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Federal Judge Rejects City of Harrisburg's Bankruptcy Petition

December 6, 2011

By Richard G. Poulson, Esq. and John R. Bielski, Esq.

In a case that has received national attention, the U.S. Bankruptcy Court for the Middle District of Pennsylvania has rejected a petition filed by the City Council of Harrisburg, Pa., for bankruptcy protection under Chapter 9 of the Bankruptcy Code. Willig, Williams & Davidson labor and employment attorneys Alaine S. Williams, Amy L. Rosenberger, Richard G. Poulson and John R. Bielski successfully represented Harrisburg’s civilian employees and police officers in connection with their Objections to the bankruptcy petition.

The Harrisburg bankruptcy filing was by far the largest in Pennsylvania’s history, and the first to implicate collective bargaining and contract rights of Pennsylvania’s public employees. The filing came in the midst of increased pressure by special interests on public employers to use bankruptcy laws to nullify the contracts of police officers, firefighters and other public workers and, in doing so, to break promises made over decades of employment. The Bankruptcy Court’s rejection of Harrisburg’s bankruptcy petition dealt a high-profile and definitive blow to the strategy of using municipal bankruptcy laws to diminish the rights of public employees.

The employee objectors to Harrisburg’s bankruptcy, American Federation of State, County, and Municipal Employees (AFSCME) District Council 90 and Fraternal Order of Police (FOP) Lodge 12, both represented by Willig, Williams & Davidson, were part of a broad coalition of stakeholders, including the Commonwealth of Pennsylvania, Dauphin County and the Mayor of Harrisburg, who were united in their opposition to the proposed bankruptcy. The employee objectors opposed the bankruptcy petition in order to protect and preserve the binding contract rights of Harrisburg’s workers.

In the months before the bankruptcy filing, AFSCME Council 13, the FOP, PA State Lodge and the Pennsylvania Professional Fire Fighters Association actively worked with the state legislature to enact fair and appropriate limitations on the use of bankruptcy by municipalities. This work resulted in the passage of Act 26 in June 2011, which prohibited bankruptcy filing by certain municipalities through June 2012, and Act 79 in October 2011, which significantly limited bankruptcy filings made after June 2012. The unions’ collective effort subsequently formed the basis of the court’s rejection of Harrisburg’s bankruptcy.  

Before June 30, 2011, Pennsylvania was one of 24 states that allowed distressed municipalities to file for federal bankruptcy protection under Chapter 9 of the Bankruptcy Code. The Municipalities Financial Recovery Act, known as Act 47, establishes procedures for determining whether a municipality is financially distressed and, if so, for guiding the municipality toward financial solvency. Among other things, Act 47 allows distressed municipalities to file for bankruptcy under Chapter 9 if certain conditions are met.  On June 30, however, the legislature enacted Act 26, an amendment to the Fiscal Code which also effectively amended Act 47 by prohibiting any fiscally distressed Third Class City from filing for bankruptcy protection through June 30, 2012. At the time of Act 26’s passage, there were ten Third Class cities that fell under that category, including the City of Harrisburg. Harrisburg was thereafter barred from filing for bankruptcy protection until July 2012.   

On October 11, 2011, despite the passage of Act 26, four members of the Harrisburg City Council passed a resolution authorizing the filing of a bankruptcy petition. That same day, legal counsel for those council members filed a Chapter 9 Petition with the Bankruptcy Court of the Middle District of Pennsylvania.  

The City Council’s bankruptcy filing raised two legal issues. First, whether four members of City Council had the authority to file a bankruptcy petition in light of Act 26’s prohibition through July 2012. Second, whether City Council had the authority to initiate the bankruptcy petition when, as here, the Mayor did not consent or agree to such a filing.

On October 14, 2011, the Commonwealth of Pennsylvania filed an objection arguing the first point, i.e., that the City lacked state statutory authority to file a Chapter 9 Petition given the enactment of Act 26. On October 16, 2011, the Mayor of the City of Harrisburg filed an objection arguing the second point, i.e., that City Council members could not initiate and authorize the filing of a petition for bankruptcy through a resolution, because such power was vested solely in the hands of the Mayor.  

AFSCME District Council 90, which represents all of the City’s non-uniformed, non-professional employees, and FOP Lodge 12, which represents all of the City’s police officers, filed objections raising similar arguments related to the statutory bankruptcy bar and the overreaching by City Council.

On November 23, 2011, following a hearing and argument, Chief Bankruptcy Judge Mary France ruled from the bench that the City lacked statutory authority to file a petition under Chapter 9 and that the four members of Council lacked the authority to initiate and authorize a bankruptcy petition, as such authority rests with the Mayor under the Third Class City Code.  Judge France’s formal written opinion was issued on December 5, 2011.

The Court’s ruling recognizes the Commonwealth’s authority under Chapter 9 to determine the circumstances under which a municipality may file for bankruptcy protection. It also allows the Commonwealth, in the first instance, to attempt a resolution of the City’s fiscal problems without resorting to bankruptcy protection. With respect to AFSCME District Council 90 and FOP Lodge 12, bankruptcy protection could have resulted in a far greater impact with respect to wages, benefits, and working conditions than those outlined in Act 47 and subsequent amendments.  

The Harrisburg bankruptcy decision casts a high-profile blow to the strategy of using the municipal bankruptcy process to diminish the rights of public workers. Considerable challenges still remain, such as the need to reform Act 47 and to restore fairness to collective bargaining in distressed municipalities. But the rejection of Harrisburg’s bankruptcy petition was a major win for Pennsylvania’s public employees.
Willig, Williams & Davidson’s labor and employment attorneys will continue to work with public employee unions to protect and defend the hard fought contractual rights of public workers, in order to ensure that elected officials keep the promises made to the men and women who work in Pennsylvania’s communities.

For information on how Willig, Williams & Davidson may assist your union in defending your contract rights in negotiations or otherwise, please contact one of our labor and employment attorneys.

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