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October 21, 2024
Cadwalader partners Lary Stromfeld and Casey Servais spoke with The Bond Buyer about the ongoing municipal bankruptcy of the city of Chester, Pennsylvania, and the legal complexities involved.
Municipal bankruptcies are rare, according to Lary, with certain legal principles are less settled than many bondholders assume.
The newly-bankrupt city filed an adversarial proceeding challenging the liens on its 2017 revenue bonds, in a "creative" effort to exploit some undefined terms, Stromfeld said.
The municipal bankruptcy code was modeled after the commercial bankruptcy code, where property acquired after a commercial bankruptcy is not subject to liens. Commercial entities often put liens on their physical properties, Casey noted, and cutting off a lien on properties acquired post-bankruptcy gives those entities "a fresh start." But a government cannot issue a lien on its physical property, and in most municipal finance contexts, the lien is almost exclusively on their revenue.
"But that whole financing structure doesn't work if the lien then gets cut off in bankruptcy," Casey said.
"In a municipal revenue deal, every time revenues are paid, like in a toll booth, every time that toll money comes in," Lary noted, it "could be viewed as property that was acquired after the bankruptcy."
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