Bankruptcy approved for Westfall in Pike County

Mar 10, 2010 — The Times-Tribune (Scranton, Pa.)

Steve McConnell

Mar. 10, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- A federal judge approved the first municipal bankruptcy filing in state history, reducing the burden of a $20 million lawsuit judgment looming over Westfall Twp., Pike County.

Last year the township, with a population of about 2,800, sought Chapter 9 protection in U.S. Bankruptcy Court for the Middle District of Pennsylvania, a rarely used section of federal bankruptcy law designed for municipalities.

The filing occurred after the township struggled for years with a $20 million award granted in 1999 to developers David H. Katz and Barbara D. Katz.

The award resulted from a lawsuit that had claimed township supervisors' illegally halted development of 1,500-unit residential project. Neither developer could be reached for comment.

Township officials and the developers agreed to a $6 million repayment compromise prior to the court's final approval of the bankruptcy package March 2. The parties agreed to $75,000 quarterly payments over 20 years.

The township also must construct a sewage pump station at one of the developer's commercial properties.

Funding the agreement will require a tax hike already approved by supervisors that will cost the owner of a median-priced home in the township $200 a year, township Supervisor Lester Buchanan said.

Mr. Buchanan said the township's other debt obligations will not be affected by the filing.

Supervisors said bankruptcy was their only viable option. "There's no way a township with a $1 million budget can pay a $20 million settlement. It was evident to the judge," Mr. Buchanan said.

The township is located in a predominantly rural eastern corner of Pike County. This year, the supervisors passed a $1.5 million budget. Mr. Buchanan said the bankruptcy petition brought developers to the bargaining table.

Now "The cloud … is gone," he said.

Attorneys with the Philadelphia law firm of Pepper Hamilton that represented the township said the bankruptcy filing is likely to set a precedent. Though such filings are complicated, Westfall's success could foster "similar actions from other municipalities" under the burden of heavy debt.

Anticipating that the U.S. Bankruptcy Court would approve the Chapter 9 petition, township supervisors raised property taxes in December to dedicate revenue toward the $6 million settlement -- the so-called "Katz Tax."

The average township resident will pay about $200 more in property taxes this year. The tax hike also required court approval since the township exceeded state millage limits. The rate is now set at 31.20 mills, up from 23.85 mills.

A mill is a $1 tax for every $1,000 in assessed property valuation.

Lawrence Young, a York bankruptcy attorney who represented the developers, said the $6 million compromise was necessary since the $20 million settlement would have placed "undue burden" on the municipality and its taxpayers.

"You can't force a municipality to pay what it doesn't have," Mr. Young said.

Without the agreement, Mr. Young said that the bankruptcy judge could have determined how much of the $20 million should have been paid to the developers.

The $6 million compromise, however, offered a "controllable result" for both parties, he said.

Mr. Buchanan said the actions that led to the lawsuit by developers occurred before any of the current supervisors were elected to the five-member board.

The bankruptcy was the best solution to a bad situation. "The tax bills have already gone out," Mr. Buchanan said. "Basically, we're back to normal."

Contact the writer: smcconnell@timesshamrock.com

Newstex ID: KRTB-0419-42740869