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On April 17, 2012, the Northern Mariana Islands Retirement Fund
(the "Fund") became the first United States public
pension fund to seek formal bankruptcy protection. The Fund, which
provides retirement benefits to government employees of the
Commonwealth of the Northern Mariana Islands (the
"Commonwealth") a U.S. territory, listed $256 million in
assets and $1 billion in liabilities and has alleged it will
exhaust its claims paying ability by as early as 2014.
Various parties including the Commonwealth itself and the United
States Trustee's Office (a division of the United States
Department of Justice responsible for overseeing the administration
of bankruptcy cases) have challenged the Fund's eligibility to
file a Chapter 11 bankruptcy.
The Fund concedes that Chapter 9 is unavailable (a Chapter 9
Debtor must be a "municipality", and because the
Commonwealth is not a state the Fund cannot be a municipality as
that term is defined in the Bankruptcy Code.) The Fund's
Chapter 11 eligibility is arguably a closer call. A debtor must be
a "person" to be eligible to file for Chapter 11
bankruptcy protection. "Person" is defined to include
individuals, partnerships, and corporations, but explicitly
excludes governmental units. The dispute is whether the Fund is a
"governmental unit."
The objecting parties argue that the Fund's structure and
statutory existence establish that it is a "governmental
unit" of the Commonwealth. They argue that providing
retirement security and other benefits to government employees is a
"traditional governmental function", that the governance
of the Fund is controlled by the Commonwealth both through the
passage of legislation and the appointment of the Board of
Trustees, and that the Commonwealth's statutory designation of
the Fund clearly confirms the "governmental unit"
classification: "The Northern Mariana Islands Retirement Fund
shall serve in a fiduciary capacity with respect to employer and
employee contributions and shall serve as a fiscal and
administrative agent of the government."
On May 18, 2012, the Fund responded to the motions to dismiss,
arguing that it is not a "governmental unit" and
therefore Chapter 11 is an available remedy. The Fund's
argument relies primarily on the recent decision in the Las Vegas
Monorail case, in which the court found that the Las Vegas Monorail
was an eligible debtor under Chapter 11 despite its ties to the
state. That decision introduced a three-part test to identify a
"governmental unit": (a) whether the entity has
traditional governmental powers and/or performs traditional
governmental functions; (b) the nature and extent of governmental
control over the operations of the entity; and (c) the
government's designation of the entity. Focusing on this test,
the Fund disputes that actively managing and investing employee and
employer contributions is a "traditional governmental
function" as such services are regularly performed by private
financial institutions. The Fund argues that "governmental
control" is determined by governmental involvement in the
daily affairs of the entity and that, in this case, the
Commonwealth only has the authority to regulate the Fund and that
regulation, even if "extensive and intrusive," does not
transform a heavily regulated entity into a governmental unit.
Finally, the Fund argues that the government's designation of
the Fund as a "public corporation and autonomous agency"
classifies it clearly as a regulated entity, not a governmental
unit.
The Fund also advances a secondary argument under the
"Alternate Relief Test." This policy-based analysis
favors Chapter 11 eligibility because no other remedy is available
to the Fund, other than "maintaining the status quo and
barreling headlong towards financial oblivion or
receivership."
Given the increasing number of such
"quasi-governmental" entities and the decreasing solvency
of pension funds, the case is being closely watched by the market.
The hearing on the motions to dismiss is on June 1, 2012. Expect a
blog update upon the court's ruling.
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