By David M. S. Shaiken
If the City of Hartford files for bankruptcy, creditors of the City will be affected in a variety of ways. It is likely that the City will seek to renegotiate its obligations to bondholders, retirees and employees. The negotiations will probably begin before the bankruptcy filing because, unless certain conditions apply, pre-bankruptcy negotiations with creditors are required in order for the City to be eligible to file for bankruptcy. Other eligibility requirements include that the City either is not paying, or cannot pay, its debts as they become due. In addition, pursuant to a State law, the City must have received written approval from the Governor in order to file for bankruptcy.
The filing of a bankruptcy petition will, with a few exceptions, automatically stay all efforts to collect debts from the City. If the City meets the eligibility requirements, then an order for relief will be entered by the bankruptcy court.
One of the key differences between chapter 9 bankruptcy for a city, and chapter 11 bankruptcy for a business, is that in chapter 9 the court has far less supervisory powers over the operation of the debtor than it does in chapter 11. So, for example, in chapter 9 the court does not have a say over which professionals the City hires to represent it, and does not oversee the City’s operations. In chapter 9, no bankruptcy estate is even created. This is to ensure that a court does not substitute its judgment for those of democratically elected officials.
The City is likely to seek to renegotiate, or reject, its collective bargaining agreements and its obligations to retirees. Rejection means that the City will no longer be bound by the terms of rejected agreements. However, retirees and employees will have claims against the City for breach of contract. These claims will have to be dealt with in the plan of reorganization. Rejection of labor agreements is easier to accomplish in chapter 9 than in chapter 11.
The City will have time to file a plan of reorganization. Unlike in chapter 11, no other party is permitted to file a plan. The plan of reorganization will propose how the City will treat its different classes of creditors. It may provide that creditors will be paid less than in full, that creditors will be paid over time, or both. The plan may provide that creditors will exchange their debts for notes.
The plan will classify creditors into different classes. Members of impaired classes will be entitled to vote to accept or reject the plan. Essentially, a class is impaired if the plan proposes to alter the claim holders’ legal rights, such as by paying them less than one hundred cents on the dollar, or by paying them over time. In order for the plan to be confirmed, at least one class of creditors whose claims are impaired must vote to accept the plan. A class is deemed to have accepted the plan if more than half in number of the members of the class, and at least 2/3 in dollar amount of the claims in the class, vote to accept the plan.
If at least one impaired class accepts the plan, then the court may confirm the plan if certain criteria are met. Confirmation over the rejection of an impaired class is called “cram down.” It means that the plan is being crammed down the throats of a class that voted to reject the plan. The criteria for cram down include that the court finds that the plan is in the best interests of the creditors and is feasible. The main point here is that creditors, and classes of creditors, who vote to reject a plan may end up bound by its terms.
Once a plan is confirmed, and the City deposits property, or notes or other legally binding obligations, with a disbursing agent appointed by the court, sufficient to meet its obligations under the plan, the City’s debts are discharged.
For more information, contact David Shaiken, at 860-606-1703, or david@shipmanlawct.com.