Workouts and Bankruptcy in Public Finance

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Historically, the tax-exempt bond market has suffered very few defaults and the filing of bankruptcy by a local government was very rare, but the recent recession and continuing economic stagnation in many parts of the United States is creating increasing work for public finance attorneys in the workout and Chapter 9 bankruptcy areas. Although the number of transactions and issuers facing such dire circumstances remains relatively small, those clients who are affected by a troubled or defaulted debt situation can look to Kutak Rock for experienced attorneys who are very skilled at assisting clients through such treacherous legal processes. The depth of our firm's public finance expertise representing all types of transaction participants, combined with our experienced tax, banking, litigation and bankruptcy practice groups, makes us uniquely situated to perform successfully in this specialty area of public finance.

In a troubled or defaulted debt workout it is critical to understand the client’s priorities and the regulations governing the particular client’s form of business entity. New banking regulations are changing the implications and costs to banks and other financial institutions of owning troubled or defaulted debt, or even the performing debt of a troubled or otherwise bankrupt issuer. Issuers and bondholders or lenders may have claims to be litigated against financial advisors, guarantors or developers. Bonds or debt secured by specific revenue streams may have limited remedies that are not well understood by those involved. Tax implications of taking losses or of preserving the tax exemption of interest income must be recognized and understood and, for some clients, can become the driving forces in any workout. In all of these circumstances, Kutak Rock has the expertise to be of help in finding a resolution among parties or of litigating on behalf of a client where a common resolution cannot be found.

Our firm’s particular expertise in the 103 tax area (tax-exempt governmental bonds), and the relationship of many of our attorneys with the IRS, have been particularly helpful to issuers of troubled debt securities that may be identified for audit or in analyzing the implications of reissuance that can be caused by the extension of bond maturity and other factors.