In a major ruling, the U.S. Court of Appeals for the Third Circuit held on July 17 that the City of Chester, Pennsylvania is entitled to keep control of several key revenue streams that it had pledged to creditors before its 2022 bankruptcy filing, delivering a significant win for the financially distressed municipality.
The long-awaited decision brought new clarity to one of the nation’s most closely watched municipal bankruptcies, where creditors had fought to preserve liens on revenue from a trash incinerator and a casino’s slot machines and table games.
Hangley Aronchick shareholder Matthew Hamermesh successfully represented the City of Chester, arguing that the liens held by Preston Hollow, U.S. Bank and Delaware County were consensual — not statutory — and therefore did not survive the City’s Chapter 9 filing.
In a 23-page opinion, U.S. Circuit Judge Matey, writing for the three-judge panel, held that the creditors’ liens depended on two security agreements to have effect, and thus could not be classified as statutory liens exempt from discharge. The panel also held that slot machine and table game revenue that Harrah’s Philadelphia Casino and Racetrack pay to Chester are fees, not special excise taxes, meaning they too fail to qualify for the Bankruptcy Code’s special-revenues exception.
“The Creditor Defendants’ liens, while authorized by the two Ordinances, depend on the contractual Contribution Agreement and Trust Indenture to have effect,” Judge Matey wrote for the court.
The panel further affirmed that Chester could receive $1.4 million in excess funds remaining after the City’s bond obligations to creditors were satisfied, rejecting the argument that the money could be withheld pending further instruction from the City.
The Court remanded the case to the bankruptcy court for further review of narrow issues concerning whether the creditors’ liens attach to future revenues based on the language of the documents. The City will have the opportunity to raise additional arguments on why the liens do not attach to the revenues even if the documents suggest the liens extend to proceeds.
The decision was covered in Bloomberg Law and Law360.
In a statement, Matt said, “We are pleased with the Court of Appeals’ decision. 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.”
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