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Money Crunch: Municipal Debt Coming Due

Chapter 9 Bankruptcy on the Radar

By: Laura Day DelCotto

Chapter 9 bankruptcy for municipal entities is coming to the forefront. All public officials need to be educated and informed to fulfill their duties as fiduciaries. This is necessary for the public interests of the constituency they serve. 

Bond debt is the lifeblood and reality of public sector finance. What you will find is a whole bunch of “bond lawyers” out there who live in their world, and a whole bunch of bankruptcy lawyers over in their own. These two worlds do not mesh well.  

The Puerto Rico bankruptcy proceeding has wound its way through the court system for years. While it is governed by its own special rules (the “PROMESA” – “Puerto Rico Oversight, Management and Economic Stability Act”), many of the bond debt issues are identical or very similar to those in chapter 9 of the Bankruptcy Code. The bond lawyer world has not been pleased. Credit-rating agencies have adjusted analysis of risk.

This blog is too short to go into a thorough legal analysis. In short, in early 2020 the US Supreme Court declined to review a 2019 decision of the First Circuit Court. This held that municipal debtors are not required to make payments on special revenue bonds during the pending chapter 9 case. They may be authorized to pay if they choose to, but they can’t be forced. This is huge.   

Bonds in Chapter 9 Bankruptcy

The differences in special revenue bonds and general obligation bonds are many. However, the basic gist is that taxpayers are not “generally obligated” on “special” bonds issued for special projects. In chapter 9, they are treated differently. Congressional amendments to the Bankruptcy Code in 1988 added some protections for special revenue bonds. However, this series of case law coming out of Puerto Rico is a “win” for struggling municipal entities. While there is no doubt that the ultimate exit strategy will have to successfully deal with special revenue debt repayment in some fashion, this ruling is one small arrow in the debtor’s quiver.  

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email info@dlgfirm.com or reach us on our contact page.

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