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Since the publication of our two-part municipal bankruptcy series (see NYLJ, March 4, 2010, and May 6, 2010), the strain of rising pension costs, declining tax revenues, and onerous debt obligations has become more acute for many struggling municipalities. Recent decisions regarding Bankruptcy Code section 904, which constrains a bankruptcy court’s oversight of a municipality’s assets and spending power, have affirmed the proposition that a municipal debtor has full discretion to modify its obligations without court approval. Most recently, the courts presiding over the Stockton and Jefferson County cases have clarified the scope of section 904 to afford a municipal debtor the unfettered right to pay creditors on account of their prepetition claims during the pendency of its chapter 9 case.

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