CHAPTER 9ADJUSTMENT OF DEBTS OF A MUNICIPALITY
Sub Chapter General Provisions
Sec. 901. Applicability of other sections of this title
(a) Sections 301, 344, 347(b), 349, 350(b), 361, 362, 364(c),
364(d), 364(e), 364(f), 365, 366, 501, 502, 503, 504, 506, 507(a)(1),
509, 510, 524(a)(1), 524(a)(2), 544, 545, 546, 547, 548, 549(a), 549(c),
549(d), 550, 551, 552, 553, 557, 1102, 1103, 1109, 1111(b), 1122,
1123(a)(1), 1123(a)(2), 1123(a)(3), 1123(a)(4), 1123(a)(5), 1123(b),
1124, 1125, 1126(a), 1126(b), 1126(c), 1126(e), 1126(f), 1126(g),
1127(d), 1128, 1129(a)(2), 1129(a)(3), 1129(a)(6), 1129(a)(8),
1129(a)(10), 1129(b)(1), 1129(b)(2)(A), 1129(b)(2)(B), 1142(b), 1143,
1144, and 1145 of this title apply in a case under this chapter.
(b) A term used in a section of this title made applicable in a case
under this chapter by subsection (a) of this section or section 103(e)
of this title has the meaning defined for such term for the purpose of
such applicable section, unless such term is otherwise defined in
section 902 of this title.
(c) A section made applicable in a case under this chapter by
subsection (a) of this section that is operative if the business of the
debtor is authorized to be operated is operative in a case under this
(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2621; Pub. L. 98-353, title III,
Secs. 353, 490, July 10, 1984, 98 Stat. 361, 383; Pub. L. 100-597,
Sec. 3, Nov. 3, 1988, 102 Stat. 3028.)
Historical and Revision Notes
Chapter 9 of the House amendment represents a compromise between
chapter 9 of the House bill and 9 of the Senate amendment. In most
respects this chapter follows current law with respect to the adjustment
of debts of a municipality. Stylistic changes and minor substantive
revisions have been made in order to conform this chapter with other new
chapters of the bankruptcy code. There are few major differences between
the House bill and the Senate amendment on this issue. Section 901
indicates the applicability of other sections of title 11 in cases under
chapter 9. Included are sections providing for creditors' committees
under sections 1102 and 1103.
house report no. 95-595
Section 901 makes applicable appropriate provisions of other
chapters of proposed title 11. The general rule set out in section
103(e) is that only the provisions of chapters 1 and 9 apply in a
chapter 9 case. Section 901 is the exception, and specifies other
provisions that do apply. They are as follows:
Sec. 301. Voluntary cases. Application of this section makes clear,
as under current chapter IX [chapter 9 of former title 11], that a
municipal case can be commenced only by the municipality itself. There
are no involuntary chapter 9 cases.
Sec. 344. Self-incrimination; immunity. Application of this section
is of no substantive effect for the administration of the case, but
merely provides that the general rules in part V [Sec. 6001 et seq.] of
title 18 govern immunity.
Sec. 347(b). Unclaimed property. This provision currently appears in
section 96(d) of chapter IX [section 416(d) of former title 11].
Sec. 349. Effect of dismissal. This section governs the effect of a
dismissal of a chapter 9 case. It provides in substance that rights that
existed before the case that were disturbed by the commencement of the
case are reinstated. This section does not concern grounds for
dismissal, which are found in section 926.
Sec. 361. Adequate protection. Section 361 provides the general
standard for the protection of secured creditors whose property is used
in a case under title 11. Its importance lies in its application to
sections 362 and 364.
Sec. 362. Automatic stay. The automatic stay provisions of the
general portions of the title are incorporated into chapter 9. There is
an automatic stay provided in current Bankruptcy Act Sec. 85(e) [section
405(e) of former title 11]. The thrust of section 362 is the same as
that of section 85(e), but, of course, its application in chapter 9 is
modernized and drafted to conform with the stay generally applicable
under the bankruptcy code. An additional part of the automatic stay
applicable only to municipal cases is included in section 922.
Secs. 364(c), 364(d), 364(e). Obtaining credit. This section governs
the borrowing of money by a municipality in reorganization. It is
narrower than a comparable provision in current law, section 82(b)(2)
[section 402(b)(2) of former title 11]. The difference lies mainly in
the removal under the bill of the authority of the court to supervise
borrowing by the municipality in instances in which none of the special
bankruptcy powers are involved. That is, if a municipality could borrow
money outside of the bankruptcy court, then it should have the same
authority in bankruptcy court, under the doctrine of Ashton v. Cameron
Water District No. 1, 298 U.S. 513 (1936) [Tex.1936, 56 S.Ct. 892, 80
L.Ed. 1309, 31 Am.Bankr.Rep.N.S. 96, rehearing denied 57 S.Ct. 5, 299
U.S. 619, 81 L.Ed. 457] and National League of Cities v. Usery, 426 U.S.
833 (1976) [Dist.Col.1976, 96 S.Ct. 2465, 49 L.Ed.2d 245, on remand 429
F. Supp. 703]. Only when the municipality needs special authority, such
as subordination of existing liens, or special priority for the borrowed
funds, will the court become involved in the authorization.
Sec. 365. Executory contracts and unexpired leases. The
applicability of section 365 incorporates the general power of a
bankruptcy court to authorize the assumption or rejection of executory
contracts or unexpired leases found in other chapters of the title. This
section is comparable to section 82(b)(1) of current law [section
402(b)(1) of former title 11].
Sec. 366. Utility service. This section gives a municipality the
same authority as any other debtor with respect to continuation of
utility service during the proceeding, provided adequate assurance of
future payment is provided. No comparable explicit provision is found in
current law, although the case law seems to support the same result.
Sec. 501. Filing of proofs of claims. This section permits filing of
proofs of claims in a chapter 9 case. Note, however, that section 924
permits listing of creditors' claims, as under chapter 11 and under
section 85(b) of chapter IX [section 405(b) of former title 11].
Sec. 502. Allowance of claims. This section applies the general
allowance rules to chapter 9 cases. This is no change from current law.
Sec. 503. Administrative expenses. Administrative expenses as
defined in section 503 will be paid in a chapter 9 case, as provided
under section 89(1) of current law [section 409(1) of former title 11].
Sec. 504. Sharing of compensation. There is no comparable provision
in current law. However, this provision applies generally throughout the
proposed law, and will not affect the progress of the case, only the
interrelations between attorneys and other professionals that
participate in the case.
Sec. 506. Determination of secured status. Section 506 specifies
that claims secured by a lien should be separated, to the extent
provided, into secured and unsecured claims. It applies generally.
Current law follows this result, though there is no explicit provision.
Sec. 507(1). Priorities. Paragraph (1) of section 507 requires that
administrative expenses be paid first. This rule will apply in chapter 9
cases. It is presently found in section 89(1) [section 409(1) of former
title 11]. The two other priorities presently found in section 89 have
been deleted. The second for claims arising within 3 months before the
case is commenced, is deleted from the statute, but may be within the
court's equitable power to award, under the case of Fosdick v. Schall,
99 U.S. 235 (1878) [25 L.Ed. 339]. Leaving the provision to the courts
permits greater flexibility, as under railroad cases, than an absolute
three-month rule. The third priority under current law, for claims which
are entitled to priority under the laws of the United States, is deleted
because of the proposed amendment to section 3466 of the Revised
Statutes [former 31 U.S.C. 191, see 31 U.S.C. 3713(a)] contained in
section 321(a) of title III of the bill, which previously has given the
United States an absolute first priority in chapter X [chapter 10 of
former title 11] and section 77 [section 205 of former title 11] cases.
Because the priority rules are regularized and brought together in the
bankruptcy laws by this bill, the need for incorporation of priorities
elsewhere specified is eliminated.
Sec. 509. Claims of codebtors. This section provides for the
treatment of sureties, guarantors, and codebtors. The general rule of
postponement found in the other chapters will apply in chapter 9. This
section adopts current law.
Sec. 510. Subordination of claims. This section permits the court to
subordinate, on equitable grounds, any claim, and requires enforcement
of contractual subordination agreements, and subordination of securities
rescission claims. The section recognizes the inherent equitable power
of the court under current law, and the practice followed with respect
to contractual provisions.
Sec. 547. Preferences. Incorporation of section 547 will permit the
debtor to recover preferences. This power will be used primarily when
those who gave the preferences have been replaced by new municipal
officers or when creditors coerced preferential payments. Unlike
Bankruptcy Act Sec. 85(h) [section 405(h) of former title 11], the
section does not permit the appointment of a trustee for the purpose of
pursuing preferences. Moreover, this bill does not incorporate the other
avoiding powers of a trustee for chapter 9, found in current section
Sec. 550. Liability of transfers. Incorporation of this section is
made necessary by the incorporation of the preference section, and
permits recovery by the debtor from a transferee of an avoided
Sec. 551. Automatic preservation of avoided transfer. Application of
section 551 requires preservation of any avoided preference for the
benefit of the estate.
Sec. 552. Postpetition effect of security interest. This section
will govern the applicability after the commencement of the case of
security interests granted by the debtor before the commencement of the
Sec. 553. Setoff. Under current law, certain setoff is stayed.
Application of this section preserves that result, though the setoffs
that are permitted under section 553 are better defined than under
present law. Application of this section is necessary to stay the setoff
and to provide the offsetting creditor with the protection to which he
is entitled under present law.
Sec. 1122. Classification of claims. This section is derived from
current section 88(b) [section 408(b) of former title 11], and is
Sec. 1123(a)(1)-(4), (b). Contents of plan. The general provisions
governing contents of a chapter 11 plan are made applicable here, with
two exceptions relating to the rights of stockholders, which are not
applicable in chapter 9 cases. This section expands current law by
specifying the contents of a plan in some detail. Section 91 of current
law [section 411 of former title 11] speaks only in general terms. The
substance of the two sections is substantially the same, however.
Sec. 1124. Impairment of claims. The confirmation standards adopted
in chapter 9 are the same as those of chapter 11. This changes current
chapter IX [chapter 9 of former title 11], which requires compliance
with the fair and equitable rule. The greater flexibility of proposed
chapter 11 is carried over into chapter 9, for there appears to be no
reason why the confirmation standards for the two chapters should be
different, or why the elimination of the fair and equitable rule from
corporate reorganizations should not be followed in municipal debt
adjustments. The current chapter IX rule is based on the confirmation
rules of current chapter X [chapter 10 of former title 11]. The change
in the latter suggests a corresponding change in the former. Section
1124 is one part of the new confirmation standard. It defines
impairment, for use in section 1129.
Sec. 1125. Postpetition disclosure and solicitation. The change in
the confirmation standard necessitates a corresponding change in the
disclosure requirements for solicitation of acceptances of a plan. Under
current chapter IX [chapter 9 of former title 11] there is no disclosure
requirement. Incorporation of section 1125 will insure that creditors
receive adequate information before they are required to vote on a plan.
Sec. 1126(a), (b), (c), (e), (f), (g). Acceptance of plan. Section
1126 incorporates the current chapter IX [chapter 9 of former title 11]
acceptance requirement: two-thirds in amount and a majority in number,
Bankruptcy Act Sec. 92 [section 412 of former title 11]. Section 1125
permits exclusion of certain acceptances from the computation if the
acceptances were obtained in bad faith or, unlike current law, if there
is a conflict of interest motivating the acceptance.
Sec. 1127(d). Modification of plan. This section governs the change
of a creditor's vote on the plan after a modification is proposed. It is
derived from current section 92(e) [section 412(e) of former title 11].
Sec. 1128. Hearing on confirmation. This section requires a hearing
on the confirmation of the plan, and permits parties in interest to
object. It is the same as Bankruptcy Act Secs. 93 and 94(a) [sections
413 and 414(a) of former title 11], though the provision, comparable to
section 206 of current chapter X [section 606 of former title 11],
permitting a labor organization to appear and be heard on the economic
soundness of the plan, has been deleted as more appropriate for the
Sec. 1129(a)(2), (3), (8), (b)(1), (2). Confirmation of plan. This
section provides the boiler-plate language that the plan be proposed in
good faith and that it comply with the provisions of the chapter, and
also provides the financial standard for confirmation, which replaces
the fair and equitable rule. See Sec. 1124, supra.
Sec. 1142(b). Execution of plan. Derived from Bankruptcy Act
Sec. 96(b) [section 416(b) of former title 11], this section permits the
court to order execution and delivery of instruments in order to execute
Sec. 1143. Distribution. This section is the same in substance as
section 96(d) [section 416(d) of former title 11], which requires
presentment or delivery of securities within five years, and bars
creditors that do not act within that time.
Sec. 1144. Revocation of order of confirmation. This section permits
the court to revoke the order of confirmation and the discharge if the
confirmation of the plan was procured by fraud. There is no comparable
provision in current chapter IX [chapter 9 of former title 11].
1988--Subsec. (a). Pub. L. 100-597 inserted ``1129(a)(6),'' after
1984--Subsec. (a). Pub. L. 98-353 inserted ``557,'' after ``553,''
and substituted ``1111(b),'' for ``1111(b)''.
Effective Date of 1988 Amendment
Amendment by Pub. L. 100-597 effective Nov. 3, 1988, but not
applicable to any case commenced under this title before that date, see
section 12 of Pub. L. 100-597, set out as a note under section 101 of
Effective Date of 1984 Amendment
Amendment by Pub. L. 98-353 effective with respect to cases filed 90
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out
as a note under section 101 of this title.
Section Referred to in Other Sections
This section is referred to in sections 103, 106, 902, 943 of this