Restructuring

Contributed by Debra McElligott
Can bankruptcy courts order government entities to take certain actions?  If so, can they exercise such authority after a chapter 9 debtor’s plan of adjustment has been confirmed?  The United States Bankruptcy Court for the Eastern District of New York, in In re Suffolk Regional Off-Track Betting Corporation,  held that bankruptcy courts may do both of these things and ordered a county and a town to accept construction-related applications from a municipal debtor after the confirmation of its chapter 9 plan.
Chapter 9 Plan and the Video Lottery Facility
The debtor, Suffolk Regional Off-Track Betting Corporation, plans to build a video lottery terminal facility in the Town of Brookhaven, New York.  The funding and feasibility of the debtor’s confirmed chapter 9 plan depends on revenues from the facility.  The debtor has acquired real estate and financing, but cannot proceed with construction without, among other things, site plan approval, a building permit, and certificate of occupancy, all to be issued by the relevant governmental authorities.  The Town of Brookhaven previously refused to accept the debtor’s applications for site plan approval and a building permit, claiming that it does not have the power to approve the project.  The debtor also approached the New York Gaming Commission and the New York Office of General Services to request a building permit, both of which similarly stated that they lack the proper authority.
After this series of denials, the debtor filed an order to show cause in the bankruptcy court to direct Brookhaven and the State of New York to accept the application for a building permit and related applications.  The State argued that Suffolk County, as the “participating county” responsible for the management of the debtor under the New York Racing, Pari-Mutuel Wagering and Breeding Law, was responsible for these applications.  The debtor then filed a second order to show cause directing Suffolk County to accept the applications.
Applications Accepted
The bankruptcy court partially granted the debtor’s motion with respect to Suffolk County, analyzing several state statutes to find that the County was responsible for reviewing the debtor’s applications for a building permit and certificate of occupancy.  The court also partially granted the motion with respect to Brookhaven, finding that the town was responsible for reviewing the debtor’s site development plan pursuant to state statutes, case law, and an opinion of the New York State Attorney General.  The bankruptcy court emphasized the importance of a prompt review and directed Brookhaven to make a decision on the site development plan in the time period required by town and state law.  Finally, the court ordered Suffolk County to issue a building permit and certificate of occupancy if the debtor meets the requirements for both under state law.
The Expansive Jurisdiction of the Bankruptcy Court
The Suffolk Regional Off-Track Betting Corporation opinion is somewhat unusual in that the bankruptcy court ordered government entities to take certain actions with respect to a debtor after plan confirmation.  The court relied on two sections of the Bankruptcy Code to establish its jurisdiction in this scenario.  First, the court noted that section 945(a) allows bankruptcy courts to retain jurisdiction over a chapter 9 case “for such period of time as is necessary for the successful implementation of the plan.”  Second, the court cited section 1142(b), which applies in chapter 9 cases, and allows bankruptcy courts to “direct the debtor and any other necessary party” to perform any acts necessary for the consummation of the plan.
The court recognized, however, that bankruptcy courts do not have unlimited jurisdiction over all post-confirmation matters.  Rather, as explained in the opinion of the United States Bankruptcy Court for the Southern District of New York in General Media v. Guccione (In re General Media, Inc.), a matter must satisfy two requirements for the bankruptcy court’s post-confirmation jurisdiction to apply.  First, the matter must have a “close nexus to the bankruptcy plan or proceeding,” which means that the matter must “relate directly to the meaning, implementation, or consummation of the plan.”  Second, the plan itself must provide that the court retains jurisdiction post-confirmation.  The court held that both requirements were met in this case, as the plan relies upon the successful construction and operation of the facility and, under the plan, the court retained exclusive jurisdiction of all matters related to the chapter 9 case.
Conclusion
What makes this case all the more unusual is that the bankruptcy court exercised its power in the context of a chapter 9 case, in which the Bankruptcy Code expressly limits the power of the court to order the debtor to do anything or to interfere with the State’s exercise of authority over the debtor. Section 903 of the Bankruptcy Code, for example, states that chapter 9 “does not limit or impair the power of a State to control . . . a municipality of or in such State in the exercise of the political or governmental powers of such municipality . . .” Section 904 limits the court’s control over a municipal debtor, but may be waived by the debtor. Here, though, the parties’ status as government entities did not appear to shield them from the bankruptcy court’s power or affect the court’s jurisdictional analysis. To the contrary, the court briefly mentioned the decision of the United States Supreme Court in Lake County Estates v. Tahoe Regional Planning Agency, which states that the Eleventh Amendment is not construed to protect political subdivisions such as counties and municipalities. Regardless of the identity of the entities at issue, the case provides a practical illustration of the expansive authority granted under sections 945 and 1142 of the Bankruptcy Code in the name of successfully implementing a debtor’s plan.