Bankrupt Pennsylvania City Stymied by Three-Way Legal Standoff

Alan Davis, a former Chester, Pa., police captain injured in a shooting that left him with permanent damage to his right arm in 2016, was forced to retire on disability.

A decade later, he’s watching a constitutional fight that could determine whether the city can monetize water assets and exit bankruptcy—and, by extension, when retirees will receive overdue pension payments.

After the Pennsylvania Supreme Court ruled this year that Chester couldn’t unilaterally seize and sell its water authority, the city was left without a clear path out of the Chapter 9 case it began nearly four years ago. It’s also awaiting a Third Circuit decision involving annual debt service payments of approximately $3 million that it has avoided since it filed for bankruptcy. In March, it withdrew its proposed turnaround plan.

The state high court ruling was a blow to a committee of about 250 retirees, co-led by Davis, who are owed back pension payments and had hoped to be made whole through an asset sale. Chester was designated a distressed city in 1995. At the time of bankruptcy, the committee cited about $127 million in unfunded pension liabilities and $232 million in retiree health-care obligations.

“Most of us have paid for our pensions and benefits with blood, sweat and tears,” Davis, who spent 20 years on the force, said.

Chester is emerging as a test case for how far state law can shape the outcome of a municipal bankruptcy. Following its loss, it’s now challenging the constitutionality of Act 73, a 2012 state law it says was drafted to target the city itself, hoping to undercut the state supreme court’s ruling.

While federal bankruptcy law takes precedence, property rights are generally determined under state law. The outcome depends, in part, on resolving state law questions regarding the water assets.

It also highlights broader governance questions about who has authority to take which actions, said Laura Coordes, an Arizona State University professor who researches municipal bankruptcies. The case reveals gaps in Chapter 9, which has a thinner body of case law and precedent than Chapter 11.

“Chester is exposing problems in the Chapter 9 process, but also problems in the state that haven’t really been exposed before,” she added.

Contested Sale

Chester’s case has splintered into three parts.

The city argues that monetizing the assets remains its best path out of bankruptcy. The Chester Water Authority counters that the city lacks such power, warning that any deal would amount to privatization and higher rates. And retirees oppose the city’s proposal to sell assets to a public entity only.

If the city can’t sell those assets, it would consider budget cuts and trimming liabilities in bankruptcy.

“We have to look at cuts, and the biggest liabilities are with the retirees,” state-appointed receiver Vijay Kapoor said.

The retiree committee argued in a lawsuit last year that the “self-imposed policy” of keeping the water assets in public hands and excluding private-sector bidders would be a “catastrophic loss of value.”

Robert D. Gordon, a partner at Boies Schiller Flexner LLP representing the committee, said the receiver is breaching his duty to creditors by failing to seek fair value for the assets.

“Retirees are not your normal creditors,” he said. “They could not evaluate any risk they were taking regarding the city’s creditworthiness before they invested their working years in service of the city.”

But being able to monetize the assets while it remains in public hands, Kapoor said, would “balance all the interests involved.”

Asset sales rarely play a central role in municipal bankruptcies, which typically focus on debt restructuring and pension adjustments.

Before the bankruptcy, CWA offered $60 million, Aqua Pennsylvania $410 million, and Pennsylvania American Water $425 million for the assets.

‘Special Legislation’

The city said in its March lawsuit that Act 73 stripped its control over water board appointments, violating the state constitution’s ban on special legislation.

The CWA, originally incorporated by the city, now serves 200,000 customers, including residents from Delaware and Chester counties.

The state supreme court said that an amendment to state law, restructuring the board to give counties representation alongside the city, stripped the city of its exclusive powers.

CWA board chairperson Noel Brandon said Act 73 was designed as a “visionary law” that recognizes that water systems change over time. The law establishes specific triggers, he said, that require governance changes when a water system grows beyond its original scope.

“We feel somewhat vindicated,” Brandon said. “You can’t say ‘We want all your money to fix the problem, and it’s too bad on you and your ratepayers.’”

The ruling “severely hamstrings” Chester, said Alvin Velazquez, an Indiana University Maurer School of Law professor who researches the intersection of labor and bankruptcy.

It “puts Chester in an unfortunate position of saying, ‘We need to impose a haircutter crammed down upon retirees who are at least able to afford it,’” he said.

Path Forward

CWA doesn’t believe the city’s claims that it will keep the assets in public hands while seeking the highest possible bid to pay back creditors.

“You can’t have it both ways,” Brandon said. “Our fiduciary responsibility is to ratepayers. And that’s why we’ve been doing this for as long as we have.”

The retirees say they also won’t make concessions and intend to fight for full benefits, noting that they accepted lower wages in exchange for the promise of retirement security.

“Some of us have lost limbs,” Davis said. “We have widows receiving pensions from officers killed in the line of duty, and firefighters who were killed in the line of duty.”

Kapoor said any bankruptcy exit strategy must ensure Chester’s long-term financial stability.

“I don’t want to be in bankruptcy,” the receiver said. “For a city that has taken decades to get into this position, it’s going to take a little while to get out.”