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Municipalities Reorganizing Under Chapter 9 Can Prove Plan to Be Fair and Equitable Without Raising Taxes According to ABI Journal Article

Alexandria, Va. — As more financially distressed municipalities consider the use of a chapter 9 bankruptcy filing, a recent article in the February ABI Journal analyzes when a court might find a reorganization plan to be “fair and equitable” in situations where the municipality is not proposing new or additional taxes to satisfy all claims in full. When applying the Bankruptcy Code’s “fair and equitable” standard in the chapter 9 context, authors B. Summer Chandler and Mark S. Kaufman of McKenna Long & Aldridge LLP (Atlanta) write in “Maybe Taxes Aren’t So Certain: What Is ‘Fair and Equitable’ in a Chapter 9 Plan?” that courts examine whether the amount to be distributed to the objecting creditors is all that they can reasonably expect given the circumstances. “Courts might also assess whether a plan is ‘fair and equitable’ in light of the primary purpose of debt restructuring for municipalities: the continued provision of public services,” according to Chandler and Kaufman. While not all municipalities have the power to tax, those that can do so run the risk that new or additional taxes proposed as part of a chapter 9 reorganization plan would discourage new residents or commercial enterprises from moving into the area. “If chapter 9 is to provide any real benefit, it must be that under some circumstances, debt relief can be accomplished without imposing greater taxes,” Chandler and Kaufman write. “Without that ability, the benefits of chapter 9 for distressed municipalities would be largely illusory, offering the distressed municipality not much more than the opportunity to experience a slow demise.” The authors write that if a municipality can show that increasing taxes is likely to be counterproductive, then a court might find a proposed plan without new or additional taxes to be “fair and equitable” even though creditors are not paid in full. “The municipality will likely need to show that it has taken action to minimize its fiscal distress by increasing revenue and decreasing costs,” according to Chandler and Kaufman. “Assuming that the municipality has taken reasonable steps to increase revenues and reduce costs, it should then show why it should not be required to impose new or additional taxes sufficient to satisfy claims in full.” The authors found that limited chapter 9 case law supports the conclusion that if a municipality can show that increasing taxes is likely to be counterproductive, then a court might find a proposed plan to be “fair and equitable.” The key question, according to Chandler and Kaufman, is what showing is to be required to confirm a plan over the objection of creditors where the plan does not propose to increase taxes to pay creditors in full. “This uncertainty may motivate a municipality and its creditors to reach agreement on debt relief, rather than turning to a court to decide the issue,” the authors conclude. To obtain a copy of “Maybe Taxes Aren’t So Certain: What Is ‘Fair and Equitable’ in a Chapter 9 Plan?” published in the February edition of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org. For further analysis of chapter 9 and municipal financial distress, be sure to pick up a copy of Municipalities in Peril: The ABI Guide to Chapter 9, Second Edition, available in the ABI Bookstore. Also, hear perspectives on chapter 9 cases in 2013 by listening to a recent ABI media teleconference examining the issue. Please click here to access the teleconference. ### 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.