A Kentucky city that filed a Chapter 9 bankruptcy petition because of a property dispute with a local company may not be eligible for bankruptcy protection, according to Moody’s Investors Service.
Hillview, Kentucky is the first U.S. city to seek protection since Detroit did two years ago. In February, Standard & Poor’s lowered its rating to junk after Hillview unsuccessfully appealed a court ruling ordering it to pay $11.4 million in damages to Truck America Training.
In its Chapter 9 petition, filed Aug. 20, the city said it couldn’t afford to pay the judgment, which has swollen to about $15 million with interest. The community of about 8,000 people has about $13.8 million in debt, compared with revenue of $2.5 million in the 2014 fiscal year.
But Moody’s analyst Nathan Phelps said Monday in a report that under Kentucky law, Hillview can issue bonds to cover losses in legal judgments and pay off the resolution over the course of a decade. It also has room to increase taxes on wages, business profits and property, he said.
Truck America Training has indicated it may fight the city’s bankruptcy by asking the judge overseeing the case for permission to interview city officials under oath and for access to internal city financial documents.
“Hillview’s decision to seek bankruptcy relief instead of living up to the judgment affirmed by the Kentucky Supreme Court is tragic and unnecessary,” the company said after Hillview filed Chapter 9. “It did not have to come to this. Truck America has made multiple, fair, settlement offers to resolve the judgment for large discounts, all of which were refused.”
“Should Truck America or another creditor convince U.S. Bankruptcy Judge Alan Stout in Louisville that the city isn’t eligible to remain under court protection, the case would be dismissed and the company free to try to collect the judgment,” Bloomberg noted.
After filing a Chapter 9 petition, a municipality automatically gains temporary protection from creditors. Only 54 cities, towns and counties have sought court protection from their creditors since 1980.
“The city really ended up with no choice,” Hillview City Attorney Tammy Baker told Bloomberg. “With the interest accruing at that rate, it’s just really going to be impossible for the city to pay that judgment.”