Alert April 29, 2011

Bankruptcy Court Protects California Bondholders from Chapter 9

Despite increasing “chatter” in the investment community concerning the municipal bankruptcy option, Chapter 9 bankruptcy filings are likely to remain a costly last resort for most municipalities. Nevertheless, municipal bond investors breathed a collective sigh when the U.S. Bankruptcy Court, Eastern District of California, recently upheld bondholder protections in a municipal bankruptcy proceeding.

In 2009, the Sierra Kings Health Care District (the “District”), located in the County of Fresno, California, filed a voluntary Chapter 9 bankruptcy petition (Case No. 2009-19728), but remained current on its debt obligations.  In March 2011, the court ruled that the District’s pledge of ad valorem taxes to secure its general obligation bonds qualifies as both a special revenue pledge and a statutory lien, and therefore cannot be interrupted due to the Chapter 9 bankruptcy filing.

More information about the District’s bankruptcy proceedings can be found here.