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* Harrisburg attorney defends bankruptcy filing
* Legal fight could involve county, bondholders
* Other cities, counties have had filings dismissed
By David Gaffen
NEW YORK, Oct 13 (Reuters) - The lawyer for Harrisburg, Pennsylvania rejected allegations on Thursday that its bankruptcy filing was illegal in the face of threatened legal and legislative challenges.
One day after Pennsylvania's state capital filed for bankruptcy, Mark Schwartz, attorney for the city council, told Reuters Insider the Chapter 9 filing was "absolutely" legal.
That followed comments by the mayor and county that the council did not have the authority to take such a step.
Harrisburg is one of a handful of municipalities that has flirted with bankruptcy in the wake of the Great Recession that devastated budgets in state and local communities. Some say it could become a touchstone for whether other cities will follow this path to extract concessions from creditors and others.
"We're trying to advocate to use the leverage of bankruptcy," said Dan Miller, Harrisburg City Controller.
But legal experts say this is a complicated process as states in recent years have erected higher walls for local governments to overcome if they seek bankruptcy. One in four Chapter 9 municipal bankruptcies are dismissed, according to a legal expert.
Several entities, including the county, state, and bondholders, are expected to contest the filing.
Thursday, Charles Zwally, special council for Dauphin County, where Harrisburg is located, said the county is weighing its options.
"We're reviewing it now and we're advising the county...We don't believe that they are authorized to file," he said.
The Pennsylvania capital's crisis has been a year in the making. The city of about 50,000 is hampered by $300 million in debt incurred from an expensive revamp of its incinerator and is struggling to fund key city services.
Less than half of U.S. states authorize a city or county to undertake such a move, and states have been making it harder to file.
A law passed in Pennsylvania earlier in the year prohibits the city from filing for bankruptcy until 2012.
Glen Grell, a Republican member of the state's house of representatives for the 87th district said the "bankruptcy petition that was filed is not authorized by state law as it's required to be."
"It's horrible for any municipality, especially the state capital of Pennsylvania, to attempt to walk away from its creditors," he said. The state Senate is expected to vote next week on a bill that calls for an eventual takeover of Harrisburg.
Schwartz called the legislation's language "deplorable, incomprehensible and illegal."
Juliet Moringiello, a professor at Widner School of Law in Harrisburg, said the state's authority is in question. The state's law says municipalities can file for bankruptcy, but it changed its law to stipulate that third-class cities -- of which Harrisburg is one -- cannot file for a year.
"The problem is that the law was aimed at Harrisburg. The question the city lawyer is raising is, 'Was that constitutional?"
In 1991, Bridgeport, Connecticut filed but the case was dismissed as the city could not prove it was unable to pay its debts.
"One of the issues is, is the municipality insolvent? Do the assets exceed the liabilities? That's why Bridgeport failed," said Richard Zeisler of Zeisler & Zeisler PC of Bridgeport, who represented that city in its unsuccessful case.
Jim Spiotto, a municipal bankruptcy expert at the law firm of Chapman and Cutler, told Reuters Insider on Wednesday one in four bankruptcies wind up "having it being dismissed or closed without a plan." He said Harrisburg's bankruptcy "could" be dismissed.
Bond insurer Assured Guaranty and the mayor questioned the legality of the filing, which the Harrisburg City Council approved in a 4-3 vote late on Tuesday, but Schwartz rejected that assessment.
"The council basically utilized that remedy, which was bankruptcy, and filed for it," he said.
Thompson said Wednesday that the mayor and the city solicitor must sign off on all hiring of outside counsel and the city solicitor must approve all ordinances and resolutions considered by the council, which was not done in this case, she said.
The county is one of the most high-profile cities to use Chapter 9 of the U.S. bankruptcy code, most notably invoked nearly 20 years ago by Orange County, California.
There have been only 629 municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code since 1937, according to Spiotto.
Pennsylvania Governor Tom Corbett has said the city would be better off if it agreed to a rescue plan under the state's Act 47 program for distressed cities -- which has seen Philadelphia and other cities through crises. His office opposes the bankruptcy.
"If you go through the Act 47 plan or the receiver legislation we're going through right now, the assets are sold and Wall Street gets paid 100 cents on the dollar. And we'll be left with no sources of income," said city councilman Brad Koplinski.
"So we're going to have to tax our citizens. Those who can leave -- will leave. Those who can't leave because of economic situations are those who can least afford to pay it."
At the root of Harrisburg's troubles is a financing scheme used to fund a state-of-the-art revamp of its trash-burning plant that left the city deeply in debt.
The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt. The state wants Harrisburg to sell major assets, cut jobs and renegotiate labor deals.
"This mess has been around for a long time," said Joe Church, a resident of Susquehanna Township, a suburb of Harrisburg. "The previous administration and the new administration are not fiscally capable."