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Court Dismisses Harrisburg Chapter 9 Petition - Rules Harrisburg Not Authorized to File

BY BILL KANNEL AND ADRIENNE WALKER

The bankruptcy court ruled today that the City of Harrisburg’s Chapter 9 petition filed by the Harrisburg City Council was not specifically authorized under Pennsylvania law.  After extensive briefing from the parties concerning, among other things, the constitutionality of Act 26 – the law passed in June 2011 to prohibit “third class” cities like Harrisburg from filing Chapter 9 -- the court ruled the law was constitutional and prohibited Harrisburg from becoming a Chapter 9 debtor.  The case has been dismissed.

At the hearing, the court quickly narrowed the multitude of issues presented in the briefs of the Commonwealth of Pennsylvania, Mayor of Harrisburg, Harrisburg City Council, a citizens group and various creditors of Harrisburg.  The court focused the parties’ argument on (a) the constitutionality of Act 26, and (b) if Act 26 is found to be unconstitutional, whether the City Council’s vote to and filing of the Chapter 9 petition complied with applicable law.

  • Act 26 is Constitutional

The court ruled that Act 26 is constitutional.  In support of its ruling, the court held that Act 26 did not violate the Pennsylvania constitution, which requires that bills have a single subject that is reflected in the title of the bill and that the final bill passed be related to the original purpose of the filed bill.  The court reasoned that Pennsylvania case law supports a holding that the overarching legislative purpose of Act 26 was to direct the fiscal purpose of the state and this includes its prohibition of financially distressed municipalities filing under Chapter 9.

  • City Council Process:  Separation of Duties Between City Council and Mayor

Because the court ruled that Act 26 was constitutional, the court said it had no need to address the second issue involving whether, under local law, the Mayor was required to file the Chapter 9 petition.  Nevertheless, the court addressed this second issue because of the possibility that its constitutionality ruling will be appealed.  The court ruled that under local rules of governance the Mayor is the CEO of Harrisburg and is required to initiate any legal proceedings – including the filing of a Chapter 9 petition.  While the City Council was required to vote to file for Chapter 9, the Mayor was ultimately the only party who could file the Chapter 9 petition.  The City Council’s action in filing the Chapter 9 was not authorized by the Mayor and therefore the court ruled the Chapter 9 petition was invalid on that basis as well.

 

 

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Authors

Leonard Weiser-Varon serves as bond counsel, purchasers’ counsel, bondholders’ counsel and trustee’s counsel on municipal bond issues, workouts and restructurings. Len also represents state sponsors and private program managers of Section 529 and 529A savings programs.

William W. Kannel

Member / Chair, Bankruptcy & Restructuring Practice

William W. Kannel is the Chair of Mintz’s national Bankruptcy & Restructuring Practice. Bill has experience in corporate and municipal reorganizations and debt restructurings. He represents both creditors and debtors in all phases of distressed debt negotiations, bankruptcy litigation, and distressed asset acquisitions.
Adrienne K. Walker is a restructuring and commercial finance attorney at Mintz. Adrienne uses her bankruptcy litigation experience to advance creditors' rights and represent debtholders in Chapter 9 municipal bankruptcies. She handles bankruptcy matters and workouts in state and federal courts.