in re central coventry fire district case no. … re central coventry fire district, debtor. ) ) )...

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

Case 1:14-bk-12785 Doc 4-1 Filed 12/23/14 Entered 12/23/14 18:08:44 Desc Memorandum of Law of 22

# 52977402 64941-163212 2

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


# 52977402 64941-163212 3

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.


# 52977402 64941-163212 4

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.


# 52977402 64941-163212 5

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


# 52977402 64941-163212 6

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


# 52977402 64941-163212 7

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


# 52977402 64941-163212 8

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;


# 52977402 64941-163212 9

(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.


# 52977402 64941-163212 10

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


# 52977402 64941-163212 11

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.


# 52977402 64941-163212 12

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


# 52977402 64941-163212 13

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


# 52977402 64941-163212 14

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


# 52977402 64941-163212 15

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).


# 52977402 64941-163212 16

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.


# 52977402 64941-163212 17

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


# 52977402 64941-163212 18

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


# 52977402 64941-163212 19

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).


http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=164&FindType=Y&ReferencePositionType=S&SerialNum=2019228525&ReferencePosition=298

http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=164&FindType=Y&ReferencePositionType=S&SerialNum=2019228525&ReferencePosition=298

# 52977402 64941-163212 20

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


# 52977402 64941-163212 21

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


# 52977402 64941-163212 22

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.


in re central coventry fire district case no. … re central coventry fire district, debtor. ) ) )...

Documents