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In re Boise County
Citations: 465 B.R. 156; 2011 Bankr. LEXIS 3346; 55 Bankr. Ct. Dec. (CRR) 109; 2011 WL 3875639Docket: No. 11-00481-TLM
Court: United States Bankruptcy Court, D. Idaho; September 2, 2011; Us Bankruptcy; United States Bankruptcy Court
Creditors Alamar Ranch, LLC and YTC, LLC filed an objection and motion to dismiss Boise County’s Chapter 9 case, which was heard from June 28-30, 2011, and taken under advisement on July 15, 2011. The memorandum serves as the Court's findings based on the record, arguments, and relevant laws. Alamar and YTC, both Idaho limited liability companies, initiated a lawsuit against Boise County in January 2009, alleging that the conditions imposed by the County on a Conditional Use Permit for a residential treatment facility violated the Fair Housing Act. The County sought coverage from its insurer, Idaho Counties Risk Management Program (ICRMP), which denied defense. Subsequently, the County pursued declaratory relief in state court, but was ruled against, and that appeal is ongoing in the Idaho Supreme Court. On December 16, 2010, a jury awarded Alamar $4 million, finding the County liable for Fair Housing Act violations. On December 30, Alamar filed for attorney's fees and costs totaling approximately $1.4 million, which the County contested as excessive. The District Court has yet to make a decision on this request. Following the judgment, settlement negotiations occurred between the parties, with a meeting on January 26, 2011, involving the County's legal counsel and Alamar's representatives to discuss potential payment. During a meeting, Banducci expressed Alamar's interest in continuing settlement negotiations and requested the County draft a settlement offer. At a subsequent meeting on February 15, key County officials and legal counsel were present, but no settlement offer was made. Banducci indicated Alamar would accept $5 million, representing a reduction from the original judgment, with payment structured over time at a prime interest rate. The parties agreed to reconvene on February 22, where the County presented a settlement offer of $3.2 million, structured as follows: $1.9 million in immediate cash, forgiveness of $164,000 in past due taxes, approximately $123,000 in forgone property taxes, a 3% annual property tax increase for ten years, and proceeds from a County lawsuit against ICRMP. If these payments did not meet the $3.2 million within ten years, the remainder would be forgiven. The County characterized this offer as a “good faith effort,” supported by financial documents detailing its revenues and expenses for fiscal years 2010-2015. Alamar rejected the offer after consulting their legal counsel. On February 24, Alamar's attorney communicated that they would consider any legal arguments regarding the exemption of County funds from execution, while expressing willingness to entertain reasonable offers despite planning to collect on the District Court Judgment. They warned that any obstruction could lead to additional liability for the County and its officials. Additionally, Woodard proposed that if the County committed by March 2 to pay the full judgment amount by March 25, they would refrain from collection efforts. However, on February 28, Alamar filed for a Writ of Execution with the District Court. The County Board of Commissioners convened an executive session on February 28, 2011, to address concerns regarding Alamar's potential execution on the County's accounts, which could disrupt operations. Following this session, the Commissioners voted to file for bankruptcy protection under Chapter 9, with the County officially filing its petition on March 1, 2011. In its bankruptcy schedules, the County reported total assets of approximately $27.77 million and total liabilities of about $7.38 million. This included a $4 million District Court Judgment and a $1.5 million contingent debt for legal fees owed to Alamar’s attorneys. The County also identified claims for medical indigency payments, estimated at around $550,000, which were categorized as contingent and unliquidated. The County manages its finances through distinct funds, adhering to standards set by the governmental accounting standards board (GASB) as required by Idaho law. For the fiscal year 2011, the budget projected total expenditures of $9,352,734 across various funds, including the General Fund, Justice Fund, and others. The budget outlines funding sources, including prior year cash and revenue from federal and state programs, and indicates necessary property tax levies to meet anticipated expenditures. As of March 1, 2011, the County reported revenues of $6,007,950 and expenditures of $3,040,595 for fiscal year 2011. At the time of the bankruptcy filing, the County had cash balances across various funds totaling $9,945,787, which included $2,045,383 in trust accounts. The cash was distributed among 11 different accounts, with a general operating investment account being the only illiquid asset due to a Freddie Mac investment, incurring a potential penalty of $25,000 for early withdrawal. The County Treasurer, April Hutchings, manages the funds to maximize returns and comply with statutory limits on account holdings. Interest earned is allocated to the County Improvement Fund. The commingling of funds across accounts complicates tracking specific fund balances. Following the bankruptcy filing, on June 14, 2011, the County submitted a Plan of Reorganization proposing to pay $500,000 to Alamar, limited by the Idaho Tort Claims Act, and $550,000 to unidentified medical providers for unpaid prepetition medical claims. To qualify as a debtor under Chapter 9 of the Bankruptcy Code, an entity must satisfy the criteria set forth in 11 U.S.C. § 109(c), which includes: (1) being a municipality; (2) possessing state law authorization to file for Chapter 9 either by name or through a governmental officer; (3) demonstrating insolvency; (4) expressing a desire to adjust debts; and (5) meeting one of several conditions regarding creditor agreement or negotiation efforts. Specifically, a Chapter 9 petitioner must fulfill all mandatory requirements in § 109(c)(1)-(4) and one from § 109(c)(5) to be eligible for relief. If an entity does not meet these requirements, the bankruptcy court is mandated to dismiss the petition under § 921(c), despite the wording suggesting discretion. The debtor bears the burden of proving eligibility, and courts are instructed to interpret the eligibility requirements broadly to facilitate access to relief. In the case of Boise County, it is determined that the County qualifies as a municipality as defined in 11 U.S.C. § 101(40) since it is a political subdivision of the state of Idaho. Additionally, Idaho Code § 67-3903 permits any taxing district in Idaho to file for bankruptcy under the Bankruptcy Code, further establishing the County's authorization to seek Chapter 9 relief. Idaho Code 67-3901, enacted July 1, 1898, was amended and references Chapter IX of the Federal Bankruptcy Act of 1898, which was repealed in 1978 when the Bankruptcy Reform Act was established. The current Bankruptcy Code does not define “taxing district,” instead using the term "municipality" for entities eligible for Chapter 9 relief, contingent on state law. This raises questions about whether Idaho Code 67-3901 maintains the prior definition of “taxing district,” adopts the current definition, or remains undefined following the repeal. However, the Court determines these questions are unnecessary for the case at hand, confirming that the County qualifies under both definitions. The Idaho Supreme Court is expected to interpret state statutes authorizing municipalities like the County to file under federal bankruptcy law. Additionally, Idaho Code 67-3904 requires the adoption of a resolution to file a petition, which the County fulfilled by passing a resolution at a public meeting on February 28, 2011. The Court concludes that the County is authorized to be a Chapter 9 debtor and meets the conditions of 11 U.S.C. § 109(c)(2). The County has also demonstrated a desire to adjust its debts, evidenced by negotiations with creditors and attempts to resolve claims, fulfilling the subjective requirement of 11 U.S.C. § 109(c)(4). Commissioners Anderson, Fry, and Day credibly asserted that bankruptcy was the only viable option for addressing Alamar’s claim due to its aggressive collection tactics and the necessity of maintaining County operations. Each Commissioner recognized the Alamar Judgment as a legitimate debt that required payment. The petition for bankruptcy was intended not to evade Alamar but to comply with Idaho law while managing the debt without jeopardizing County functions. The County has actively sought to resolve Alamar’s claim post-filing, as evidenced by ongoing communications between its bankruptcy counsel and Alamar’s attorneys. While the County's proposed plan to address the Alamar Judgment, which included a $500,000 payment based on a theory of reduction under the Idaho Tort Claims Act, may face challenges during confirmation, the submission of the Plan and Disclosure Statement indicates the County's intent to adjust its debts. The Court found that the County met the requirement under § 109(c)(4) to show a desire to effectuate a debt adjustment plan. Further negotiations with Alamar had become impracticable for Boise County, as it argued that circumstances necessitated a quick filing to protect its assets. The Court noted that impracticability in negotiations could stem from various factors, including the number of creditors and the urgent need to act. The County perceived an imminent threat of execution on its accounts, indicating that negotiations had reached an impasse. The evidence suggested Alamar was poised to execute its Judgment, further complicating negotiations. The need to preserve cash assets for uninterrupted County operations justified the impracticability of further discussions. Additionally, the County asserted it had a reasonable belief that Alamar might seek a preferential transfer that could be avoided under § 547 of the Bankruptcy Code, which the Court accepted as a valid concern at the time of filing. 109(c)(5)(D) permits municipalities to file for bankruptcy and receive an automatic stay while negotiating with creditors to prevent unfair preferential payments. In this case, Alamar's aggressive collection efforts raised concerns for the County that it might make a preferential payment, jeopardizing its ability to meet other financial obligations. If Alamar had successfully executed a Writ against the County, it could have received payment for an antecedent debt, raising the possibility of an avoidable preference. The Court found the County's concerns about potential execution on the Alamar Judgment were reasonable, regardless of the actual insolvency status of the County, which remains disputed. The Court highlights that for a municipality to be considered insolvent under 109(c)(3), it must either not generally pay debts as they become due or be unable to pay debts as they come due. The tests for insolvency focus on current nonpayment and future inability to pay, with the petition date serving as the reference point. The burden of proof lies with the petitioner to demonstrate insolvency. The County admitted it was paying its debts as they became due, except for approximately $550,000 in unprocessed medical indigency claims. The Court disagreed with the County's assertion that this nonpayment constituted insolvency under Section 101(32)(C)(i) because it did not reflect a general failure to pay debts and was a small portion of its budget. Thus, the County's situation did not meet the insolvency criterion under that section. The debtor municipality is current on 76% of its obligations and delinquent on 24%, primarily due to a temporary political dispute over check-signing authority, indicating it is not insolvent for failing to pay debts as they come due. Evidence shows the County Indigent Fund has sufficient funds to cover estimated outstanding medical indigency claims and projected future claims for fiscal year 2011. Specifically, on the petition date, the Indigent Fund had a cash balance of $647,597. After accounting for $550,000 in disputed claims, a positive balance of $44,756 remains, even considering projected negative cash flow changes for the fiscal year. Furthermore, the court questions whether the $550,000 in medical indigency claims is "due" since the definition requires debts to be presently enforceable. The County failed to provide evidence of when these medical indigency payments would be payable, as the necessary documentation for determining the exact amounts is still pending. Consequently, the court cannot conclude that the debt is "due" under the relevant statute. Additionally, the County alleges insolvency under a second prong, asserting it will be unable to pay the Alamar Judgment and other operational expenses. This assessment requires demonstrating an inability to meet debts as they come due for the current or upcoming fiscal year, based on cash flow rather than budget deficits. The court's analysis relies on cash flow projections rather than simply budget considerations. Alamar argues that the County has sufficient cash in its financial records to satisfy the Judgment and cover other expenses for the upcoming fiscal year. The County, however, claims that most of its nearly $10 million in cash and investments is restricted by federal and state laws from being used to pay the Judgment. The Court finds the County's argument unconvincing for two primary reasons. First, testimony from Prisco indicated that the funds in various accounts, totaling $2,045,383, were not restricted, as they primarily consisted of payments in lieu of taxes and unallocated interest earnings. The County did not provide evidence of any other restrictions on these funds. Second, the County failed to demonstrate that it could not use reserves from its General, Road, Bridge, and Solid Waste Funds to pay the Judgment. Idaho law generally prohibits counties from exceeding budget appropriations, making officials personally liable for any such excess expenditures. However, exceptions exist, allowing counties to make expenditures beyond the budget for court-ordered payments or specific emergencies defined by law, such as natural disasters or public health crises. Funds for these expenditures must come from available moneys in the county treasury, and if not sufficient, warrants must be registered and accrue interest. The County treasurer must then identify methods for redeeming these warrants, potentially including short-term borrowing or interim financing. Emergency warrants issued, registered, and unpaid in the current fiscal year must be included in the county's annual budget submitted to the board of county commissioners. The board is required to allocate funds equal to these unpaid warrants in the next fiscal year's appropriations, as mandated by Idaho Code § 31-1608. If there is insufficient levy authority to redeem these warrants, a warrant redemption fund must be established under Idaho Constitution, Article VII, § 15, and Idaho Code § 31-1507. A warrant redemption levy, capped at two-tenths of one percent of the taxable property’s market value, must be enacted to fund this redemption (Idaho Code § 63-806(1)). Additionally, any surplus funds in the county treasury on October 1, from various county funds no longer needed for current expenses, must be transferred to the warrant redemption fund (Idaho Code § 63-806(2)). These regulations are part of a comprehensive financial framework designed to ensure counties maintain balanced budgets, preventing expenditures from exceeding revenues. County boards are tasked with levying adequate funds to meet appropriations and may address unforeseen emergency expenses as necessary. The system is designed to efficiently manage any outstanding debts arising from such expenses using the county's levy authority and reallocating unneeded funds. The Court does not find merit in the County's claim of inability to pay the Alamar Judgment, which it acknowledges is a legally mandated expenditure under Idaho Code § 31-1608. While the County argues, referencing Lloyd Corp. v. Bannock County, that this code does not permit the Commissioners to incur debt beyond annual income, the Court interprets the relevant provisions differently, asserting that the Idaho Constitution, Article VIII, § 3, allows for necessary expenses without voter approval in such cases. A taxpayer from Bannock County sought a writ to prevent the county from issuing bonds to cover $347,548.06 in warrant indebtedness, some of which were emergency warrants authorized under Idaho Code 30-1208. The trial court ruled against the taxpayer, confirming the county's bond issuance. On appeal, the taxpayer contended that Idaho Code 30-1208 conflicted with Idaho Constitution, article VIII, section 3, which restricts expenditure beyond the county budget. The court held that issuing refunding bonds to pay existing warrant indebtedness did not constitute new indebtedness but merely altered the form of existing debt, citing precedent cases such as Butler v. City of Lewiston. The court further assessed whether the initial emergency expenditures were "ordinary and necessary expenses" under the constitution. Ultimately, it concluded that such expenditures were permissible under Idaho law. The analysis in Butler similarly affirmed that changing the form of existing debt does not increase legal indebtedness and that the expenses incurred were ordinary and necessary. The court identified three key principles from Lloyd and Butler, emphasizing that modifying the evidence of existing indebtedness does not violate Idaho Constitution, article VIII, section 3. A county in Idaho can issue registered warrants to cover expenditures that exceed its annual revenue due to emergencies, as outlined in Idaho Code 31-1608, without breaching the Idaho Constitution, provided those expenditures are deemed "ordinary and necessary." The Idaho Constitution, Article VIII, Section 3 stipulates that such expenditures must be authorized by state law and must be ordinary and necessary. Payments to satisfy tort judgments are classified as ordinary and necessary expenses. The court questions whether an analysis under Article VIII, Section 3 is necessary, indicating that merely altering the form of existing debt does not engage the article's provisions. The original liability arises from a federal judgment, and Article VIII, Section 3 imposes limitations on state powers but does not restrict federal court judgments against municipalities. The Idaho legislature has recognized an exception for expenditures mandated by court orders, as seen in Idaho Code 31-1607, which suggests that budget laws do not control the courts. Therefore, using registered warrants to convert a pre-existing judgment liability into warrant indebtedness does not violate the Idaho Constitution. Even if Article VIII, Section 3 is applicable to judgment payments, evidence suggests that the Alamar Judgment is an "ordinary and necessary" expense for the County, aligning with the ordinary course of municipal business. An expense is considered ordinary if it is likely to be necessary in the regular operation of municipal functions, even if infrequent. Under Idaho law, counties possess the authority to engage in litigation, making it reasonable for them to pay judgments from lawsuits as part of their standard operations. An expense is deemed necessary if there is a legal obligation to make the expenditure within the fiscal year. Necessary expenditures typically involve urgent needs, such as public safety or obligations that must be addressed promptly. The Alamar Judgment, issued by a federal court, represents a liability that the County is legally required to address in a timely manner. The County's urgency to fulfill its Judgment obligations led to its bankruptcy filing. It cites Idaho Code § 31-1508, which generally prohibits fund transfers, and Idaho Code § 40-709(7), which restricts certain road fund uses, but acknowledges exceptions under the law. Idaho Code § 63-806(2) requires counties to transfer surplus funds to the warrant redemption fund, including from the road fund. The County claims that utilizing registered warrants is inadequate due to a 3% levy increase limit under Idaho Code § 63-802; however, this limit pertains only to property tax levies and does not restrict surplus fund transfers from other funds to redeem warrants. Evidence suggests that the County has sufficient surplus funds to cover the Alamar Judgment without exceeding levy limits. Cash flow summaries indicate that the General Fund will have a surplus of $1,042,534 available for transfer, the Road and Bridge Fund will have $1,239,999 available, and after setting aside $297,000 for landfill closure costs, the Solid Waste Fund will have $830,128 available. In total, these excess funds amount to $3,112,661, demonstrating the County's ability to satisfy the Judgment and maintain operations without legal or factual impediments to transferring these funds into a warrant redemption fund. The County's projections indicate that it does not require certain funds to cover expenses for the remainder of the current fiscal year or for fiscal year 2012. The County failed to demonstrate that it is prohibited from utilizing available funds to satisfy the Alamar Judgment. Combining $2,045,383 from “trust accounts” with additional excess funds from the General, Road, Bridge, and Solid Waste Funds totals $5,158,044, sufficient to cover the Judgment. Consequently, the Court concludes that the County has not proven insolvency under the applicable bankruptcy code provisions, specifically §109(c)(3), and is thus ineligible for chapter 9 bankruptcy. Alamar’s objection is upheld, leading to the County's chapter 9 case dismissal as per §921(c), with an order to be submitted by Alamar’s counsel. The Court acknowledges the judicial notice of records from both the District Court and the County's bankruptcy case. The composition of the Board of Commissioners includes three members, none of whom were in office during the events relating to the Alamar District Court case. Notably, while Banducci Woodard Schwartzman is listed as a creditor for $1.5 million in legal fees, the request for those fees was made by Alamar, meaning any award would likely benefit Alamar directly. Additionally, the County participates in the Catastrophic Health Care Cost Program, which mandates payment for necessary medical services to indigent residents, supported by state funding and specific reimbursement limits per resident. Applications for assistance not acted upon within designated timeframes are automatically approved, and the County Clerk, Maty Prisco, is responsible for the initial review and processing of these applications. Consequences of failing to act on certain applications include the inability to determine applicants' eligibility for Medicaid or Medicare, loss of the contracted reimbursement rate, and potential costs exceeding $11,000 for the County. The East Boise County Ambulance Fund, which contained $161,619, is a separate taxing authority managed by the County for administrative purposes, and accounts labeled as "trust accounts" do not meet the legal definition of a trust. These accounts mainly consist of federal payments in lieu of property taxes and interest earnings, contributing to a total of $10,107,406. Idaho law allows a county treasurer to invest surplus or idle funds, with resultant interest directed to the county's general fund unless specified otherwise. The definition of "surplus or idle funds" encompasses excess treasury moneys over anticipated expenditures, ensuring maximum revenue generation. Hutchings has served as County Treasurer since November 2009 and was elected in November 2010. The account balances were confirmed as of February 28, 2011. The court is bound by the state's highest court decisions and must predict outcomes in unsettled areas of law. Idaho's statutory references remain unchanged since the Bankruptcy Act's 1978 repeal, suggesting legislative oversight without intent to remove municipal eligibility for filing. The term "taxing district" is defined in the Idaho Code, and the County qualifies under this definition as it has the authority to levy property taxes. However, limitations in the Idaho Code suggest caution in applying the definition for bankruptcy purposes, as outlined in relevant case law. Legislative definitions within a statute primarily dictate the meanings of terms as they apply in that statute, but these definitions may not be applicable in all contexts or purposes. The Court can reference the definition of "taxing district" in Idaho Code § 63-201(28) to inform its understanding of the term as it appears in Idaho Code §§ 67-3901 and -3903. To predict how the Idaho Supreme Court might interpret an issue, the Court may consider various sources, including state court decisions, statutes, and legal treatises. Alamar's claim that the use of an executive session before a vote on a resolution to file for Chapter 9 relief was improper lacks supporting authority, as neither the Court nor Alamar has identified any relevant legal basis. Under § 547(b) of the Bankruptcy Code, a trustee can avoid transfers of a debtor's property under specific conditions, including transfers made while the debtor is insolvent. "Transfer" is defined in § 101(54)(D) as any method of parting with property or an interest in property. Insolvency is generally analyzed through a balance sheet test in § 101(32), but municipalities have a distinct definition under the same section. Furthermore, § 547(f) presumes insolvency for preference analysis during the 90 days leading up to the petition. The Court must consider any legal restrictions the County claims on its funds in evaluating its insolvency. It acknowledges the complexities and uncertainties in this area of law, particularly influenced by recent Idaho Supreme Court rulings in City of Boise v. Frazier and City of Idaho Falls v. Fuhriman, which have implications for local government financing. The Court evaluates the County's ability to meet its financial obligations under Idaho municipal law, following the precedents set in Frazier and Fuhriman. Before incurring emergency expenses, the board of county commissioners must unanimously adopt a resolution documenting the emergency, as specified in Idaho Code 31-1608. A "warrant" is defined as a payment order from the commissioners to the treasurer, while a "registered warrant" is issued when there are insufficient funds to cover it (Idaho Code 31-1510). The County’s annual budgeting process starts in April, with department heads providing budget worksheets to the County Clerk, who prepares a suggested budget for review by the Board of Commissioners. A public hearing is held in August, allowing taxpayers to comment on the tentative budget before the final budget is adopted by early September (Idaho Code 31-1605). The fiscal year 2012 projections are based on estimates from this process. If there are unpaid warrants due to insufficient funds, Idaho Constitution Article VII, Section 15 mandates the commissioners to levy a special tax up to ten mills on taxable property to create a redemption fund for these warrants. Idaho Code 63-806 further stipulates the property tax levies necessary to ensure the redemption of such warrants, including a provision for raising taxes if outstanding warrants exceed certain limits. All property taxes collected for the county's current expense fund, road fund, and bridge fund, starting from January of the following year, must be deposited into the county treasury and allocated to the warrant redemption fund unless otherwise stipulated by law. Any funds in the county treasury as of October 1 that are no longer needed must also be transferred to the warrant redemption fund by resolution from the county commissioners. The Idaho Constitution mandates the legislature to establish a cash-based financial system for counties. It was acknowledged by County Clerk Prisco and Commissioners Anderson, Day, and Fry that the County has a legal obligation to pay the Alamar Judgment. The language of Idaho Code 30-1208, effective since 1933, is similar to that of Idaho Code 31-1608 today. Additionally, Article VIII, Section 3 of the Idaho Constitution, known as the "proviso clause," states that its requirements do not apply to ordinary and necessary expenses authorized by state law, which has been interpreted to include judgments for necessary expenses, such as those arising from defective sidewalks. There is a potential argument that the County could have satisfied the judgment through bond issuance, thereby converting the judgment liability into refunding bonds without violating constitutional provisions. The Alamar lawsuit against the County, framed as a discrimination claim under the Fair Housing Act, is treated as a tort action. The concept of judicial confirmation was discussed to determine if the Alamar Judgment qualifies as an "ordinary and necessary" expense. This process allows a municipality to seek court confirmation regarding the nature of an expense but is noted to be potentially lengthy and costly; however, there is no evidence that the County actively pursued this option. Idaho Code 63-802 restricts taxing districts from certifying budget requests exceeding specific limits. The dollar amount of property taxes certified for the County's annual budget for any of the three tax years preceding the current one may be increased by a growth factor of up to three. An attorney, Buxton, expressed concerns regarding the County's financial capacity to fund registered warrants after assessing the situation in January 2011. County Clerk Prisco, who had just begun her tenure, felt confident in the financial information she provided to the Commissioners only after April, post-petition filing. Evidence presented during the trial indicated that the County had sufficient cash on hand to fund warrant indebtedness without needing additional levy authority. The Court also assessed the precedent set in the Idaho Supreme Court case Garrity, which ruled that a warrant redemption fund cannot be repurposed for current expenses. In contrast, the current situation does not involve a warrant redemption fund; the County may issue warrants to pay the Alamar Judgment and subsequently establish a fund through its levy authority. The Court determined that the County is not insolvent and therefore ineligible to be a chapter 9 debtor, and it did not further consider Alamar's claim for dismissal due to lack of good faith.