The previous post in this series examined the statutory definitions of a municipality. The three eligible types of entities under Chapter 9 of the Bankruptcy Code include the nebulous "instrumentality of a state," which is receiving increasing attention from potential filers.
Two recent court cases focused on this issue.
In In re Hospital Authority of Charlton County, the Bankruptcy Court for the Southern District of Georgia applied the criteria developed in In re Las Vegas Monorail Co., decided in 2010, and determined that the Hospital Authority of Charlton County was an instrumentality of the state.
The court affirmed the standard laid out in Las Vegas Monorail, and found that an entity's ability to qualify as an instrumentality of a state depends on the answers to three questions:
- Does the entity have any of the powers typically associated with sovereignty, such as eminent domain, taxing power or sovereign immunity?
- If these powers are absent or only weakly present, does the entity have a public purpose and, if so, what is the level of control exerted by the state over the entity's activities?
- Does the state's own designation and treatment of the entity indicate that it is a municipality or an instrumentality of the state?
While the Hospital Authority was found to be an instrumentality of the state, application of this same test has led courts to reach the opposite conclusion.
For example, in In re Connector 200 Assoc., Inc. , decided almost a year after Las Vegas Monorail, the court focused on the degree of public control that existed over the proposed Chapter 9 debtor, as opposed to any other factors. By establishing this fact-specific approach to determining eligibility, the court injected additional uncertainty into future analysis and court decisions.
At this point, it is unlikely there will be much clarity on this subject until additional "instrumentality of the state" cases wind their way through the courts.
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