BRIDGEPORT, Conn. -- Bridgeport's first day of hearings in federal bankruptcy court on its bid to enter Chapter 9 featured discussions of how Connecticut could authorize one of its subdivisions to enter bankruptcy, and whether or not the state board overseeing the city's finances could prevent the move entirely.
In the course of the hearing, Judge Alan H.W. Shiff carefully questioned the state's attorney general, Richard Blumenthal, who is seeking to block the city's June 6 Chapter 9 filing.
Mr. Blumenthal attempted to tone down the increasingly combative standoff between Hartford and the state's poorest, largest city. "We're here not because of a refusal to recognize the problem that Bridgeport faces," he said. "Whether or not the court rules that the petition should be granted, we will continue to be a positive contributor."
This particular hearing had been slated to examine the powers of the state oversight board in preventing Bridgeport from entering bankruptcy, but the discussions yesterday delved into the deeper questions of how a state authorizes its subdivisions to enter bankruptcy. According to section 109(c)(2) of the bankruptcy code, municipalities must be "generally authorized" under state law to file for protection from creditors.
Other attorneys beside Mr. Blumenthal included: James Berman, an attorney with Zeisler & Zeisler, representing the city; Harry B. Elliott of Gagne & Collins, a Hartford firm representing city workers; and William S. Fish, an attorney representing the Connecticut Conference of Municipalities.
Yesterday's oral arguments undescored that amendments to the Bankruptcy Code passed in the mid-1970s have left questions about how much authority states have in controlling filings by their municipalities.
Connecticut's attorneys contend that states must pass legislation allowing municipal bankruptcy.
Lawyers who side with the city say any statute broadly authorizing cities and towns to enter court suffices.
Both sides buttress their cases by citing the lack of any laws specifically to the contrary. "The state could have, but it did not enact, state law prohibiting municipalities from filing," said Mr. Berman of Zeisler & Zeisler. The 1988 legislation that established the state's financial review board for Bridgeport nowhere mentions the possibility of the city seeking the protection of federal bankruptcy court. "There is no express prohibition on the filing," Mr. Berman said. "The purpose of the review board is primarily one of review, as is implied by its title. Nowhere are they conferred expressly the power to prohibit the Chapter 9 filing."
The state attorney general disagreed, saying "the financial review board is an organization empowered to authorized or disapprove" the city's petition. The board passed a resolution in January enjoining the city from declaring bankruptcy. Mr. Berman dismissed the resolution yesterday, labeling it "a gratuitous comment for public consumption" that had no binding force on the city. "The financial review board can make orders," he asserted. "Those orders aren't absolute and beyond the ability of the city to challenge."
Like Mr. Berman, Mr. Blumenthal also relied heavily on the lack of specific language in state law to bolster his case. He contended that Connecticut's municipal powers law -- establishing the independent legal powers of communities -- does not authorize Bridgeport to file for bankruptcy protection.
He further warned that the court's acceptance of the Bridgeport petition will run afoul of Connecticut's rights under the United State Constitution. "There would be 10th Amendment problems, in the absence of some specific authorization," Mr. Blumenthal maintained.
Judge Shiff grew almost exasperated at that point. The Bankruptcy Code, he noted, uses the expression "generally authorized." He asked Mr. Blumenthal, "Is it your contention that these words are in violation of the 10th Amendment?"
The attorney general replied that "it would depend on the specific interpretation given those words in the context that it reached the court."
Judge Shiff asked, "Is it your view that there has to be some sort of language that mentions bankruptcy?"
Mr. Blumenthal would not answer the question, and instead gave the judge a primer in state law. "Connecticut law is clear that we have a constellation of enumerated powers; they are not delegated generally."
That referred to the federal bankruptcy provision that debtors under Chapter 9 must be "generally authorized," the notion that became the centerpiece of debate here yesterday.
Mr. Elliott, the attorney representing some city workers, said that federal lawmakers intended to require some state law specifically mentioning bankruptcy and Chapter 9 be on the books before a local body could enter federal court. "It has to be clear on the face of the statute," Mr. Elliott said. "Sue and be sued statutes" such as Connecticut's are common, and, he added, are "absolutely necessary for other reasons."
Even if the state's municipal powers law does afford Connecticut cities the right to enter bankruptcy, Bridgeport surrendered that right when it began operating under the financial review board in 1988, lawyers for the state and labor unions said.
And because the legislation was part of a package that helped the city market nearly $35 million in bonds backed by a state guarantee, Bridgeport has effectively surrendered any right to challenge the authority of the review board to run its affairs. "There's no question that they complied with the board up until this," Mr. Elliott said. "That's an implied waiver" of rights to file bankruptcy. "They voluntarily sought the benefits [of the review board law] for a bond issue, and now they seek to bypass that."
Mr. Berman, however, said that because the review board has no direct powers to renegotiate labor contracts or adjust debts in the way bankruptcy proceedings can, barring the city from bankruptcy would be unfair. "There would be a vacuum of power if the city were prohibited from filing Chapter 9, because there's nothing in its place."
Four attorneys represented Bridgeport, including city attorney Barbara Brazzel-Massaro and three lawyers from Zeisler & Zeisler. A vote of the city aldermen to approve the bankruptcy bid had strengthened their case.
Late Tuesday, members of the city's Common Council voted 12 to 9 to approve, retroactively, the mayor's petition.
Richard D. Zeisler said the council's approval of the filing "shows that we have the support of the people of the city." He added that the vote silenced Mr. Blumenthal's earlier challenge of whether Mayor Mary C. Moran had adequate approval of her legislative body in filing for bankruptcy protection.
But even some city lawmakers who voted in favor of the resolution did so reluctantly, and council members simultaneously imposed a $150,000 cap on the case's legal costs through July 30.
After the Hearing, Mr. Shiff met with attorneys in his chambers. He gave the city until July 8 to file papers on the financial review board's powers, and he assigned July 10 as the state's deadline, Mr Blumenthal said. The city attorneys will then have until July 12 to file the last word on the topic.
Judge Shiff repeated that more hearings on Bridgeport's petition will commence July 16, as planned.