There is remarkably little in Chapter 9 of the Bankruptcy Code.  Taking up only about six pages of my copy of the Code, it mostly consists of cross-references to other Code provisions that incorporate, or do not incorporate, familiar business bankruptcy concepts.  As we are finding out in the Jefferson County case, the Detroit bankruptcy, and the host of other recent municipality bankruptcies, the devil is in the details of those provisions.  Thinking of Chapter 9 as “sort of like a Chapter 11 for cities” is a sure way to get into trouble.

While the section 109 eligibility requirements were the focus of Judge Rhodes’ recent decision in the Detroit case and of much dispute in other recent cases, another quirky aspect of Chapter 9 is its definition of “municipality.”  Most bankruptcy lawyers are familiar with the section 109 requirement that a State must authorize the filing of Chapter 9 cases by municipalities located therein.  See 11 U.S.C. § 109(c)(2).  This prevents the cities, and various other public agencies, in about half the States from using Chapter 9.  

What is less well known is that the definition of “municipality” excludes Washington, D.C., one of our 25 largest cities by population.  Section 101(40) defines a “municipality” as a political subdivision, public agency or instrumentality of a State.  Although “State” is defined to include the District of Columbia and Puerto Rico for most purposes, both are expressly excluded from the definition for purposes of determining who may be a debtor under Chapter 9.  See 11 U.S.C. § 101(52).  Thus, Chapter 9 relief is not available to Washington D.C., Puerto Rico and Puerto Rico’s cities and public agencies.  Further, since these are governmental units, they are excluded from the Code’s definition of “person” and therefore ineligible for relief under any other chapter.  See 11 U.S.C. §§ 101(41) and109(a).  This makes sense because neither Washington, D.C., nor Puerto Rico raise the federalism and Tenth Amendment issues that are presented by federal Bankruptcy Court supervision of a State entity.  Further, because of the constitutional prohibition on State-based impairment of contracts, State governments and their political subdivisions lack the power to adjust their debt obligations and may need to use the federal powers provided by Chapter 9.  In contrast, Congress has the constitutional power to address debt problems in the District of Columbia and territories so the special powers provided by Chapter 9 are not needed.