What’s next for Boise County after bankruptcy filing? | Local News | Idaho Statesman
When Boise County filed Chapter 9 bankruptcy March 1, it entered uncharted territory as possibly the first county in state history to seek bankruptcy protection.
Few attorneys in Idaho are well versed on Chapter 9 bankruptcy, the section of the code dedicated to municipalities.
James Spiotto, a Chicago-based attorney who has authored numerous books and articles on municipal defaults and bankruptcy, told the Idaho Statesman last week that there are myriad consequences when municipalities resort to bankruptcy.
He said it starts with attorney and consultant fees that can soar into the millions. Then there’s the impact on county workers — particularly those dealing with financial matters — who have to devote time to bankruptcy-related inquiries.
There’s also the stigma of bankruptcy and long-term financial ramifications.
“In the West, there’s an old saying, ‘You don’t hang a person for stealing horses, you hang them so that horses won’t be stolen,’ ” Spiotto said, quoting a Texas judge.
He said when Boise County needs to borrow money for future improvement projects, it could be a lot more costly. Interest rates on bonds are likely to be significantly higher.
The county’s Chapter 9 may also make it more costly for other municipalities, he said.
“If the market sees some people doing it (Chapter 9), the cost for everybody rises,” Spiotto said.
Spiotto opposes the creation of a bankruptcy law for states. And though some are predicting a flurry of municipal bankruptcies, he’s optimistic.
“While we may have more challenging times, I don't know necessarily if there’s going to be a significant increase in defaults or bankruptcies,” he said. “I think there’s dedication to try to work through these things ... The states can provide loans, grants, oversight.”
Boise County’s troubles started in December, when a federal jury in Boise determined that the county had violated the federal Fair Housing Act in its handling of an application for a proposed teen treatment center. The jury awarded developer Oaas Laney $4 million in damages.
Boise County may be the first county in the state to file Chapter 9, but it is not the first government entity in Idaho to file for bankruptcy.
Two Idaho taxing districts in the state have also done so since 1980: East Shoshone Hospital District (1998) and Lost Rivers Hospital District (2010).
Chapter 9 was added to federal bankruptcy code in 1937, when more than 4,000 municipalities were defaulting on their obligations, Spiotto said.
“Thousands were asking the federal government to give relief,” Spiotto said.
Idaho is one of 15 states with specific provisions authorizing Chapter 9.
Two states prohibit municipal bankruptcies (Georgia and Iowa), while others offer conditional (requiring legislative or other permission) or very limited authorization, Spiotto said. For example, Oregon limits Chapter 9 to irrigation and drainage districts only.
Spiotto says there have been 621 municipal bankruptcies in the country since 1937. The vast majority were special taxing districts (school, health, irrigation, etc.).
Of the 250 that have occurred since 1980, and just 46 — including Boise County — were cities, towns, villages or counties.
He said one reason there have been few municipal bankruptcies is because local governments have found other ways to deal with their fiscal problems. Some cities have looked to their state governments for assistance.
HOW WILL THE BOISE COUNTY BANKRUPTCY WORK?
D. Blair Clark is the Boise attorney handling Boise County’s Chapter 9 filings.
Clark has been doing bankruptcy cases for more than 35 years and is currently working on another Chapter 9 case in Idaho (Lost Rivers Hospital District).
In its initial bankruptcy filing, Boise County lists more than $900,000 in debt on top of the $4 million from the Alamar Ranch/Oaas Laney judgment. The county’s debt is listed as vehicle, equipment and building leases, and the indigency fund.
The county has said it also faces plaintiff’s attorneys fees of $1.4 million as part of the Alamar Ranch judgment, but that was not listed in the initial bankruptcy filing.
Clark agreed to answer some general questions about Chapter 9 and a few specific questions about Boise County.
Q: How does filing Chapter 9 protect a municipality?
A: The automatic stay prohibits creditor action without bankruptcy court approval and gives the entity time to file a plan to restructure its debts and resolve its other financial issues.
Q: Could the county have sold an asset — say a piece of land — to raise the money to pay the Oaas Laney/Alamar Ranch judgment?
A: I do not believe so.
Q: Are municipalities that file Chapter 9 allowed to seek bonds or is there a period in which they are prohibited?
A: Since Boise County has no bonded debts, that’s not an issue. They can still attempt to seek bonds if needed.
Q: Are there court-imposed deadlines for Chapter 9? What are the next steps in the process.
A: We need to get the Alamar objections resolved which could take a while and then work on a plan. There are no real court-imposed deadlines as such except for the publication of the notice of filing, which is going on now. The Court did extend the time for the dismissal motion to be filed to May 2.
Q: The attorneys for Oaas Laney have filed a petition to dismiss Boise County's Chapter 9 filing, claiming it was done in “bad faith.” When will a decision be made on that petition?
A: We do not yet have a date. The judge will set that when they know how long we anticipate the hearing to take. They have until May 2 to file, and we may not have a hearing date until June or July.
Q: Does Boise County have some or all of the money needed to pay the Oaas Laney/Alamar Ranch judgment in reserves?
A: It cannot pay all of it with funds available. It cannot legally propose a long-term solution without court approval.
Q: How does filing Chapter 9 affect the payment of the judgment in the Oaas Laney/Alamar Ranch case? Does it simply delay when payments are due or does it relieve some or all of the amount owed?
A: Probably a bit of both. The Court has to approve a plan as “fair and equitable,” which encompasses both a potential reduction in the total amount of the claim required to be paid, and the timing of payment. That depends on the County’s budget, anticipated needs, anticipated tax revenues (which are declining in 2011 compared with prior years) and other subjective factors to be considered by the Court.
Q: Which creditors get paid first under Chapter 9?
A: Statutory priority claims under section 507 of the Bankruptcy Code.
Q: How does Chapter 9 affect the day-to-day operations of Boise County?
A: It can conduct ordinary course of business matters and its statutory and constitutional duties.
Q: Some experts say there’s likely to be a flurry of Chapter 9 filings across the country soon. Do you see that happening, and what consequences do you see as a result?
A: I do. And the consequences are basically a guess into the unknown. I’m not trying to be evasive, but it depends so much on the municipality involved, where it gets revenue and what its creditors’ demands are. There’s a move in Congress, as you may have read, to expand Chapter 9 to include state governments as well as their political subdivisions. I’ve heard opinions from those I respect that California itself may have to file to clean up its situation. When you consider that it has an economy that’s larger than most countries’ GDP, I doubt if anybody could predict what the total consequences would be and to whom.
Katy Moeller: 377-6413
This filing was not made in bad faith. The county clerk elected last November - an auditor used to digging out corruption in Big Corp. America - walked into the middle of this lawsuit when her term started in January, and has worked nonstop to find solutions to a problem created by scam artists who know where to buy, from whom, and what the rules and ordinances need to be in order for them to sue when their plans for 'unsavory' applications of property (in this case a proposed halfway house) are rejected as well as how to ensure those rejections will be forthcoming. With all due respect to the previous clerk, who is by all accounts highly regarded and who to her credit left Boise County with no bonded debts, on top of that are the usual signs of laissez-faire that arise in any office that's been too comfortable for too long, sloppy paperwork and non-existent filing systems, places where choices were made based upon perhaps inappropriate criteria as often happens in smaller or exclusive communities where one hand can easily wash another and favors are often bandied about, and all those things are being addressed as quickly and efficiently as possible, as is this lawsuit.
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