By: D. Nicholas Panzarella
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in In re Seven Counties Services, Inc., a bankruptcy court held that a Kentucky non-profit corporation designated as a community mental health center (“CMHC”) was not a “governmental unit” and therefore, was eligible to be a debtor in a chapter 11 bankruptcy case. In Seven Counties, the CMHC debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code after the Kentucky General Assembly raised the contribution rate for participants in a state pension system, which the debtor participated in pursuant to a state statute. After filing, the CMHC debtor sought to reject its executory contract with the pension system. In response, the state pension commenced an adversary proceeding seeking (1) a determination that the CMHC debtor was a “governmental unit,” and not a “person,” and thus was statutorily barred from seeking relief under chapter 11 of the Bankruptcy Code and (2) the issuance of a preliminary injunction compelling the CMHC debtor to continue contributing to the pension. The Seven Counties court held that the CMHC debtor was entitled to chapter 11 relief and permitted the CHMC debtor to reject its executory contract with the pension system.