March 27, 2014 Articles

When Negotiations Are "Impracticable": Detroit and Chapter 9 Eligibility

The troubled Motor City satisfies a key condition to bankruptcy filing.

By Brendan M. Gage

The Bankruptcy Court for the Eastern District of Michigan recently determined that the City of Detroit was eligible for relief under Chapter 9 of the Bankruptcy Code. See In re City of Detroit, Mich., 504 B.R. 97 (Bankr. E.D. Mich. 2013). In rendering its decision, a major issue addressed by the court was whether Detroit satisfied one of the four eligibility conditions in 11 U.S.C. § 109(c)(5). The court concluded that while Detroit did not negotiate with creditors in “good faith” prior to filing its bankruptcy petition under section 109(c)(5)(B), its failure to do so did not prevent the city from qualifying as a Chapter 9 debtor because such prepetition negotiations were “impracticable” under section 109(c)(5)(C).

The court’s decision highlights the need for the prospective Chapter 9 debtor to conduct a prepetition analysis of whether it should attempt negotiations with creditors in light of section 109(c)(5). This determination is important because the failure to satisfy section 109(c)(5) could result in dismissal of the debtor’s bankruptcy petition. See, e.g., In re Sullivan Cnty. Reg’l Refuse Disposal Dist., 165 B.R. 60, 83 (Bankr. D.N.H. 1994); In re Ellicott Sch. Bldg. Auth., 150 B.R. 261, 266 (Bankr. D. Colo. 1992). To guide the prospective Chapter 9 debtor, this article provides an overview of section 109(c)(5) and analyzes how the City of Detroit was able to meet this key requirement.

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