UNITED STATES BANKRUPTCY COURT DISTRICT OF RHODE ISLAND
In re CENTRAL COVENTRY FIRE DISTRICT, Debtor.
) ) ) ) ) ) ) )
Case No. 14-12785 Chapter 9
DEBTOR’S MEMORANDUM OF LAW IN SUPPORT OF ITS STATEMENT OF QUALIFICATIONS UNDER SECTION 109(c)
The Debtor, Central Coventry Fire District (the “District”), by and through its state-
appointed Receiver, Steven T. Hartford, submits the following Memorandum of Fact and Law in
support of its Statement of Qualifications Under Section 109(c) of the United States Bankruptcy
Code. The District also relies upon and incorporates by reference the Affidavit of Rosemary
Booth Gallogly with attached exhibits, submitted herewith as Exhibit A (“Gallogly Aff.”), the
Affidavit of Richard L. Land, Esq. with attached exhibits, submitted herewith as Exhibit B
(“Land Aff.”), the Affidavit of Timothy Cavazza, with attached exhibits, submitted herewith as
Exhibit C (“Cavazza Aff.”), and the Affidavit of Steven T. Hartford, with attached exhibits,
submitted herewith as Exhibit D (“Hartford Aff.”).
I. INTRODUCTION
The General Assembly originally created the Central Coventry Fire District (“District”)
by a legislative charter in 1959. The charter authorized voters of the District to create a fire
district to provide fire protection, emergency medical services, and other services to the
District’s residents. Over the years, the General Assembly amended the charter of the fire
district, including significant amendments in 2006. These amendments allowed the voters of the
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District and three (3) other fire districts in the town of Coventry (Harris, Washington, and
Tiogue) to merge. This merger required the voters’ approval from all districts, including the
current Central Coventry Fire District. The voters approved this merger, which led to the current
configuration, board, and structure of the District. The voters later amended the charter in 2012.
Importantly, while the District provides valuable services to the Town of Coventry, the
Town does not control the District in any way. The District has its own annual taxpayer meeting
at which the voters authorize a tax levy to fund the District for the fiscal year. The voting
taxpayers in attendance also vote for representatives on the Board of Directors (“Board”). The
voters, through the duly elected Board, retain a Chief of the District and are responsible for all
aspects of the District’s operations.
The District has been in dire financial straits for more than two years. On October 12,
2012, the Board petitioned to place the District into a judicial special mastership before the
Rhode Island Superior Court. On October 16, 2012, the Superior Court appointed Richard J.
Land, Esq. (“Attorney Land,” or the “Special Master”) as the Temporary Special Master in the
special mastership proceedings. On November 13, 2012, the Superior Court appointed Attorney
Land as the Permanent Special Master.
During the course of the judicial special mastership, the Special Master investigated the
pending claims and debts that the District owed, investigated the causes of its revenue shortfalls,
and worked with the International Association of Firefighters, Local 3372 (the “Union”) to
obtain voluntary concessions. The Superior Court directed the Board to formulate a fiscally
responsible budget for the District’s taxpayers to approve, but it was to no avail.
After the attempts to rehabilitate the District’s operating budget and fiscal projections
within the Superior Court’s authority failed, the Court entered an Order of Liquidation, pursuant
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to which the Superior Court ordered the Special Master to file a plan of liquidation on or before
May 16, 2014. See Exhibit E to the Land Aff.
On May 2, 2014, the Governor signed a bill into law expanding the Act Relating to Cities
and Towns – Providing Financial Stability, G.L. 1956 §§ 45-9-1, et seq. (the “Fiscal Stability
Act”), to include fire districts, therefore providing the authority for the State to step in to
reorganize the District’s finances. The revised Fiscal Stability Act authorized the Director of
Revenue to appoint a receiver to manage the District. On May 6, 2014, Rosemary Booth
Gallogly, in her capacity as Director of Revenue, and after consultation with the Auditor General
and Governor Lincoln Chafee, appointed Steven T. Hartford as Receiver for the District (the
“Receiver”). Since his appointment, the Receiver has overseen negotiations with the Union and
has worked with the Director of Revenue and her staff to operate the District and to formulate a
plan to restructure the District’s finances to resolve the District’s financial woes.
Unfortunately, the District’s financial difficulties are simply too severe to remedy
through the limited powers of a state receivership. Prior to the judicial special mastership and
the state receivership, the District overestimated its revenue and underestimated its budget –
resulting in a cumulative operating deficit in excess of $1.5 million. Yet it still leased new
equipment and hired new employees – even after the then-existing Board was aware of the
District’s revenue shortfall. The District also faces oppressive future liabilities stemming from
its collective bargaining agreement with the Union. While the District was in the special
mastership, taxpayers in the District rejected two proposed budgets that contained increased tax
levies to keep the District financially viable. The District has not been able to obtain sufficient
revenues to support its operations and pay its debts, and it will not be able to pay its other
obligations as they become due. Stated simply, the District is insolvent.
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As a result, the Receiver has determined that there is no avenue to achieve short term and
long term fiscal stability for the District other than to seek relief in this Court under Chapter 9 of
the United States Bankruptcy Code.
As part of the Petition under Chapter 9 of the Bankruptcy Code (the “Petition”), the
Receiver has filed a Statement of Qualifications under Section 109(c) in which he certified that
the District satisfies each of the five (5) eligibility criteria set forth in Section 109(c). Below, the
Receiver details the facts and law that demonstrate that his certification is correct, and that the
District is eligible to be a debtor in a Chapter 9 case.
II. FACTUAL BACKGROUND
A. The District’s Financial Challenges.
The Affidavit of Richard Land contains an extensive chronology of the events leading up
to the District’s current insolvency, and the District incorporates the entire affidavit by reference.
See Land Aff.
On October 16, 2012, the District’s Board voted to file an application with the Rhode
Island Superior Court to place the District into receivership. See Transcript of February 12, 2014
bench decision ordering liquidation of the District (“Liquidation Decision”), 6.1 Superior Court
Associate Justice Brian Stern appointed Attorney Land as the Special Master. See Liquidation
Decision, 6. When the Board filed its application for a judicial special mastership, the District
was in dire financial straits. The Board represented to the Superior Court that: 1) it had not
implemented a budget or tax levy for the upcoming fiscal year; 2) it had less than $1,000 cash on
hand; 3) it had not paid its employees in more than three weeks; 4) Centreville Bank had recently
1 The Land Aff. refers to, and incorporates by reference, the entirety of Judge Stern’s Liquidation Decision, which is attached to his Affidavit as Exhibit E.
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closed the District’s line of credit; and 5) the District’s accrued debts were significantly more
than its assets. Land Aff. ¶5; Liquidation Decision, 6.
Special Master Land examined the District’s finances and identified obvious
discrepancies that explained a primary reason for the District’s financial situation. For Fiscal
Years 2010-2011 and 2011-2012 the District miscalculated its budget by overestimating its
revenue by approximately $800,000 per year, which is equal to about fifteen percent (15%) of
the District’s total annual budget. Land Aff. ¶¶8-9. This resulted in a cumulative budget deficit
of more than $1.6 million by the end of Fiscal Year 2012. Land Aff. ¶9. Nevertheless, the
District and its Board ignored these shortfalls, and proceeded to hire additional firefighters, lease
new equipment, and negotiate a new collective bargaining agreement with the Union that
increased the firefighters’ rate of pay and accrued benefits. Land Aff. ¶9. As a result, in addition
to incurring a cumulative budget deficit that equaled nearly one-third of the District’s revenues,
the District also incurred significant future liabilities that it did not have the revenue to fund. See
Liquidation Decision, 8.
The District’s financial situation is no better today than it was more than two years ago
when the Special Mastership commenced. The District has the same outstanding liabilities, and
the District’s structural deficit is so large that even a fifty percent (50%) increase in taxes would
not generate enough revenue to solve the District’s financial problems. See Liquidation
Decision, 12. For fiscal year 2015, the District’s projected personnel costs, without a plan of
adjustment, will be in excess of $6.4 million, which expense by itself exceeds projected revenues
for Fiscal Year 2015. Gallogly Aff. ¶¶8, 14. Even if the District were able to ignore every other
expense, the District still cannot meet its projected personnel costs. Simply, the District
generates too little revenue, and because the majority of the District’s expenses relate to
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personnel working under a collective bargaining agreement, it cannot unilaterally reduce
expenses sufficient to restore the District to financial viability. Gallogly Aff. ¶¶17, 18.
B. The District’s Attempts to Avoid Insolvency.
The District has few options to address its financial issues. It has limited means to
increase revenue or decrease expenses. Through its Board and the Special Master, the District
attempted to avoid liquidation and bankruptcy, while trying to restore the District to financial
viability.
The Special Master attempted to propose a budget that included increased tax levies, but
voters rejected that budget in February 2013. Land Aff. ¶¶10, 12. As a result, the District could
not generate additional revenue to offset its expenses. Land Aff. ¶11. The Special Master
sought to liquidate the District because it had insufficient funds to support its continued
operations and did not have an approved budget. Land Aff. ¶13. The Superior Court ordered the
Special Master to develop another budget based on reduced operating costs and concessions
from the Union. Land Aff. ¶14. In March 2013, the Special Master developed a revised budget
and presented it to voters, but the voters rejected this budget as well. Land Aff. ¶¶15-16.
Thereafter, the Town of Coventry authorized a loan of $300,000 to the District for the purpose of
maintaining operations for a few weeks longer, which the Superior Court approved in the judicial
special mastership proceedings. See Liquidation Decision, 12.
While the District attempted to pass a budget and increase its revenue, the Special Master
also took steps to decrease its expenses, including negotiations with the Union to obtain
voluntary concessions. See Land Aff ¶18. On October 17, 2013, the Union members voted to
ratify a concession agreement with the District. Land Aff. ¶26. That evening, however, the
Board unanimously rejected the concession agreement with the Union. Land Aff. ¶26. As a
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result, the Board’s budget was not balanced, and the District would incur an operating deficit for
Fiscal Year 2013-2014. The Board voted unanimously to recommend that the Superior Court
authorize the Special Master to liquidate the District. Land Aff. ¶26.
In addition to negotiations with the Union, the District took several other steps to reduce
its expenses. First, the District did not hire any new or additional firefighters, notwithstanding
reductions in workforce due to injuries, disabilities, retirements or other separations. Land Aff.
¶35. Second, the District closed three fire stations to reduce operating expenses. Land Aff. ¶35.
Third, the District returned a ladder truck that it had leased to reduce the expenses related to
those lease payments, and in connection with such return, the Special Master negotiated a waiver
of the equipment lessor’s claims against the District. Land Aff. ¶35. These actions, however,
could not remedy the District’s fundamental problems: insufficient revenue and a structural
deficit that the District’s crushing personnel expenses only exacerbated.
Thus, on February 14, 2014, the Supreme Court ordered the District to liquidate. It
appointed Richard Land as the Liquidating Receiver of the District, and ordered that a plan of
liquidation be filed or before May 16, 2014. Land Aff. ¶28. Pursuant to the Court’s Liquidation
Order, all persons or entities, including governmental entities, were instructed to file proofs of
claim on or before April 24, 2014. The total amount received in claims as of that date was in
excess of $9.6 million, and many of the claims were unliquidated. As of April 24, 2014, the
District’s cash on hand was insufficient by several million dollars to pay its debts and continue
operations.
On May 2, 2014, before the District could liquidate, the Governor signed a bill into law
expanding the Fiscal Stability Act to include fire districts. The expanded scope of the Fiscal
Stability Act authorized the State to intervene and to reorganize the District’s finances. Land
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Aff. ¶ 30. On May 6, 2014 the Director of Revenue, after consulting with the Auditor General
and Governor Chafee, appointed the Receiver.
Throughout the summer and fall months following the Receiver’s appointment,
negotiations continued with the Union. During those sessions, the parties discussed the
possibility that the District would file for bankruptcy and considered the potential impact of a
restructuring plan on the Union members that the District employed. Cavazza Aff. ¶6. These
negotiations ultimately were unsuccessful, as the District could not achieve the savings it
required to balance the District’s operating budget and its future financial projections.
The projected personnel expenses under the current collective bargaining agreement are
estimated to be $6,431,551 in fiscal year 2015, while the District’s projected revenues for fiscal
year 2015 are estimated to be only $5,823,800. Gallogly Aff. ¶8.
As demonstrated by the forgoing chronology, the District has exhausted all other options
before filing its Chapter 9 petition to pursue a viable plan for financial stability and recovery.
III. LEGAL ARGUMENT
A. THE DISTRICT SATISFIES THE CRITERIA SET FORTH IN § 109(C), AND IS THEREFORE ELIGIBLE TO BE A DEBTOR UNDER CHAPTER 9 OF THE BANKRUPTCY CODE.
To be eligible as a debtor in a Chapter 9 case, the District must satisfy five prerequisites.
Under Bankruptcy Code § 109(c), a governmental entity is eligible for Chapter 9 relief if such
entity:
(1) is a municipality;
(2) is specifically authorized, in its capacity as a municipality, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;
(3) is insolvent;
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(4) desires to affect a plan to adjust its debts; and
(5) (A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan;
(B) has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan;
(C) is unable to negotiate with creditors because such negotiation would be impracticable; or
(D) reasonably believes that a creditor may attempt to obtain a preference under § 547.
The criteria “are to be construed broadly to provide access to relief in furtherance of the
Code's underlying policies.” In re Valley Health Sys., 383 B.R. 156, 163 (Bankr. C.D. Cal.
2008). The general policy of Chapter 9 is to give a municipal debtor a breathing spell from debt
collection efforts “so that it can work out a repayment plan with creditors.” In re County of
Orange, 183 B.R. 594, 608 (Bankr. C.D. Cal. 1995). The District has the burden to establish
eligibility under Section 109(c). Id at 599 ("The burden of proving eligibility under § 109(c) is
on the party filing the petition."). As will be discussed below, the District satisfies each of the
above criteria and is eligible to be a debtor under Chapter 9.
1. The District is a Municipality.
Section 109(c)(1) requires that a petitioner under Chapter 9 be a municipality. 11 U.S.C.
§ 109(c)(1). A municipality is defined under Section 101(40), which provides: "The term
'municipality' means political subdivision or public agency or instrumentality of a State." 11
U.S.C. § 101(40). Rhode Island law provides that the District is a political subdivision of the
State of Rhode Island. See e.g., R.I. Gen. Laws §§ 9-31-1, 42-8.1-2, 42-142-7.
2. Rhode Island Law, Specifically the Fiscal Stability Act, Expressly Authorizes the State Appointed Receiver for the District to File a Petition Under Chapter 9.
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Section 109(c)(2) requires that the municipality be specifically authorized to be a Chapter
9 debtor under state law. State law must authorize the municipality “in its capacity as a
municipality or by name, to be a debtor under such chapter by State law, or by a governmental
officer or organization empowered by State law to authorize such entity to be a debtor under
such chapter.” 11 U.S.C. 109(c)(2). The Fiscal Stability Act authorizes the Director of Revenue
to appoint a receiver for a city, town, or fire district. R.I. Gen. Laws § 45-9-7(a). The receiver is
charged with restoring financial stability to a fire district. The receiver’s powers specifically
include “[t]he power to file a petition in the name of the … fire district under Chapter 9 of Title
11 of the United States Code, and to act on the … fire district's behalf in any such proceeding.”
R.I. Gen. Laws §45-9-7(b)(3). Thus, the Fiscal Stability Act authorizes the receiver of a fire
district to file for Chapter 9 bankruptcy, which the Receiver has done in this case. Hartford Aff.
¶9. Accordingly, the District meets the second eligibility standard to be a debtor under Chapter
9.
3. The District is Insolvent.
Section 109(c)(3) requires simply that the municipality “is insolvent.” 11 U.S.C.
§ 109(c)(3). Under § 101(32)(C), a municipality is “insolvent” if it is:
(i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or (ii) unable to pay its debts as they become due.
The District is insolvent because it is both “not paying its debts as they become due” and
because it is “unable to pay its debts as they become due.” 11 U.S.C. § 101(32)(C). The theme
underlying these two definitions of insolvency is that the District “must be in bona fide financial
distress that is not likely to be resolved without use of the federal exclusive bankruptcy power to
impair contracts. The insolvency must be real and not transitory.” In re City of Stockton, 493
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B.R. 772, 788 (Bankr. E.D. Cal. 2013). Insolvency is determined by a prospective analysis using
the date the petition is filed as the reference point. In re District of Bridgeport, 129 B.R. 332,
337 (Bankr. D. Conn. 1991).
a. The District is Insolvent Because it is Currently Not Paying its Debts as They Become Due.
Under the first insolvency test, the District must demonstrate that it is “generally not
paying its debts as they become due unless such debts are the subject of a bona fide dispute.” 11
U.S.C. § 101(32)(C). This test looks to current non-payment of debts by the municipality.
Detroit, 504 B.R. at 262. A payment is due under the first prong if it is “presently,
unconditionally owing and presently enforceable.” Hamilton Creek Metro. Dist. v. Bondholders
Colo. Bondshares (In re Hamilton Creek Metro. Dist.), 143 F.3d 1381, 1385 (10th Cir. 1998).
The test for current insolvency is whether the municipality is able to pay its current, outstanding
debts. See, Detroit, 504 B.R. at 262 (When a municipality is unable to meet its presently
enforceable debts, it is said to be cash insolvent.”).
In this case, the District clearly is unable to pay its current, outstanding debts. The
District’s acute cash crisis prevents it from making payments on all of its current, outstanding
debts. Specifically, since 2012, the District has not timely paid wages or obligations to
equipment lessors. Land Aff. ¶5, 35. Claims totaling more than $9.6 million were filed against
the District in the special mastership, not including unliquidated claims. Land Aff. ¶29. Because
the District has not been, and currently is not, paying bona fide obligations as they have come
due, the District is “insolvent” within the meaning §101(32)(C) of the Bankruptcy Code, and it
satisfies the eligibility requirement of section 109(c)(3) of the Bankruptcy Code.
b. The District is Insolvent Because it is Unable to Pay Debts as They Become Due.
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The second test under §109(c)(3) is whether the District will be able to pay its debts as
they are expected to be due, on a prospective basis. Even if the Court were to determine that the
District’s inability to pay existing debts does not make it “insolvent” under the first §109(c)(3)
test, its structural budget deficits render it “insolvent” under the second test because the District
is unable to pay its known, foreseeable obligations as they become due in the future. As
described in Gallogly Aff. ¶8-¶14, if the District does not obtain the protections of Chapter 9, the
State Receiver’s team estimated that the District will have a worsening budget deficit in each of
the next six (6) years.
Under this second insolvency test, the District does not have to wait until it is actually not
paying its bills (even though this is already the case) to become eligible to file for Chapter 9
relief. The court in District of Bridgeport recognized that:
Cities cannot go out of business. Chapter 9 is intended to enable a financially distressed District to “continue to provide its residents with essential services such as police protection, fire protection, sewage and garbage removal, and schools . . .,” while it works out a plan to adjust its debts and obligations. A construction of 11 U.S.C. § 101(32)(C) under which a District would not be able to seek Chapter 9 protection unless and until it was actually not paying its bills could defeat that purpose, as actually not paying bills could lead to the non-delivery of services.
Id. at 336-37.
Courts have determined that merely having cash on hand does not render a municipality
solvent when it is still likely to run out of funds for operations within months. In re New York
District Off-Track Betting Corp., 427 B.R. 256, 271-72 (Bankr. S.D.N.Y. 2010). The District of
Bridgeport court also held that in order to be “insolvent,” a District must prove that it will be
unable to pay its debts as they become due in its current fiscal year or, based on an adopted
budget, in its next fiscal year. 129 B.R. at 338; see also In re Boise Cnty., 465 B.R. 156, 172
(Bankr. D. Idaho 2011) (“The test under § 101(32)(C)(ii) is a prospective one, which requires the
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petitioner to prove as of the petition date an inability to pay its debts as they become due in its
current fiscal year, or, based on an adopted budget, in its next fiscal year.”). This is a cash flow,
not a budget-deficit analysis. See In re Pierce County Hous. Auth., 414 B.R. 702, 711 (Bankr.
W.D. Wash. 2009) (debtor was insolvent as it did not have a tangible reserve fund from which
debts could be paid); see also In re Mt. Carbon Metro. Dist., 242 B.R. 18, 32-33 (Bankr. D.
Colo. 1999) (court applies “a functional rather than balance sheet approach”). The second
insolvency test “is an equitable, prospective test looking to future inability to pay.” Hamilton
Creek, 143 F.3d at 1384. Under this test, courts “take into account broader concerns, such as
longer term budget imbalances and whether the City has sufficient resources to maintain services
for the health, safety, and welfare of the community.” Detroit, 504 B.R. at 262.
The District will not have sufficient revenue, or cash on hand, to pay all debts that come
due in the next fiscal year. It has operated with a shortfall in revenue since 2012. Land Aff. ¶9.
Only a loan from the Town of Coventry allowed the District to remain in operation in 2013.
Land Aff. ¶17.
Further, reduced expenses have come at a cost. The District’s mission is to provide
emergency services to the citizens of the Town of Coventry for the health and safety of the
community. To reduce its expenses, the District has closed fire stations, returned equipment, and
reduced personnel. Land Aff. ¶35. This is precisely the type of service-delivery insolvency that
the Stockton court discussed as evidence of insolvency under § 101(32)(C). In re City of
Stockton, 493 B.R. 772, 789 (Bankr. E.D. Cal. 2013) (“Service delivery insolvency focuses on
the municipality's ability to pay for all the costs of providing services at the level and quality that
are required for the health, safety, and welfare of the community”). The concept of service-
delivery insolvency is perhaps more applicable here than in any other type of municipal
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bankruptcy situation. The District’s primary mission is the delivery of public safety services,
and its ability to operate and staff at levels needed to fulfill this mission is critical to providing
those services to the public.
The District’s efforts to reduce its expenses have not restored the District to solvency and
will not prevent insolvency going forward. The District’s current budget projects a deficit of
$1,955,047 for the fiscal year 2015. Gallogly Aff. ¶8. This is a significant deficit; the District’s
projected total revenue for Fiscal Year 2015 is less $6,000,000. Gallogly Aff. ¶8. The District
has tried but failed to increase its revenue. During the course of the judicial special mastership
proceedings, the Special Master recommended two budgets which would have required increased
tax levies. Land Aff. ¶¶ 10-12, 15-16. Voters rejected both budgets. The District, through the
actions of the Special Master and Receiver, has more than exceeded § 109(C)(3)’s requirements
to avoid insolvency. See Stockton, 493 B.R. at 790 (finding city insolvent and rejecting
argument that city must propose tax increases to voters to be eligible to file a petition under
Chapter 9). Because the District is unable to pay its debts as they become due, including those
debts in the current and next fiscal year, it is “insolvent” under §101(32)(C) and satisfies
§109(C)(3).
4. The District Desires To Affect A Plan to Adjust Its Debts.
Section 109(c)(4) requires that the petitioner under Chapter 9 desire to affect a plan to
adjust its debts. 11 U.S.C. § 109(c)(4). The purpose of this requirement is to ensure that the
municipality is not filing “for some ulterior motive, such as to buy time or evade creditors, rather
than to restructure the City's finances.” Detroit, 504 B.R. at 265. This requirement is highly
subjective, and no bright-line test exists to determine whether a municipality desires to effect a
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plan to adjust its debts. In re City of Vallejo, 408 B.R. 280, 295 (B.A.P. 9th Cir. 2009). A debtor
may submit direct and circumstantial evidence to satisfy this element. Id.
Courts have found that municipalities have met this requirement when they negotiated
with creditors pre-filing, developed a draft plan pre-filing, submitted a plan post-filing, and
continued to negotiate post-filing. See id.; Detroit, 504 B.R. at 265-266; see also, In re New York
City Off-Track Betting Corp., 427 B.R. 256, 272-73 (Bankr. S.D.N.Y. 2010) (discussing
municipality’s efforts to negotiate with creditors, restructure its debts, and reduce expenses).
The District has stated, through its Receiver’s sworn affidavit, that it desires to effect a
plan to adjust its debts. The District, by and through the Receiver, has certified in the Statement
of Qualifications Under Section 109(c) that it desires to affect a plan to adjust its debts. Hartford
Aff., ¶9. Receiver Hartford’s affidavit states: “Based on the continued inability to obtain
sufficient voluntary concessions from the Union to balance the District’s budget, I determined
that the only way to prudently return the District to viability would be through the filing of a
Chapter 9 petition and confirmation of a prudent plan of debt adjustment and I hereby declare my
desire to do so in order to fulfill my statutory duties under the Fiscal Stability Act.” Hartford
Aff. ¶9.
Moreover, the District’s actions demonstrate that it seeks to adjust its debts so that it can
continue to provide important and necessary public safety services to the citizens of the Town of
Coventry. As discussed above and below, the District has reduced its expenses, developed a pre-
petition plan of debt adjustment, modified that plan, negotiated with creditors, and presented a
proposed plan of debt adjustment to its creditors. The District’s sworn statements and actions
demonstrate that it desires to effect a plan to adjust its debts to satisfy the requirements of
§ 109(c)(4).
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5. The District Has Satisfied §109(c)(5)’s Negotiation Requirements.2
In order to be “eligible” for Chapter 9 relief, the debtor has the burden of demonstrating
satisfaction of one of the following four (4) criteria:
(A) [it] has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(B) [it] has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(C) [it] is unable to negotiate with creditors because such negotiation is impracticable; or
(D) [it] reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title.
11 U.S.C. § (c)(5).
Generally, § 109(c)(5) requires the District to demonstrate that it has engaged in certain
pre-petition negotiations with creditors, or is excused from doing to because of impracticability.
See 11 U.S.C. § 109(c)(5); Valley Health Sys., 383 B.R. at 161 (The purpose of Section
109(c)(5) is to promote prepetition negotiations between debtor and creditors). Here, the District
has satisfied this requirement.
a. To the Extent it was Practical to do so, the District has Negotiated in Good Faith with its Creditors.
The District has satisfied the requirement to negotiate in good faith with its major
creditors. Determining whether negotiations took place in good faith involves an analysis of the
totality of the circumstances. See WestAmerica Bank v. Mendocino Coast Rec. & Park Dist. (In
re Mendocino Coast Rec. & Park Dist.), 2013 U.S. Dist. LEXIS 139697, at *25 (N.D. Cal. Sept.
27, 2013). Several factors inform a court’s determination, including: whether the debtor
2 References to negotiations undertaken by the District refer to negotiations undertaken by the Receiver, the Receiver’s Chief of Staff, the Receiver’s labor counsel Timothy Cavazza, the Receiver’s bankruptcy counsel, and the Director of Revenue and members of her staff.
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informed creditors that a bankruptcy filing was proposed and imminent; the degree of disclosure
about the proposed bankruptcy plan; whether, and when the debtor disclosed classes of creditors;
the creditors’ responses; and the length of time the creditors had to respond. Mendocino, 2013
U.S. Dist. LEXIS 139697, at *29-*31.
Negotiations should take place in context of a proposed plan of debt adjustment.
Mendocino, 2013 U.S. Dist. LEXIS 139697, at *16-*17 (“Section 109(c)(5)(B) requires
municipalities not just to negotiate generally in good faith with their creditors, but also to
negotiate in good faith with creditors over a proposed plan, at least in concept, for bankruptcy
under Chapter 9”); see also, Detroit 504 B.R. at 267 (following Mendocino). As explained by
the court in Vallejo, “because § 109(c)(5)(B) involves classification and impairment, it would be
difficult for a municipality to prove that it negotiated in good faith with creditors it intends to
impair unless the municipality had a plan of adjustment drawn or at least outlined when it
negotiated with the creditors.” 408 B.R. at 297. Adopting a rule set forth in Vallejo, the court in
Mendocino explained “[t]o negotiate in good faith, the municipality must put on the table how its
proposed bankruptcy plan would treat creditor classes, so that creditors know whose ox, overall,
is being gored.” 2013 U.S. Dist. LEXIS 139697, at *23.
The District has satisfied this standard; it has negotiated with the most significant creditor
or creditors in each class it proposes to impair and it has done so in the context of a proposed
pendency plan for the District. It has engaged in extensive negotiations with its most significant
creditor in any class, the Union. The Union’s claims comprise a majority in amount of the
claims of all general unsecured creditors – the class in which the District has placed the Union.
Impairment of the Union’s claims is absolutely necessary to the District’s future financial
stability, both in terms of the amount in claims it has asserted against the District and the impact
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of personnel costs on operating expenses and the overall budget. Without those concessions, the
District cannot balance its budget or pursue any plan for financial recovery. Gallogly Aff. ¶¶ 18,
28. Those negotiations took place over a period of several months as detailed in the Affidavit of
Timothy Cavazza. Cavazza Aff. ¶¶ 6-21. The District concluded that the only way it could
avoid the filing of a bankruptcy petition was to obtain concessions from the Union, so the
District focused its negotiation efforts on this creditor. The District provided the Union with the
broad concepts of a bankruptcy plan as early as September 2014, and on December 12, 2014,
provided a draft of a proposed bankruptcy plan to ensure the Union understood how the proposed
plan would affect the Union and the District’s other creditors. Cavazza Aff. ¶¶ 13, 21. Prior to
that time, on November 26, 2014, the District offered to provide the Union with a draft pendency
plan, but the Union refused to accept it or discuss it, stating that it desired to have bankruptcy
counsel present. Cavazza Aff. ¶20. The Union’s claim makes up the overwhelming majority of
the District’s expenses. Gallogly Aff. ¶14.
The District has been negotiating with creditors holding a majority in amount of claims in
each class of its creditors. The District has with every one of the creditors in the governmental
priority unsecured class, which has allowed the District to delay payment of these creditors. The
District also has been communicating with each of the creditors in the general secured class,
including Centreville Bank, in an effort to adjust the payment terms of the obligations the
District owes to these creditors. As a result of those communications, the District anticipates
being able to obtain the agreement of the majority in amount of the creditors in the priority
unsecured class, the general secured class, and the general unsecured class. However, the
District was not able to reach agreement with the Union, meaning that the District did not have
the support of a sufficient number of creditors for the District to effect a financially viable
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restructuring plan. As provided in the Land Affidavit, the Gallogly Affidavit, the Cavazza
Affidavit and in Section II(D) above, the District has negotiated in good faith to seek voluntary
concessions from the Union and to seek an alternative plan from Centreville Bank to save the
amount necessary to affect a plan of recovery. The District successfully negotiated with
creditors holding the majority in amount of claims of each other class the District intends to
impair. Notwithstanding those good faith negotiations, the District was not able to reach
agreement on a proposed restructuring plan with enough creditors for the District to effect a
financially viable restructuring plan.
b. Negotiations with the District’s Other Creditors Were Impracticable Unless Negotiations with the Union Would Yield the Necessary Reductions in Operating Expenses.
Furthermore, the District satisfies the requirement that it is unable to negotiate with all of
its creditors because such negotiations were impracticable. 11 U.S.C. § 109(c)(5)(C). Courts
interpret impracticability broadly, looking to the ordinary meaning of the word:
‘Impracticable’ means ‘not practicable; incapable of being performed or accomplished by the means employed or at command; infeasible.’ Webster's New International Dictionary 1136 (3d ed. 2002). In the legal context, ‘impracticability’ is defined as ‘a fact or circumstance that excuses a party from performing an act, esp. a contractual duty, because (though possible) it would cause extreme and unreasonable difficulty.’ Black's Law Dictionary 772 (8th ed. 2004).
In re Valley Health Sys., 383 B.R. 156, 163 (Bankr. C.D. Cal. 2008).
“Whether negotiations with creditors is impracticable depends upon the circumstances of
the case.” Pierce County, 414 B.R. at 713 (citing Vallejo, 408 B.R. at 298). Impracticability may
include certain situations where assets would be at risk if time is taken to negotiate with
creditors. New York District, 427 B.R. at 276 (citing, inter alia, Valley Health Sys., 383 B.R. at
163).
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Here, as discussed above in Section III.E.1, the District engaged in extensive negotiations
with a single creditor (the Union) that has the most significant impact on the District’s current
and future financial situation. To date, those negotiations have failed to achieve sufficient
savings in personnel costs to restore the District to fiscal solvency. Although further
negotiations with the District’s more than fifty other creditors will occur, without the Union’s
agreement to a proposed plan that includes significant concessions, those negotiations with other
creditors would be fruitless and impracticable in terms of avoiding the necessity of filing for
bankruptcy. Labor costs and related health benefits represent the bulk of the District’s expenses
and without significant reductions in these costs, no projected plan would be viable. As
discussed above, without substantial changes to the collective bargaining agreement, personnel
costs alone will exceed all projected revenues for the District. Additional negotiations with
other creditors have occurred and will continue, but such negotiations will not result in sufficient
cost reductions to restore the District to solvency without a restructured Union agreement and
impairment of its claims. Outside of bankruptcy, the District cannot reach financial viability
without the Union’s agreement. Gallogly Aff. ¶28. For that reason, the District also satisfies
§ 109(c)(5)’s negotiation requirement due to the impracticability of requiring it to negotiate with
its other creditors when it has been unable to substantially restructure its obligations to its
firefighter’s Union.
IV. CONCLUSION
The District has engaged in significant efforts to avoid filing a petition under Chapter 9.
It reduced expenses by failing to fill empty personnel positions, eliminated equipment, and
closed fire houses. It attempted to raise even more taxes beyond the large increases previously
levied. It has negotiated – unfortunately without sufficient success so far – to obtain enough
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concessions from the Union and from its other significant creditors to return the District to fiscal
viability. It was subject to a receivership in state court, and the Superior Court ordered the
District to liquidate. For more than two years, the District has worked to become solvent, but
because of revenue shortages and outstanding debts, the District cannot do so without the
Bankruptcy Court’s assistance.
For the reasons described above, the District meets the eligibility requirements to be a
debtor under Section 109(c) of the Bankruptcy Code and respectfully requests that this Court
enter an Order for Relief pursuant to 11 U.S.C. § 921(d).
STEVEN T. HARTFORD, in his capacity as State-Appointed Receiver of the Central Coventry Fire District By his Attorney, /s/ Robert G. Flanders, Jr. Robert G. Flanders, Jr. (# 1785) Jennifer Doran (# 6553) Andrew S. Tugan (# 9117) Hinckley, Allen & Snyder LLP 50 Kennedy Plaza, Suite 1500 Providence, Rhode Island 02903 Telephone: (401) 274-2000 Facsimile: (401) 277-9600 Email Address: [email protected]
[email protected] [email protected]
/s/ Christine M. Curley Christine M. Curley (# 4529) Law Offices of Christine M. Curley, Esq. 275 Beacon Drive North Kingstown, Rhode Island 02852 Telephone: (401) 294-0847 Facsimile: (401) 294-0849
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Email Address: [email protected]
Dated: December 23, 2014
CERTIFICATE OF SERVICE I hereby certify that on December 23, 2014, I electronically filed the within Memorandum of Law with the Clerk of the Bankruptcy Court for the District of Rhode Island Using the CM/ECF System.
/s/ Robert G. Flanders, Jr.
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