BRIDGEPORT, Conn. -- A U.S. judge held yesterday that Bridgeport has the right under state law to use Chapter 9 of the federal Bankruptcy Code.
"Bridgeport was generally authorized by state law to be a debtor," with all the rights and privileges debtors enjoy, Bankruptcy Court Judge Alan H.W. Shiff said in a 29-page opinion. He also held that state laws providing for oversight of the city's finance did not keep the city from filing for bankruptcy.
"This is a major step in telling our citizens that, yes, we are in charge," proclaimed Mayor Mary C. Moran as she left the federal district courthouse. The judge still must rule on several other issues that could halt the city's bid to restructure its labor agreements and other financial obligations.
"We have a long way to go," the mayor acknowledged.
Bridgeport filed its petition for protection from creditors on June 6, citing an impending $16 million budget gap and the city's property tax rates, which are already among the highest in the state.
The state tried to block the petition, charging that a state board installed in 1988 to oversee the Bridgeport's finances precluded the city from filing for bankruptcy without the state's specific approval.
Richard Blumenthal, the state's attorney general, vowed to fight yesterday's ruling. "It will be appealed, and to the United States Supreme Court, if necessary," he said.
Letting the ruling stand would set a precedent for municipalities in Connecticut, as well as other states, Mr. Blumenthal said. "Therefore, we are under obligation to appeal it."
Municipal finance and legal experts have said other impoverished cities could follow Bridgeport into bankruptcy, if this attempt succeeds.
In the opinion he handed down yesterday, Judge Shiff said the Bridgeport Financial Review Board has no power over the city's use of Chapter 9.
"The power to prohibit a bankruptcy was not given expressly to the [financial review board], nor was it given by necessary implication," the judge held. Judge Shiff added that "there is no reason to believe that a bankruptcy case is inconsistent with the purposes of" the review board law -- "the restoration of financial stability through enhanced access to public credit markets.
"Indeed," the judge continued, "the restoration of the financial stability of a troubled city is precisely what Congress designed Chapter 9 to accomplish."
The city's bankruptcy attorneys, Bridgeport-based Zeisler & Zeisler, had testified to that effect during a hearing June 26 on whether state law allowed the filing. Mr. Shiff called the state's argument "unpersuasive," and said the law establishing the review board "is no more than a bonding statute" passed to allow Bridgeport to borrow with state backing.
Citing precedents in Connecticut case law, the judge further held that while attorneys for the state argued for "an unbridled right of the [financial review board] to issue any order," the board's powers have limits.
Under the law, the board must approve the city's borrowings and budgets. Judge Shiff ruled that the board has no power to authorize or deny a Chapter 9 filing by Bridgeport, in spite of the provisions of the 1988 law regarding oversight of the city's fiscal affairs.
The state's position, he said, would allow the board draconian powers over city government.
"Following the state's logic, if the [financial review board] determined that the actions of a city official were harming Bridgeport's bond rating, it could simply order the replacement of that official, something clearly not contemplated by the special act," Judge Shiff wrote.
The judge also ruled that an existing state statute allowing municipalities to engage in legal proceedings satisfies the "generally authorized" test laid out in section 109(c)(2) of the Bankruptcy Code.
Richard D. Zeisler, an attorney representing the city, said that while he would not gloat over the ruling, he expected it to bolster his case in court today, when closing arguments are expected.
"Obviously, when you win the first inning, you get a little pumped up," Mr. Zeisler said. "The state maintained from day one that the issue of general authorization was one that could be acted on quickly .... This was the crystal-clear issue."
Now, three other questions that center on Mayor Moran's actions and the city's financial landscape -- rather than on the law itself -- will decide the case.
The state alleges that Mayor Moran filed the petition "in bad faith," that the city is not insolvent, and that the mayor acted without the necessary approval of Bridgeport Common Council. Hearings on those charges began Tuesday of last week.
The remaining complaints raised by the state in its attempt to stop Bridgeport's bankruptcy could pose challenges, Mr. Zeisler pointed out.
"We know we've got to jump the rest of the way in order to make this thing fly."
Mr. Blumenthal said he thought the state could prevail on those issues. "We're very hopeful," he said.
Attorneys for both sides will have until July 30 to file written statements.