A bankruptcy lawyer handling the Chapter 9 filing by Bridgeport, Conn., yesterday voiced confidence in the case, despite charges that the city has overstepped legal boundaries by seeking bankruptcy court protection.
"The city recognized there's a certain element of risk," said Richard D. Zeisler, a corporate bankruptcy lawyer with the Bridgeport firm Zeisler & Zeisler who was retained to represent the city. "But we feel we can prevail."
Under the legal guidance of state Attorney General Richard Blumenthal and the terms of the federal Bankruptcy Code itself. Connecticut maintains that its cities and towns require specific authorization from the state government to file a legitimate Chapter 9 petition.
State officials say that principle holds true all the more for Bridgeport, which since 1988 has operated under the constant fiscal scrutiny of a state financial review board.
Existing precedents for Chapter 9 filings are few, Mr. Zeisler conceded in an interview. "I've probably filed more Chapter 11s from my office than Chapter 9s have been filed in the country," he said, adding that the paucity of Chapter 9 cases has made preparing the city's case easier.
But Mr. Zeisler also said existing case law for municipal bankruptcies, limited as it is, provides ample precedent for Bridgeport's filing under a general state municipal powers law.
That law, Sec. 7-148(c)(1)(A)(General Statutes, grants municipalities the right to "contract and be contracted with, sue and be sued, and institute, prosecute, maintain, and defend any action or proceeding in any court of competent jurisdiction."
According to Mr. Zeisler and other bankruptcy specialist, municipalities have effectively used such general laws in other states to seek protection under Chapter 9, which requires such authorization.
Jeffrey Cohen, a lawyer with the Denver-based law firm of Cohen & Hern, said cases in Mississippi and Colorado have used nearly identical state laws providing for general municipal powers as legal grounds for entering Chapter 9.
Still, Mr. Zeisler said, he has no way of knowledge if the precedents will guarantee that U.S. Bankruptcy Court Judge Alan H.W. Shiff will the petition.
"The general authority given to the city by Connecticut law gives [Bridgeport] the right to file for bankruptcy," Mr. Zeisler said. "But these are all things that the guy in the black robes is going to have to decide."
The judge will probably not decide on whether to accept the petition until next month, according to hearing schedules agreed to yesterday.
Another challenge to the filing is whether Bridgeport is actually insolvent. State officials claim Bridgeport's fiscal straits are bad, but do not constitute insolvency, and that the city therefore has no right to seek protection in bankruptcy court.
Mr. Zeisler disagrees. "The city passes the insolvency test because if it continues at its present rate, it will run out of money," he said.
Meanwhile, Judge Shiff yesterday met with the the state attorney general and lawyers involved in the case to schedule hearings from July 16 through July 18. The attorney general's office said yesterday that the state plans to file a motion for dismissal of the case today.
After meeting with Judge Shiff, Mr. Blumenthal released a statement saying that schedule would "enable expeditious resolution of the factual and legal questions raised by the city of Bridgeport's petition for bankcruptcy."
He added taht the case has "momentous importance" and "is to municipal finance in Connecticut what the Pentagon papers case was to the First Ammendment."
Late Monday, Gov. Lowell P. Weicker Jr. Signed legislation shifting the chairmanship of the Bridgeport Financial Review Board to the executive branch. William J. Cibes Jr., Gov. Weicker's budget chief, will now serve as chairman of the board, replacing state Treasurer Francisco L. Borges.
"There now is a major public policy issue of how the state relates to its municipalities," said Donald A. Kirshbaum, executive director the Bridgeport Financial Review Board. "It's part of the administration, and the gubernatorial level. The treasure isn't the administration."
The change reportedly came at the request of Mr. Borges, who held a news conference in Hartford yesterday to discuss the situation. The review board is expected to meet tomorrow, probably to discuss obtaining a writ of mandamus to force the city to impose an 18% property tax increase in the fiscal year that begins July 1.
Mr. Borges also released a statement late Monday, in which he said Bridgeport's fiscal straits do not pose any direct threat to bondholders of the state, which backed about $35 million of the city's 1988 deficit bond issue.
"The city of Bridgeport's move," Mr. Borges said, "will have no effect whatsover on repayment of the state of Connecticut's bonded indebtedness."
He also said the state remained "confident that the city's action is illegal, and that the city's filing will be dismissed."
Mr. Borges said he had cut office flow of money from a state clean water fund to Bridgeport after the city filed for bankruptcy. The filing constitutes a technical default on the city's borrowings from the fund, Mr. Borges said.
Mr. Kirshbaum said yesterday that Mr. Borges, as administrator of the fund, stopped a $500,000 payment that he said had been "in the pipeline" to the city from the fund.
The city is under a court order to stop polluting Long Islands Sound with sewage. It remained unclear yesterday whether the state's embargo on the clean-water fund money would come into conflict with the court order.
Mr. Kirshbaum said that some of the outstanding $2.9 million in loans to the city for its clean water projects could be accelerated as a result of the technical default.
According to Kathleen Palm, a spokeswoman for Mr. Borges, the treasury has yet to the state under an array of programs for needs including bridge repair and hosuing.
"We are reviewing all of these things," Ms. Palm said. "It's become clear that there were potentially numerous interlocking relationships between the state and the city. Frank, as chief fiscal officer for the state, has a responsibility to see to that," she said.
While the city has made repeated promises to make good on debts to bondholders and vendors, it has singled out city employee union agreements as a source of burgeoning budget deficits. Chapter 9, according to Mr. Cohen, the bankruptcy expert, could allow the city wide latitude in reforging its agreements with unions.
So union leaders also were scrambling yesterday to determine their legal options, one said. "The International Association of Firefighters is doing some research," said Patrick J. Shevlin, president of Local 0834 of the union.