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.

 

 

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Joe Mathewson
3 years ago

A brilliant observation! All contracts, even union pension commitments, are on the table in Bankruptcy Court.

Advocate
3 years ago

But what of all the Art at the Art Institute? It could be sold to cover debts…..and other public assets as well….assets we cherish. Like our roads parks and public spaces. The lakefront could be commercialized as an asset. Lake Michigan water could be sold as an assett. Need I go on? Yes we maybe break a bad meter deal. We LOSE our financial sovereignty…..a Judge becomes CZAR….our State and City laws are superceeded by the Czar. Unrealized assets become part of the mix. Happy days WONT be here again….for every problem ya fix…two more problems will emerge. Assets locked… Read more »

Advocate
3 years ago
Reply to  WirePoints

More of the same for the last 3 years, ya dont like or agree with my words. Thats fine, I dont always agree with yours but I NEVER wish to silence them or ask them to not be said. Parking meters are privatized as an unrealized city assett is cashed in on. We have seen this. Highways are cashed in on, privatized as well, we have seen this. Drive to Indiana lately? Bridges, Roads, Buildings, parkland, ASSETTS can be tolled, and sold, and privatized. AND TAXED. All part of a bankruptcy settlement. How much to use the Jayne Byrne interchange?… Read more »

Advocate
3 years ago
Reply to  Advocate

As for alternatives……again just one small example …for 3 years Ive been using the word amortization on this website and you have ridiculed me for it.

But so strange I ve seen you come around lately, using the word itself, not exactly rolling off your tounge, but your using it now …using the word amortization. How you use to slap me when I used it so long ago. I would say remortgage, you would say…..why dont you “fail to comment here” A polite way of saying be quite. Thats still what ya want really Mark?

Advocate
3 years ago
Reply to  Advocate

The FEDS, Congress, Courts, et al. will not let a Chicago Bankrutcy plan sail through without CONSIDERAL MUNICIPAL FISCAL PAIN.

The Feds will want to disincentivize rather than encourage, muncipalities throughout America, from storming the Federal gates to impliment easy bankrutcies. Otherwise, the no-tax crowd, will avoid tough fiscal governing for easy bankruptcy restructuring.

If the Feds make it easy and relatively painless for Chicago to escape its pension mess. Watch many, many many municipalities to follow…throughout Illinois and throughout America. We then become The United States of Restructuring. Happy 4th everyone.

Steve-Oh
3 years ago
Reply to  Advocate

Advocate: Your grammar, punctuation and spelling is horrific, which I assume is largely intentional to show how relaxed and care-free you are. But it’s insulting to the school system you attended. And it makes your points even MORE unintelligible than they already are ! When you can’t even spell the word “asset” , that is a marker for how uninformed you are. And when you refer to people with my opinion — believers that govt has gone wild with spending, nest-feathering, taxation and all-out disrespect for the private sector citizens who support ALL of govt — as the “no-tax crowd”…….you… Read more »

Advocate
3 years ago
Reply to  Steve-Oh

Yes Steve-O,
At times my grammar is horrific. I am a terrible speller…and auto-correct somehow seems to make it even worse.

I always need to pay closer attention to spelling.
Thanks for reading and repsponding even with the bad spelling.
I do not mean to insult anyone especially you, when I used the term no tax crowd, only you can decide for yourself if ya fit the bill, not me. If ya put your own head in the noose …dont blame the hangman for what happens.

Advocate
3 years ago
Reply to  Advocate

This will be my final wirepoints post, I sincerely wish Mark and all wirepoints readers the best.

Steve-Oh
3 years ago
Reply to  Advocate

We’re NOT a “no-tax” crowd !!!!!!!!!! We see govt’s gone absolutely berserk with their spending and taxation, and property taxes ALSO have been abused by the govt. We want LIMITED govt, NOT mammoth-size with corresponding, egregiously punishing taxes. If you pay 50% (counting FICA 15.3%, fed, state, sales taxes) THEN you pay 5% or 10% of your home value in annual property taxes……the total is TOO HIGH. What’s your problem with admitting that? Maybe you have some kind of special situation the rest of us don’t have. I don’t expect or care if you answer, but your insinuation that we’ve… Read more »