Court allows revenue streams backing bonds to remain with Chester in bankruptcy case
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An appellate court ruled in favor of Chester, Pennsylvania last week, determining that pre-existing liens backing bonds did not survive the city’s 2022 bankruptcy. The decision gives Chester access to the revenue streams that bondholders had fought to preserve for their bonds.
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Bondholder liens securing the 2017 revenue bonds were consensual rather than statutory and are therefore subject to termination under the bankruptcy code, opined the July 17
The court also ruled that gaming revenue on slot machines and table games, which are two of the bonds’ revenue streams, is derived from fees, not from taxes. It therefore does not qualify as a special excise tax, which would be protected as “special revenues” under Chapter 9, the judges said.
Preston Hollow Community Capital is the sole bondholder of the 2017 bonds, which total roughly $15.2 million, according to court documents. The firm declined to comment, with a spokesperson saying in an email “we respect the judicial process and, as a matter of policy, do not comment on pending litigation.”
The appellate court sent back to the bankruptcy court for further analysis the question of whether certain post-petition receipts are “proceeds” that should be preserved and whether pre-petition “accruals” — amounts owed but unpaid as of the bankruptcy filing date — are property subject to liens.
Chester, with a population of around 30,000,
The Series 2017A bonds were issued by the Chester Economic Development Authority to cover general fund liabilities and create a reserve fund. The debt included $9.149 million of trustee 2017A bonds and $6.107 million of trustee 2017B bonds.
The bonds were backed by liens on four revenue streams: a portion of annual slot machine license operation fees collected by the state and distributed to Chester, a portion of gambling table revenues collected by the state, revenues associated with fees paid to the city by a waste incinerator operator servicing the city, and host community revenues.
Preston Hollow and bond trustee U.S. Bank Trust NA, along with Delaware County, argued in bankruptcy court that their liens were created by 2009 and 2017 ordinances, making them “statutory liens” that should survive the Chapter 9.
“We disagree,” the three-judge panel said in its opinion. “The creditor defendants’ liens, while authorized by the two ordinances, depend on the contractual contribution agreement and trust indenture to have effect,” the judges said, referring to bond agreements that accompanied the 2017 ordinance.
“Indeed, the liens contemplated in the 2009 and 2017 ordinances depend on the subsequent lien-creating language in the contribution agreement and the trust indenture.”
The court also affirmed the order requiring U.S. Bank to transfer “excess” funds in the revenue fund to the city under the terms of the trust indenture.
“We are pleased with the Court of Appeals’ decision,” said Hangley Aronchick Segal Pudlin & Schiller shareholder Matthew Hamermesh, who represented the city, in an email.
“The court ruled in favor of the city on the most significant and novel issues in the case. While the court decided that the case needs to go back before the bankruptcy court to further consider a couple of issues, we are confident that the court will ultimately find in favor of the city on those issues as well.”
In its Chapter 9 filing, Chester’s emergency manager estimated liabilities between $100 million and $500 million with assets of between $10 million and $50 million.
