Bankruptcies, defaults, and other local government financial emergencies Page: 10
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ty taxes, and if forced to pay the judgment out of current
revenues, it would "cease to function as a municipality."
The plan asked the court to reduce the judgment
and to order a tax levy to pay the reduced amount, based
on an assumption that the courts could order it to levy a
tax in excess of its legal limit.
The plaintiff did not approve the plan and challenged
the bankruptcy filing as not being made in good faith
and not complying with the requirements of Chapter 9.
He claimed specifically that the city was not insolvent
and was filing the petition for purposes of delay. The
plaintiff also claimed that the city was not authorized by
the laws of Mississippi to file a bankruptcy petition and
had not received any state approval to file.
After filing the bankruptcy petition the city asked the
bankruptcy court to reduce the judgment because it was
excessive and unfair to the city's taxpayers. Thus, after
exhausting all of its usual appeal rights in federal courts,
it made a further appeal to the federal bankruptcy court.
The bankruptcy court declined to consider the request
to change the judgment. On March 23, 1978, the court
ordered the city to make a concerted effort to attempt to
borrow the amount needed to pay the judgment. To help
the city the court indicated that it would consider approving
city certificates of indebtedness, as authorized
by Chapter 9 of the bankruptcy law. Such certificates
have a prior lien on city revenues. The city found that a
local bank would loan the money, but only if a state
court validated the loan. The state's bond counsel advised
the city that he did not believe such a validation
would be possible without an amendment to state laws.
Because of the unfavorable state ruling on borrowing
money for the judgment, the city suggested that the court
order a 5-mill levy above the city's tax limit to raise
about $70,000 per year, and that this amount be paid
annually until the $375,000 award was paid. The plaintiff
objected to the revised plan and alleged that the
bankruptcy court could authorize the borrowing of money,
without the need for an amendment of state laws.
The court agreed with the plaintiff and ordered the city
to borrow $450,000 by the issuance of certificates of
indebtedness to pay the judgment, interest, and legal
fees. The court stated that if the city did not borrow the
money within 30 days, the bankruptcy petition would
be dismissed on the finding that the plan submitted by
the city did not meet the requirements of Chapter 9 and
should not be confirmed. The city appealed this order
The city did not borrow the money as directed by the
court because it could not meet the legal conditions
imposed by the banks. As a result, the bankruptcy petition
was dismissed on December 4, 1978.
In early 1979 the city got approval of the state legislature
to borrow money to pay the judgment, and to amortize
the debt by imposing a 0.5% additional sales tax.
This action successfully resolved the problem.
A financial emergency was officially declared in Wapanucka
on June 28, 1982, with the filing of a bankruptcy
petition under the federal bankruptcy law. The
emergency was caused by a $112,527 judgment against
A description of the series of events that occurred
prior to Wapanucka's bankruptcy explains how the
judgment occurred. Briefly, an oil truck went off a highway
and landed in the lake which provided the town's
water supply. The oil from the truck made the water
from the lake permanently unusable. To replace the water
supply, the town planned to obtain an artesian well
located on private property about two miles outside of
town. A loan of $210,730 was obtained from the Farmers
Home Administration to provide the necessary piping
and to rehabilitate the distribution system. Through its
right of eminent domain, the town then sought to acquire
the well. Based on an appraisal, $5,000 of the
available loan money was reserved for this purpose,
pending a court determination of the actual condemnation
award. When the court awarded a $112,000 judgment
instead of the $5,000 reserved, the town had an
insufficient sum of money with which to pay the judgment
and the bankruptcy proceeding ensued.
Like several other bankruptcies, the Wapanucka bankruptcy
had no direct relationship to expenditures exceeding
revenues. The town of 472 people, mostly
ranchers and pensioners, had a 1983 general operating
budget of approximately $48,000, long-term debt of
$210,730, and no significant financial problems prior to
The judgment created a problem because under Oklahoma
law, judgments are to be paid from property taxes
levied over three years. The law invokes the state constitution
which requires that tax levies be used for payment
of judgments. The law does not consider the effects
of such levies on either the local budget, or on the taxpayer's
Under the threat of a three-year tax levy to pay the
judgment, the attorney for the town claimed it "would
be totally insolvent if it has to pay that bill ($112,000)."
He alleged that the additional property tax payments
would have amounted to over $500 per owner and
"many people would have been put out of their homes
for inability to pay."
The bankruptcy petition was filed by the town to stop
the three-year tax levies that were demanded by the
holders of the judgments and to get approval by the
bankruptcy judge for paying a reduced amount. An unstated
purpose of the filing was probably also to delay
proceedings on the judgment, so that a related lawsuit
(involving the oil truck) could be settled.
The time gained by filing bankruptcy and thus stopping
action on the judgment permitted the town to successfully
complete its lawsuit for damages against the
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United States. Advisory Commission on Intergovernmental Relations. Bankruptcies, defaults, and other local government financial emergencies, book, March 1985; Washington, D.C.. (digital.library.unt.edu/ark:/67531/metadc1317/m1/20/: accessed January 19, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.