In re County of Orange

On June 7, 1994, the board of supervisors (board) of Orange County (county) (debtor) authorized the county to issue tax-anticipation notes (TRANS). In connection with this issuance, the board pledged certain tax and other revenues as security. Additionally, the board provided that (1) all pledged monies would be set aside in a special fund when received and (2) if, during any month, the set-aside funds were insufficient to satisfy the TRANS, the county would make up the deficiency from other generally available funds. The county sold the TRANS to the underwriter on July 5. The county made its required set-aside payments in September, October, and November, which it invested in Orange County investment pools (OCIP). However, on December 6, the county and the OCIP filed Chapter 9 bankruptcy petitions due to substantial losses by the OCIP. On December 29, the county declared that it would not make any remaining set-aside payments. Per the county, it had no obligation to make future payments because under Bankruptcy Code (code) § 552(a), the lien created by the county’s contract with the underwriter did not survive the county’s postpetition revenues because the lien was a security interest. In January 1995, certain TRANS holders (holders) (creditors) moved to terminate the code § 362 automatic stay so that the holders could seek a state-court order compelling the county to make the set-aside payments. Per the holders, cause existed for the bankruptcy court to terminate the stay because (1) under code § 904, the holders’ only recourse was in state court; (2) terminating the stay would serve Congress’s goal of providing states with maximum flexibility in solving municipal-debt problems in Chapter 9 proceedings; and (3) the holders would be irreparably harmed by the county’s failure to make future set-aside payments because the county would not have enough money to pay them when the TRANS matured in July 1995 and the holders’ lien survived the bankruptcy. The county responded by consenting to the bankruptcy court’s jurisdiction to order adequate protection for the holders. The bankruptcy court issued a preliminary order continuing the stay and set the matter for a final hearing.