## Facts

- On June 7, 1994, Orange County’s Board of Supervisors authorized the County to issue tax and revenue anticipation notes (TRANS).
- The authorizing resolution pledged certain tax and other revenues as security for the TRANS and required that pledged monies, when received, be deposited into a special fund.
- The resolution also provided that if the monthly set-aside deposits were insufficient, the County would cover the deficiency from other generally available funds.
- The County sold the TRANS to an underwriter on July 5, 1994.
- The County made the required set-aside deposits in September, October, and November 1994 and invested those deposited funds in Orange County Investment Pools (OCIP).
- On December 6, 1994, the County and OCIP filed Chapter 9 petitions after OCIP sustained substantial investment losses.
- On December 29, 1994, the County announced it would not make the remaining set-aside payments.
- The County asserted that any lien securing the TRANS was a consensual “security interest” and, under 11 U.S.C. § 552(a), did not extend to postpetition revenues.
- In January 1995, certain TRANS holders moved for relief from the 11 U.S.C. § 362 automatic stay so they could pursue a California state-court writ of mandate to compel continued set-aside payments.
- The holders argued there was “cause” to lift the stay because (i) § 904 limits bankruptcy-court control over municipal revenues and made state court their only effective forum, (ii) the lien survived bankruptcy, and (iii) they would be harmed if the County failed to fund the set-aside before the notes matured in July 1995.
- The County opposed stay relief but consented to the bankruptcy court’s jurisdiction to determine the parties’ rights and to provide adequate protection if warranted.
- The bankruptcy court issued a preliminary order continuing the stay and set the matter for a final hearing.

## Issues

1. Was the TRANS holders’ lien on pledged revenues a “security interest” created by agreement (subject to § 552(a)) or a statutory lien that could attach to postpetition revenues?
2. If the lien was a security interest, did Chapter 9’s “special revenues” provisions (including § 928 and § 902(2)) preserve the holders’ lien on postpetition revenues?
3. Did the holders show “cause” under § 362(d) to lift the automatic stay to pursue state-court mandamus compelling the County to continue making set-aside payments, given § 904 and Chapter 9’s structure?

## Decision

- The court held the holders’ lien was a consensual lien created by the County’s authorizing resolution and related transaction documents, and therefore was a “security interest,” not a statutory lien.
- Applying 11 U.S.C. § 552(a), the court held the holders’ prepetition security interest did not extend to the County’s postpetition revenues.
- The court rejected the argument that § 928 preserved the lien as a special-revenue lien, reasoning the TRANS were tax-anticipation obligations supported by a pledge of general revenues rather than revenue-bond debt payable from “special revenues” as used in Chapter 9.
- Because the holders lacked a surviving lien interest in postpetition revenues, they did not establish a basis for adequate protection tied to those revenues.
- The court denied relief from the automatic stay and continued the stay in effect, concluding the requested state-court mandamus action would be inconsistent with the Chapter 9 stay’s role in preventing creditor-by-creditor collection efforts during the case.

## Legal Principles

- A “security interest” is a lien created by agreement; a “statutory lien” arises solely by force of statute. A lien dependent on a municipal resolution and contractual issuance documents is generally treated as consensual.
- Under 11 U.S.C. § 552(a), a prepetition security interest does not attach to property (including revenues) acquired by the debtor after the bankruptcy filing, absent an applicable statutory exception.
- Chapter 9’s special-revenue provisions (including § 928) protect certain liens on “special revenues,” but they do not automatically extend to general obligation or tax-anticipation debt supported by broad pledges of general revenues.
- Relief from the automatic stay under § 362(d) requires a showing of “cause.” In Chapter 9, the stay serves to stop piecemeal enforcement actions that would interfere with an orderly municipal debt adjustment.
- Section 904 restricts bankruptcy-court interference with a municipality’s political or governmental powers and its property and revenues absent consent or specific statutory authorization, but a municipality may consent to the bankruptcy court’s jurisdiction to resolve creditor disputes and determine whether any protection is required.

## Conclusion

In In re County of Orange, the bankruptcy court treated the TRANS holders’ claimed lien on pledged revenues as a consensual security interest that § 552(a) cut off as to postpetition revenues, found the special-revenue protections of § 928 inapplicable to the County’s tax-anticipation notes, and therefore denied stay relief sought to pursue state-court mandamus to compel continued set-aside payments.


In re County of Orange, 179 B.R. 185 (1995)