ado about nothing on that one issue. Why?  Because 11 U.S.C. §365, which is the Code section governing assumption or rejection of executory contracts, applies equally in both Chapter 11 and Chapter 9.

So, what is really going on? The financial consequences are massive, and the system is fundamentally structured as a “joint and several” endeavor.  In 2015, the Legislature passed a law allowing any employer to voluntarily withdraw from KERS upon paying a “withdrawal liability.” KRS 61.522(3)(a).  A number of participants filed lawsuits to be permitted to withdraw.   The more who withdraw, the more the “last man standing” issues become more untenable than they already are.

The Kentucky Supreme Court has just been handed a complex and immensely important issue not only in the pension world but also in the bankruptcy world. Let’s hope they get it right.

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