Oct. 14 (Bloomberg) -- Pennsylvania officials joined Harrisburg Mayor Linda D. Thompson in an bid to dismiss a bankruptcy petition filed by the city council, which critics say violates local, state and federal laws.
Thompson and lawyers for the state are seeking an immediate end to the bankruptcy, which began Oct. 11 after four members of the city, the capital of Pennsylvania, voted to hire a lawyer to file the case. Thompson says the council members didn’t follow proper procedures and the state says the bankruptcy violates a law passed earlier this year by legislators.
In court papers filed today, the state asked a judge to put “a quick end to this ill-advised and transparent gambit fostered by a bare majority faction of Harrisburg’s city council.”
The city council voted 4-3 on Oct. 11 in favor of Chapter 9 municipal bankruptcy, seeking to ward off a state takeover of its finances after failing to pay debt on a trash-to-energy incinerator. Mark D. Schwartz, a lawyer based in Bryn Mawr, Pennsylvania, faxed the bankruptcy petition to the Harrisburg court that night.
The bankruptcy was “filed without requisite authority” and “must be dismissed,” Thompson said in papers submitted late yesterday in U.S. Bankruptcy Court in Harrisburg.
“If I didn’t think it had merit, I wouldn’t have filed it,” Schwartz said in an interview responding to questioning about the validity of the bankruptcy filing. “I don’t feel that anything was spurious.”
Thompson, who hired the law firm Tucker Arensberg PC to oppose the bankruptcy, said her lawyers will file a formal dismissal motion “shortly.” In the meantime, she asked U.S. Bankruptcy Judge Mary D. France to set up a conference quickly to schedule an emergency motion to end the case.
France set a hearing for Oct. 17 to discuss the status of the case and to set a schedule for the coming battle over whether the bankruptcy should be dismissed. She set Nov. 21 as a deadline to file objections to the bankruptcy.
France still must decide who will represent the city in the case. She will look to the municipal code governing Harrisburg to decide which lawyer speaks for the city, bankruptcy attorney R. Dale Ginter said in an interview. If she sides with Thompson, the case may be over quickly, he said.
“The mayor has no standing” and is just a spectator in the case. “The governing body is the council not the mayor,” Schwartz said.
Other issues include whether the filing violated the law of the commonwealth of Pennsylvania, as Governor Thomas Corbett has asserted, and whether the case meets the tests laid out in Chapter 9 of the federal bankruptcy code, which governs municipal bankruptcy filings.
“It sounds to me like those who want Harrisburg in bankruptcy have some hurdles to overcome,” said Ginter, who was born and grew up in Harrisburg. He now lives in Sacramento, California, where he represented retirees in the municipal bankruptcy of Vallejo, California.
Chapter 9 gives municipalities advantages in bankruptcy that private companies don’t have. For example, a bankruptcy judge can’t appoint a trustee to run a city.
The code also imposes a burden that corporations don’t face: cities must have permission from their state government to file for bankruptcy, Robert G. Flanders Jr., an attorney with Hinckley Allen Snyder LLP said in an interview. Flanders is a former Rhode Island Supreme Court judge who was appointed by the state as the receiver for the city of Central Falls, Rhode Island, which filed bankruptcy in August.
In June, Pennsylvania passed a law that barred a Harrisburg bankruptcy filing until July. France may need to rule that law wasn’t valid to justify allowing the bankruptcy to go forward, Ginter said.
That law, which purportedly bars the city from seeking court protection, contains “bizarre” language and is “unconstitutional”, Schwartz said. The law was directed solely at Harrisburg and you can’t legislate to one city, he added.
Next week, legislators for Pennsylvania will consider a bill that would let Corbett name a receiver who would develop a recovery plan. That official would be able to sell assets, hire advisers and suspend the authority of elected officials who interfere.
“Any bankruptcy judge would take that extremely seriously,” Ginter said.
Pennsylvania Representative Glenn Grell of Hampden Township in Cumberland County said state intervention is in the best interest of city residents because it will put a long-term plan in place. That plan was rejected by the council.
Bankruptcy is a better option than the pain of a state-imposed recovery plan, said Councilwoman Susan Brown-Wilson, who backed the filing.
The city of 49,500, seat of Dauphin County, faces a debt five times its general-fund budget because of an overhaul and expansion of the incinerator, which doesn’t generate enough revenue. Its guaranteed debt is about $242 million, with $65 million of it overdue, according to the bankruptcy petition.
The Pennsylvania law barring Harrisburg from filing bankruptcy was passed on June 30, the last day of the legislature’s session before it broke for the summer. Before the vote, Representative Joe Markosek, a Democrat representing Allegheny and Westmoreland counties, called the bill a “GOP dumping ground” for legislation that couldn’t get passed earlier in the session.
France will also consider whether the bankruptcy complies with other aspects of federal law as laid out in the bankruptcy code. The code requires the city to negotiate in good faith with its creditors and be unable to pay its bills as they come due.
The city has a better chance of showing it meets those standards, Ginter said.
As the case goes forward, the bankruptcy is likely to be challenged by several different entities, said Clayton W. Davidson, an attorney for Dauphin County, which opposes the bankruptcy. Dauphin County is a co-guarantor for some of the city’s debt.
“I’m glad I’m not the bankruptcy judge,” said Ginter, of the Sacramento law firm of Downey Brand LLP.
The case is In re City of Harrisburg, Pennsylvania, 11-06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg).
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