As cities and states continue to struggle financially, and with cities in Alabama and California already availing themselves of its protections, more governmental entities are examining the option of restructuring under Chapter 9 of the Bankruptcy Code. Access to Chapter 9 relief, however, is tightly controlled and not every "municipality" is eligible to file.
Protection under Chapter 9 of the Bankruptcy Code is not only limited to "municipalities," but further restricted to three statutorily prescribed sub-groups:
(1) political subdivisions;
(2) public agencies; and
(3) instrumentalities of a state.
There is little debate over what constitutes a political subdivision or a public agency. Those terms generally cover expected entities such as counties, cities, and school districts.
The term "instrumentality of a state" is, on the other hand, much broader and open to greater interpretation. The vagueness of the term, combined with the practical implications of the increasing number of public-private partnerships and other quasi-governmental entities, especially those utilized in municipal finance transactions, has focused more attention on this third category of municipalities and their Chapter 9 eligibility.
The next post in this series will examine two recent cases that have addressed this issue.
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