Saturday, April 4, 2009

My Legislative Recommendation: Authorize the CIB to File Bankruptcy

In the post below, I made the case for the Capital Improvement Board to go into bankruptcy under Chapter 11. As was pointed out to me by an attorney who obviously paid closer attention in law school than I did, Chapter 9 bankruptcy, dealing with municipalities, might be the appropriate vehicle rather than Chapter 11. After looking into the matter more closely, it likely would come down to whether the CIB is viewed more as a municipal entity or not. While I hear the argument that these entities like the CIB, Airport Authority, etc. are set up to operate as private entities, frankly I've never bought that they are anything more than an extension of our city-county government. These entities perform a public service using tax dollars and user fees, and their members are appointed by elected officials. That's goood enough for me to consider them government entities, responsible to the people.

Nonetheless, the debate though gave me the chance to refresh my memory on some of the more obscure provisions of the Bankruptcy Code. After doing so, I am even more enthused about the bankruptcy option if Chapter 9 is available to the CIB. While Chapter 9 gives the Bankruptcy Court less power, that less power is more with respect to control over the debtor municipality, not the creditors (i.e. Pacers, Colts, the holders of debt, etc.) For example, in Chapter 9 the court cannot force the municipality to liquidate its property to pay creditors, for example. So the Bankruptcy Court could not order the CIB to sell downtown property to pay off debts. Unlike Chapter 11, in Chapter 9 the creditors cannot even offer their own reorganization plan.

It would, however, be helpful to avoid objections in the bankruptcy if the Indiana General Assembly specifically authorized the CIB to file bankruptcy. That bankruptcy authorization alone would also suddenly give the CIB enormous leverage in renegotiating the Colts sweetheart Lucas Oil Stadium deal. The CIB may not ever have to even file bankruptcy. The bankruptcy option, bolstered by the state's authorization, would give the CIB enormous negotiating leverage. The Colts would know that is an arrow in the CIB's quiver. Further, the Pacers request for $15 million more could go out the window as well. We're talking concessions by the team, especially with regard to the Colts, that would be worth millions of dollars and forgo the need for hospitality tax increases that will drive away convention and tourism business.

If the Colts and Pacers do not want to make concessions, then the CIB can simply file bankruptcy and let the court rewrite the contracts. As I said in a previous post, the Pacers, and especially the Colts, are unlikely to get another sweetheart deal from another city, especially in light of today's economic climate. The recession, and a bankruptcy authorization, would give the CIB enormous leverage. They need to use it.

Of course, the leaders of the CIB in the past have either been too conflicted or too clueless to be strong negotiators when it comes to professional sports teams. In conjunction with any bankruptcy authorization should be a demand by the General Assembly for a change in the makeup of the CIB, including the leadership.

For those attorney types who want to review Chapter 9, I have included below a summary on the U.S. Bankruptcy Court's website:

Purpose of Municipal Bankruptcy

The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Although similar to other chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs. Indeed, due to the severe limitations placed upon the power of the bankruptcy court in chapter 9 cases (required by the Tenth Amendment and the Supreme Court's decisions in cases upholding municipal bankruptcy legislation), the bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under chapter 11. The functions of the bankruptcy court in chapter 9 cases are generally limited to approving the petition (if the debtor is eligible), confirming a plan of debt adjustment, and ensuring implementation of the plan. As a practical matter, however, the municipality may consent to have the court exercise jurisdiction in many of the traditional areas of court oversight in bankruptcy, in order to obtain the protection of court orders and eliminate the need for multiple forums to decide issues.

Commencement of the Case

Municipalities must voluntarily seek protection under the Bankruptcy Code. 11 U.S.C. §§ 303, 901(a). They may file a petition only under chapter 9. A case under chapter 9 concerning an unincorporated tax or special assessment district that does not have its own officials is commenced by the filing of a voluntary "petition under this chapter by such district's governing authority or the board or body having authority to levy taxes or assessments to meet the obligations of such district." 11 U.S.C. § 921(a).

Notice of Case/ Objections/ Order for Relief

The Bankruptcy Code requires that notice be given of the commencement of the case and the order for relief. 11 U.S.C. § 923. The Bankruptcy Rules provide that the clerk, or such other person as the court may direct, is to give notice. Fed. R. Bankr. P. 2002(f). The notice must also be published "at least once a week for three successive weeks in at least one newspaper of general circulation published within the district in which the case is commenced, and in such other newspaper having a general circulation among bond dealers and bondholders as the court designates." 11 U.S.C. § 923. The court typically enters an order designating who is to give and receive notice by mail and identifying the newspapers in which the additional notice is to be published. Fed. R. Bankr. P. 9007, 9008.

The Bankruptcy Code permits objections to the petition. 11 U.S.C. § 921(c). Typically, objections concern issues like whether negotiations have been conducted in good faith, whether the state has authorized the municipality to file, and whether the petition was filed in good faith. If an objection to the petition is filed, the court must hold a hearing on the objection. Id. The court may dismiss a petition if it determines that the debtor did not file the petition in good faith or that the petition does not meet the requirements of title 11. Id.

If the petition is not dismissed upon an objection, the Bankruptcy Code requires the court to order relief, allowing the case to proceed under chapter 9. 11 U.S.C. § 921(d). ...

Court's Limited Power

Sections 903 and 904 of the Bankruptcy Code are designed to recognize the court's limited power over operations of the debtor.

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.

The restrictions imposed by 11 U.S.C. § 904 are necessary to ensure the constitutionality of chapter 9 and to avoid the possibility that the court might substitute its control over the political or governmental affairs or property of the debtor for that of the state and the elected officials of the municipality.

Similarly, 11 U.S.C. § 903 states that "chapter [9] does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of the municipality, including expenditures for such exercise," with two exceptions – a state law prescribing a method of composition of municipal debt does not bind any non-consenting creditor, nor does any judgment entered under such state law bind a nonconsenting creditor.
....

Role of the U.S. trustee/bankruptcy administrator

In a chapter 9 case, the role of the U.S. trustee (or the bankruptcy administrator in North Carolina or Alabama) (1) is typically more limited than in chapter 11 cases. Although the U.S. trustee appoints a creditors' committee, the U.S. trustee does not examine the debtor at a meeting of creditors (there is no meeting of creditors), does not have the authority to move for appointment of a trustee or examiner or for conversion of the case, and does not supervise the administration of the case. Further, the U.S. trustee does not monitor the financial operations of the debtor or review the fees of professionals retained in the case.

Role of Creditors

The role of creditors is more limited in chapter 9 than in other cases. There is no first meeting of creditors, and creditors may not propose competing plans. If certain requirements are met, the debtor's plan is binding on dissenting creditors. The
chapter 9 debtor has more freedom to operate without court-imposed restrictions.

In each chapter 9 case, however, there is a creditors' committee that has powers and duties that are very similar to those of a committee in a chapter 11 case. These powers and duties include selecting and authorizing the employment of one or more attorneys, accountants, or other agents to represent the committee; consulting with the debtor concerning administration of the case; investigating the acts, conduct, assets, liabilities, and financial condition of the debtor; participating in the formulation of a plan; and performing such other services as are in the interest of those represented. 11 U.S.C. §§ 901(a), 1103.

Intervention/Right of Others to be Heard

When cities or counties file for relief under chapter 9, there may be a great deal of interest in the case from entities wanting to appear and be heard. The Bankruptcy Rules provide that "[t]he Secretary of the Treasury of the United States may, or if requested by the court shall, intervene in a chapter 9 case." Fed. R. Bankr. P.
2018(c). Further, "[r]epresentatives of the state in which the debtor is located may intervene in a chapter 9 case." Id. In addition, the Bankruptcy Code permits the Securities and Exchange Commission to appear and be heard on any issue and gives parties in interest the right to appear and be heard on any issue in a case. 11 U.S.C. §§ 901(a), 1109. Parties in interest include municipal employees, local residents, non-resident owners of real property, special tax payers, securities firms, and local banks.
Powers of the Debtor

Due to statutory limitations placed upon the power of the court in a municipal debt adjustment proceeding, the court is far less involved in the conduct of a municipal bankruptcy case (and in the operation of the municipal entity) while the debtor's financial affairs are undergoing reorganization. The municipal debtor has broad powers to use its property, raise taxes, and make expenditures as it sees fit. It is also permitted to adjust burdensome non-debt contractual relationships under the power to reject executory contracts and unexpired leases, subject to court approval, and it has the same avoiding powers as other debtors. Municipalities may also reject collective bargaining agreements and retiree benefit plans without going through the usual procedures required in chapter 11 cases.

A municipality has authority to borrow money during a chapter 9 case as an administrative expense. 11 U.S.C. §§ 364, 901(a). This ability is important to the survival of a municipality that has exhausted all other resources. A chapter 9 municipality has the same power to obtain credit as it does outside of bankruptcy. The court does not have supervisory authority over the amount of debt the municipality incurs in its operation. The municipality may employ professionals without court approval, and the professional fees incurred are reviewed only within the context of plan confirmation.

Dismissal

As previously noted, the court may dismiss a chapter 9 petition, after notice and a hearing, if it concludes the debtor did not file the petition in good faith or if the petition does not meet the requirements of chapter 9. 11 U.S.C. § 921(c). The court may also dismiss the petition for cause, such as for lack of prosecution, unreasonable delay by the debtor that is prejudicial to creditors, failure to propose or confirm a plan within the time fixed by the court, material default by the debtor under a confirmed plan, or termination of a confirmed plan by reason of the occurrence of a condition specified in the plan. 11 U.S.C. § 930.

Treatment of Bondholders and Other Lenders

Different types of bonds receive different treatment in municipal bankruptcy cases. General obligation bonds are treated as general debt in the chapter 9 case. The municipality is not required to make payments of either principal or interest on account of such bonds during the case. The obligations created by general obligation bonds are subject to negotiation and possible restructuring under the plan of adjustment.

Special revenue bonds, by contrast, will continue to be secured and serviced during the pendency of the chapter 9 case through continuing application and payment of ongoing special revenues. 11 U.S.C. § 928. Holders of special revenue bonds can expect to receive payment on such bonds during the chapter 9 case if special revenues are available. The application of pledged special revenues to indebtedness secured by such revenues is not stayed as long as the pledge is consistent with 11 U.S.C. § 928 [§ 922(d) erroneously refers to § 927 rather than § 928], which insures that a lien of special revenues is subordinate to the operating expenses of the project or system from which the revenues are derived. 11 U.S.C. § 922(d).

Bondholders generally do not have to worry about the threat of preference liability with respect to any prepetition payments on account of bonds or notes, whether special revenue or general obligations. Any transfer of the municipal debtor's property to a noteholder or bondholder on account of a note or bond cannot be avoided as a preference, i.e., as an unauthorized payment to a creditor made while the debtor was insolvent. 11 U.S.C. § 926(b).

Plan for Adjustment of Debts

The Bankruptcy Code provides that the debtor must file a plan. 11 U.S.C. § 941. The plan must be filed with the petition or at such later time as the court fixes. There is no provision in chapter 9 allowing creditors or other parties in interest to file a plan. This limitation is required by the Supreme Court's pronouncements in Ashton, 298 U.S. at 528, and Bekins, 304 U.S. at 51, which interpreted the Tenth Amendment as requiring that a municipality be left in control of its governmental affairs during a chapter 9 case. Neither creditors nor the court may control the affairs of a municipality indirectly through the mechanism of proposing a plan of adjustment of the municipality's debts that would in effect determine the municipality's future tax and spending decisions.

9 comments:

Daniel said...

Just to be clear, the objections to bailing out the CIB is the fact that they subsidize the city's professional sports teams (and others), correct? Shouldn't the proper debate be whether or not we want the Pacers/Colts in this city then? Wouldn't bankruptcy likely trigger the departure and/or sale or both teams?

If that's the case, then the departure of the Colts/Pacers a policy and political decision that must be defended.

Unfortunately, professional sports is a monopoly system in this country (unlike collegiate sports where any institution of higher education can be a Division I team if they are willing to meet the requirements financially, etc.). When you have a monopoly, someone ends up subsidizing that monopoly, which can be rich individuals or corporations, the taxpayers or some combination. But on the flip side, what you end up subsidizing ends up being a more valuable asset. If every city that wanted one had a pro football/basketball team, the Pacers and Colts would not be as valuable to Indianapolis and would likely stick around town. Since there are only 30-some teams in their respective associations, Indianapolis benefits from that exclusivity and as a result must subsidize them in the form of favorable leases and even the direct subsidies Indianapolis used to pay the Colts. Other cities like Kansas City and Louisville may be glad to take those liabilities off the hands of Indianapolis in exchange for the asset professional sports brings to a city. You can argue all you want about whether professional sports is an asset to a city, and there are arguments on both side that have merit, but the real question is whether Indianapolis wants to have professional sports. Ultimately, despite the policy arguments re: the merits of professional sports, it comes down to a political decision as to whether or not a city (or state) wants those teams to stick around.

Advance Indiana said...

Municipal bankruptcies will probably become commonplace before the year's out at the rate we're going. The irony is that the CIB, by drawing so much attention to its plight, ensures that its bond rating will deteriorate, driving up its borrowing costs.

Paul K. Ogden said...

Daniel,

First, it's pretty clear from virtually all the academic studies that professional sports teams are not much of an econmic benefit (actually some studies show they have a negative effect)and certainly not worth a large public subsidy.

Now if you want to talk about intangible PR benefits of professional sports, I think there is a better argument than that professional sports teams are some sort of economic benefit to a city. That's worth something. But it certainly is not worth the amount of public support the Colts or Pacers are getting.

Second, bankruptcy would trigger clauses in the Colts and Pacers contract that would allow them to leave. I think it's highly unlikely that the Colts or Pacers, especially, the Colts who have the mother of sweetheart deals at Lucas, would choose to relocate. They wouldn't get that type of deal from another other city, especially in today's climate. Instead, they would look at their current situation, and choose to make a concession or two on their contract, which would be worth millions and allow the city to avoid raising hospitality taxes which will shut off the very convention business we're trying to attract.

Daniel said...

Paul, I concur re: the economics and the PR value. I think there is also a personal, sports fan, factor that has an intangible value difficult to measure. You must also put a value on what it would cost to operate Conseco/Lucas if the teams were to move.

I think the Colts would have trouble finding a better economic deal at this point, but the Pacers may be another case due to the new arenas in Louisville and Kansas City. If the city picks up the $10-15 million for operating Conseco, it'd be that much harder for another city to lure them away.

Politically, I would be very damaging to let either of these teams leave. See Seattle, where they're already in the process of trying to get a new team. See Cleveland, Charlotte and the many other cities who lost their teams, only to just pay the same amount later to get new teams back.

If you don't like the way professional sports hold cities hostage, get Congress and the DOJ to break up the cartel.

Downtown Indy said...

The headline is YOUR recommendation, not that there has been any informal recommendation FROM them, right?

I think entering the process is the smartest thing for the CIB to do. Maybe we'd start to see more documentation from the 'negotiations' that got us into this.

guy77money said...

Hmmm while we are at it could the city declare bankruptcy so they could rewrite all of the inflated contracts the Peterson administration pushed through right before they were voted out of office. Just a thought.

Paul K. Ogden said...

DI,

Good point. I need to revise to make clear it's my recommendation.

Paul K. Ogden said...

One poster on another blog, mentioned that bankruptcy could hurt the City's credit rating. The CIB is a separate entity and the entity filing bankruptcy. It would take the hit on its credit rating, making it more difficult and expensive to borrow more for a few years.

I'm not sure that's a bad thing. The CIB does not need to be taking on new debt.

As far as the existing debt the CIB has, a bankruptcy would allow the principal to be reduced and you'd lock in a favorable interest rate.

Again, the downside from a credit standpoint, is only to new borrowing which I wouldn't want the CIB doing any way.

I know said...

Be aware of the possibility of the City taking on the CIB under the city and then being able to petition the Indiana Bond Bank if the legislature does not bail the CIB out.

If the City takes the CIB under their control and then the bonds default the criminal anti trust laws could then be in play.

A governmental contract at the state level has already defaulted on their bonds of hundreds of millions of dollars and the state agency assisted in getting a refinanced bond deal on defaulted bonds that are in trouble AGAIN!

The CIB lawyers are some of the same that have assisted the group in their state contract that is in trouble.

The city already has an Indiana Bond Bank deal wit another private company. Please peruse the Indiana Bond Bank cities that are currently being assisted and Indianapolis is listed.