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What Is Chapter Nine Bankruptcy

  In this case, the debtor essentially tried to circumvent the feasibility requirement with two arguments. First, it argued that the plan had the overwhelming support of creditors and the only opponent was a city, that could protect its executory contract rights after assumption, through state law remedies. The court held that it cannot deny standing to the city to object to feasibility based on some attribute (size, funding, or alternative remedies). In addition, the "best interest" test may be satisfied by creditor approval of the plan, but feasibility is a separate standard that must be satisfied in Chapter 9, regardless of creditor support. Secondly, the debtor argued that the plan's provision for the issuance of "no default" exchange bonds, which merely compound unpaid payments, but do not allow the holder to declare a default, meant that it need only establish that it can issue these bonds legally, and need not prove it can pay them timely. The court found this interpretation would render the feasibility requirement and purpose of Chapter 9 meaningless.

     In determining whether the plan had been proposed in "good faith," the court applied the "totality of the circumstances" test. In this case, it found that the favorable treatment of the creditor co-proponent, by itself, did not run afoul of the "good faith" standard. However, the plan was not proposed in good faith because all profits under the plan were being funded by using the taxing power of a municipality without consideration of the municipality's obligation to provide future public services. No expenses for future services or infrastructure had been projected, and all projected revenue was to be devoted to bond repayment. In addition, the municipality would be unable to raise future revenue from other sources because the exchange bonds constituted a first lien on the property and under an agreement with the creditor co-proponent, the creditor held a veto power over any future increase in taxes. Under these circumstances, the plan effectively stripped the municipality of any public function and encumbered its future revenue to pay past debt and future profit to the creditor co-proponent. The court found that the plan was an attempt to harness a governmental entity's taxing power for private profit. Chapter 9 was not intended for this purpose and, thus, the plan was not proposed in good faith.

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