By: Mark Glennon*
A bankruptcy filing is the ugly inevitability for Chicago, we’ve said, but here’s one interesting, potential sweetener: Bankrupt municipalities have the option of cancelling most contracts and leases they don’t like, and that might include Chicago’s despised deal that privatized parking meters.
Regardless, think of this as a lesson in one part of bankruptcy. Arcane bankruptcy topics like this, unfortunately, will be critical to the recovery of dozens of insolvent municipalities across Illinois that face bankruptcy.
First, a little background on the deal, which was executed in 2008 and partially amended in 2013. In exchange for an upfront payment of $1.1 billion, most of which the city quickly spent, a private entity named Chicago Parking Meters (formed by Morgan Stanley and other financial partners) got the rights to keep money paid into the meters for 75 years.
The meters took in $122 million last year, not a dime of which went to the city, according to a nice Sun-Times article a couple months ago on the numbers. Since 2008, the private entity has reported $778 million of revenue. “It’s on pace to make back what it paid the city by 2020, with more than 60 years of meter money still to come,” according to the Sun-Times.
Obviously, a horrible deal for the city.
If Chicago filed for bankruptcy (authorization for which would first have to come from the state), Chicago would have the option, like all parties in bankruptcy, to assume or reject all “executory contracts.” An “executory contract” is basically any agreement not fully performed on both sides. The parking meter deal certainly appears to be an executory contract– it’s a very lengthy agreement containing many ongoing obligations on both sides. (The original agreement and the ordinance authorizing it are linked here.)
That general rule is subject to a number of exceptions. Since I’m rusty on those and don’t practice law anymore, I asked a smart bankruptcy lawyer I know what exceptions might apply, David Christian of Chicago. One exception is for leases of real property (basically, land and things connected to it (Bankruptcy Code Section 365(h)(1)(A)(ii)). Maybe the deal could be characterized as a lease of real property.
However, the parking meter agreement says expressly that no transfer of real estate of any kind is conveyed by it. (Section 2.1.) It’s styled, instead, as a concession agreement. Chicago Parking Meters didn’t rent the parking spaces; drivers do.
It’s also possible the city executed some form of hell-or-high water payment agreement or guaranty with a third party, separate from the agreement with Chicago Parking Meters, though I’ve seen no indication any was done. Neither David nor I reviewed all the documents, so nothing is certain here, but it looks like there’s a good chance the deal could be rejected.
What would result if the city successfully rejected the agreement? All future parking meter revenue would belong to the city – taxpayers, essentially.
Chicago Parking Meters would have a damage claim for its losses just as if Chicago had breached the agreement. However, that damage claim would just be counted with other unsecured claims. Those other unsecured claims (which would include unfunded pension debt and unsecured bonds) would already total tens of billions of dollars. They all would be reduced and paid out of the bucket of whatever is left to pay them.
In short, the city wouldn’t bear the burden of the damage claim but it would get billions of dollars of future meter revenue back, though unsecured creditors would get their recovery reduced somewhat.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.