Wednesday, August 20, 2008

What Is Chapter 9 Bankruptcy?

One of the big fears in the markets right now is the very real risk of a number of municipal bond defaults. Sadly, few stories on the subject fail to mention Pittsburgh which offers a menu of at risk debt, from the Transit Authority, Sports and Exhibition Authority or from the city itself. Null Space has followed this depressing subject. The city has a staggering pension shortfall of close to or over a billion dollars. (the city insists it's only 899 million short.)

One thing one learns is that under the law, governments really never have to pay their bills.

"Section 904 limits the power of the bankruptcy court to "interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property" unless the debtor consents or the plan so provides. The provision makes it clear that the debtor's day-to-day activities are not subject to court approval and that the debtor may borrow money without court authority. In addition, the court cannot appoint a trustee (except for limited purposes specified in 11 U.S.C. § 926(a)) and cannot convert the case to a liquidation proceeding.

The court also cannot interfere with the operations of the debtor or with the debtor's use of its property and revenues. This is due, at least in part, to the fact that in a chapter 9 case, there is no property of the estate and thus no estate to administer. 11 U.S.C. § 902(1). Moreover, a chapter 9 debtor may employ professionals without court approval, and the only court review of fees is in the context of plan confirmation, when the court determines the reasonableness of the fees."

Chances are that we will all learn about the subject.

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