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January ABI Journal Article Explores Ways Taxpayers Can Be Parties-In-Interest in Municipal Bankruptcies

Alexandria, Va. — Taxpayers and citizens without a direct financial stake in chapter 9 proceedings are generally not considered to be “parties-in-interest,” but an article in the January edition of the ABI Journal explores ways that they might be able to participate. “Timing is key,” writes Christine A. Schleppegrell of Schiff Hardin LLP (San Francisco) in her article “Can Taxpayers Leverage the Ambiguity of ‘Party-in-Interest’ to Enter the Chapter 9 Arena?” “Within chapter 9 proceedings, party-in-interest status is determined differently at plan confirmation than at the eligibility stage.” The term "party-in-interest" is not explicitly defined in the Bankruptcy Code, but includes the debtor, the trustee, a creditors' committee, an equity security-holders' committee, a creditor, an equity security-holder or any indentured trustee. Yet “[i]n chapter 9 proceedings, courts more closely scrutinize ‘party-in-interest’ status,” Schleppegrell writes. Examining the legislative intent of the statutes and existing case law, she found that there is a high bar set at the eligibility stage of a chapter 9 for establishing “party-in-interest” status. As the bankruptcy court in In re Addison Community Hospital Authority made clear, "Congress intended municipalities to have more streamlined control in the debt-adjustment period without interference from outside parties.” Courts have therefore ruled that allowing taxpayers to be granted “party-in-interest” status at the eligibility phase would not be productive and would merely cause confusion and delay. “The party-in-interest argument is strongest after the debtor has filed a proposed plan of adjustment,” according to Shleppegrell. Stakes at the plan-confirmation stage are higher, she writes, because there is a tangible monetary interest in the case. Therefore, “[i]f the debtor municipality proposes to fund any portion of a plan through taxes, taxpayers can demonstrate that they have a pecuniary interest at stake.” Schleppegrell recommends that taxpayers emphasize that they are primarily individual residents whose financial interests are being impacted and distance themselves from the term "taxpayers." Playing up the pecuniary-interest element at the plan-confirmation stage will help residents argue that they have a stake in the outcome, since they are being asked to fund a plan that will only increase the municipality’s level of insolvency. By taking such steps at the plan-confirmation stage to achieve “party-in-interest” status, residents will be able to “put before the court a unique perspective on the viability of a proposed plan and prospects for long-term financial recovery,” Schleppegrell writes. To obtain a copy of “Can Taxpayers Leverage the Ambiguity of ‘Party-in-Interest' to Enter the Chapter 9 Arena?,” published in the January issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org. ### ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 13,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.