## Facts

- California law permits certain local governmental entities to deposit excess public funds with the county treasury, where the county treasurer invests the funds in authorized securities.
- Orange County’s Treasurer, Robert L. Citron, commingled deposited public monies into related investment vehicles collectively referred to as the Orange County Investment Pools (OCIP).
- By December 1994, about 190 municipal entities had invested roughly $7.6 billion in OCIP.
- OCIP followed a leveraged investment approach that was highly sensitive to rising interest rates and lacked liquidity.
- After interest rates rose in 1994, OCIP sustained major losses and faced significant withdrawal demands from pool participants.
- On December 6, 1994, Orange County and OCIP filed separate Chapter 9 petitions.
- Several entities moved to dismiss OCIP’s Chapter 9 case, arguing OCIP failed Chapter 9 eligibility requirements, including municipal status, specific state authorization, insolvency, and prepetition negotiation requirements.

## Issues

1. Whether OCIP is a “municipality” (a political subdivision, public agency, or instrumentality of a state) eligible to be a Chapter 9 debtor under 11 U.S.C. §§ 101(40) and 109(c).
2. Whether OCIP was “specifically authorized” by California law to file Chapter 9, as required by 11 U.S.C. § 109(c)(2).
3. Whether OCIP was “insolvent” on the petition date under 11 U.S.C. § 101(32)(C) and § 109(c)(3).
4. Whether OCIP satisfied 11 U.S.C. § 109(c)(5) through prepetition creditor negotiations or by showing negotiations were impracticable.

## Decision

- The court denied the motions to dismiss.
- The court held OCIP qualified as a “municipality” because it functioned as a public instrumentality of Orange County formed and operated to invest public funds under statutory authority and county action.
- The court held the state-authorization requirement was satisfied where California law authorized the County to seek Chapter 9 relief and OCIP was an instrumentality operating within that authorized governmental framework.
- The court found OCIP met the municipal insolvency standard because it was generally unable to meet obligations as they became due in light of losses, illiquidity, and withdrawal demands.
- The court concluded § 109(c)(5) was met because negotiations with a large number of creditor-participants were impracticable under the rapidly developing liquidity crisis.

## Legal Principles

- A Chapter 9 “municipality” includes a public instrumentality used by a governmental body to carry out governmental functions; separate incorporation is not required.
- “Specific authorization” under § 109(c)(2) can be satisfied where state law authorizes the relevant political subdivision to file and the debtor is an instrumentality operating within that authorization, rather than requiring the instrumentality to be separately named.
- Municipal insolvency under § 101(32)(C) turns on general inability to pay debts as they become due, not solely on balance-sheet measures or disputed market valuations.
- Section 109(c)(5) is satisfied when prepetition negotiations are impracticable, including where creditors are numerous and circumstances demand immediate action.

## Conclusion

The bankruptcy court allowed OCIP’s Chapter 9 case to proceed, holding that the public investment pool was a county instrumentality specifically authorized under state law, insolvent under the municipal standard, and not required to complete prepetition negotiations where negotiations were impracticable.


In re Cnty. of Orange, 183 B.R. 594 (Bankr. C.D. Cal. 1995)