Harrisburg May Have Bankruptcy Dismissed Next Month Amid Legal Challenges
By Steven Church and Romy Varghese – Oct 18, 2011 12:00 AM ET
The bankruptcy filing by Harrisburg, Pennsylvania, the first state capital to seek chapter 9 protection in at least 40 years, may not survive past November as the state Senate plans a vote today on a takeover of the city’s finances.
The Senate is considering legislation that would make Harrisburg the first Pennsylvania city to go into receivership. Its Rules Committee yesterday voted 11-6 to send the bill to the full Senate for a vote today. If it passes, it will need House approval and the signature of Governor Tom Corbett to become law. Corbett has said he would sign it.
State Senator Jeffrey E. Piccola said that if the bill becomes law and the governor declares a fiscal emergency, “it’s quite possible” the state and the receiver will have the Harrisburg City Council withdraw its bankruptcy petition. A receiver couldn’t end the Oct. 11 bankruptcy without approval of the court, lawyers for the city and the council members said.
Harrisburg Mayor Linda D. Thompson and state officials claim the bankruptcy filing by a majority of the City Council was invalid. Thompson said the council didn’t follow proper procedures, while the state said the bankruptcy violates a law enacted this year.
Mark D. Schwartz, a lawyer for the City Council, said lawmakers are “playing games to protect insurance companies and doing something that is too little and too late.”
Schwartz claims that the governor is trying to protect bond insurance companies behind debt for an incinerator in a waste- to-energy project from taking any losses.
“They should try to solve the real fiscal problems facing Harrisburg and the other municipalities in Pennsylvania,” the attorney said.
Thompson argued in court papers that under Pennsylvania law, Harrisburg is a city with a strong-mayor form of government, meaning the City Council can authorize a filing but only the mayor can sign the court documents and actually file the case.
The city is paying its bills as they come due, Thompson said in a press conference after the court hearing.
‘Business as Usual’
“It is business as usual,” the mayor said. “We are on budget for the remainder of the year.”
Thompson asked U.S. Bankruptcy Judge Mary D. France to cancel or delay the official notice informing the public that a bankruptcy case has been filed. The judge today agreed to the delay and said written arguments by both sides should be filed by Oct. 28.
Chapter 9 of the U.S. Bankruptcy Code gives municipalities advantages in bankruptcy that companies don’t have. For example, a bankruptcy judge can’t appoint a trustee to run a city.
The law 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 justice 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 enacted a law that barred a Harrisburg bankruptcy filing until next July. France might need to rule that law invalid to justify allowing the bankruptcy to go forward, lawyers said.
Under the Senate bill, which would let Corbett name a receiver to develop a recovery plan, such an official would be able to sell assets, hire advisers and suspend the authority of elected officials who interfere.
State 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. Such a 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 of the petition.
Harrisburg, a city of 49,500 and 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. Guaranteed debt is about $242 million, with $65 million of it overdue, the bankruptcy petition said.
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.
If she rules the bankruptcy was legally filed, the judge will also consider whether it complies with the bankruptcy code, which requires the city to negotiate with creditors in good and be unable to pay its bills as they come due.
The law firm hired by the mayor, Tucker Arensberg PC, is charging $200 an hour for the two lead attorneys in the case, less than half its normal rate, Tucker Arensberg attorney Beverly Weiss Manne said today in an interview. In corporate cases, law firms typically charge bankrupt companies from $500 to $1,000 an hour.
The case is In re City of Harrisburg, Pennsylvania, 11- 06938, U.S. Bankruptcy Court, Middle District of Pennsylvania (Harrisburg).