Chester Agrees to Withdraw Chapter 9 Plan in Response to CWA Call for Carve-Out, Opposes Other CWA Requests Including Lift-Stay Motion

Relevant Documents:
Chester Objection and Response
Chester Objection to Lift-Stay Motion

In two March 16 filings in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, the city of Chester, Pa., agreed to withdraw its proposed chapter 9 plan of adjustment but seeks to preserve water asset monetization options as it pursues new litigation relating to the Chester Water Authority, or CWA.

One filing is an objection and response to the CWA’s motion to strike CWA-related provisions from the city’s chapter 9 plan, vacate multiple bankruptcy court orders, be released from mandatory mediation and compel the return of documents produced in discovery.

The second filing is an objection to the CWA’s motion seeking relief from the automatic stay to resume state court litigation aimed at placing the CWA’s assets into a 40-year trust.

Both filings reference Chester receiver Vijay Kapoor’s March 13 filing in Pennsylvania Commonwealth Court of a petition seeking to nullify Act 73-2012, the state legislation that stripped Chester of exclusive control over CWA’s board of directors. The receiver’s state court action seeks to have Act 73 declared null and void under Article III, Section 32 of the Pennsylvania Constitution, which prohibits the general assembly from passing special legislation that targets a single entity. If successful, the action would restore Chester’s exclusive right to appoint all board members of the CWA.

The petition followed the Pennsylvania Supreme Court’s ruling in January that the city lacks unilateral power to acquire the CWA’s assets, a decision that has cast substantial uncertainty over Chester’s path out of bankruptcy.

The March 16 filings in the bankruptcy court position chapter 9 plan withdrawal as a tactical reset as the city reserves the right to revive its suspended request for proposals, or RFP, process for the monetization of various water assets in which the city has asserted an interest.

Monetization of the assets of the CWA and the Stormwater Authority of Chester, or SAC, as well as the city’s asserted reversionary interest in the sewer assets currently held by the Delaware County Regional Water Quality Control Authority, or Delcora, was at the heart of the city’s proposed chapter 9 plan of adjustment filed in late August 2024. Chester suspended the RFP process seeking to monetize the assets following the Pennsylvania Supreme Court’s ruling regarding the CWA assets.

The city says in its March 16 filings that it “has not yet determined whether it will utilize” the RFP process for the non-CWA assets.

Chapter 9 Plan, Documents, Mediation

The March 16 filings say the city “will withdraw” the chapter 9 plan. However, to the extent the court takes any action on the relief requested in the CWA’s motion regarding the plan, Chester asks the court to “reject the premise that parties who claim not to be parties in interest have standing to blue pencil a chapter 9 plan, particularly in light of the City’s exclusive right to file and seek approval of a chapter 9 plan.”

Pushing back against the CWA’s request to strike CWA-related provisions from the chapter 9 plan, the city asserts that under the Bankruptcy Code, only the municipality can propose or modify a chapter 9 plan, and that the CWA’s attempt to have the court revise the plan at its behest constitutes “a flagrant violation of the City’s exclusive right to propose a plan.”

The city says it is willing to agree to the vacatur of the bankruptcy court’s orders requiring the CWA to produce documents to the city and allowing the city to share those documents with certain third parties. Chester and the CWA concur, however, that due to CWA’s appeals to the U.S. District Court for the Eastern District of Pennsylvania, the bankruptcy court lacks jurisdiction to vacate those orders.

The city agrees that the court’s orders regarding the CWA’s “effort to harass” participants in the now-paused RFP process should be vacated.

Chester defers to the bankruptcy court on whether the CWA should be removed from the mediation order. “However, once let out, CWA should be barred from seeking reentry into any mediation regarding its fate that might occur among other parties and the City in the future,” the filing says.

The city says it is willing to return the documents produced by the CWA without prejudice to the city’s right to seek the same documents at a later date. However, given CWA’s alleged “propensity toward vindictive and harassing behavior,” the city should not be required to disclose the identity of the parties who participated in the RFP process, according to the filing.

The Act 73 Challenge

The city characterizes Act 73 – which increased CWA’s board from five to nine members and divided appointment authority equally among Chester, Delaware County and Chester County – as targeted special legislation that 14 years after enactment continues to apply to “only one entity within the Commonwealth of Pennsylvania: CWA.”

The Pennsylvania Supreme Court ruled that the city cannot unilaterally dissolve CWA under the Pennsylvania Municipal Authorities Act, or MAA, as a result of Act 73. However, the ruling also rejected the CWA’s position that the CWA’s own board must approve its dissolution, holding that the city, Chester County and Delaware County together have dissolution authority without CWA’s consent.

The city’s March 16 filings note that the Pennsylvania Supreme Court’s statement – which the city says was made “in dicta” – that Chester holds no ownership interest in the CWA’s assets “does not address the City’s actual position” in the bankruptcy court, which is that its statutory MAA rights give rise to a contingent property interest protected by the automatic stay.

If the Act 73 litigation succeeds, Chester would regain exclusive board appointment power and exclusive dissolution authority, effectively rendering the Pennsylvania Supreme Court’s ruling moot and restoring the factual predicate for a revived monetization strategy. The filings signal that future negotiations over the CWA’s fate are likely to involve Chester County and Delaware County directly, rather than the CWA’s board, and the city asks the court to bar the CWA from participating in any future mediation among those parties if it is released from the existing mediation order.

Sanctions, Moody’s and the CWA’s Financial Position

The March 16 filings also address existing sanctions imposed on the CWA’s counsel, Clark Hill, by the bankruptcy court for what the city characterized as willful and bad-faith refusal to comply with a document production order. The city opposes vacating a premises access order – even though it says it has no current intent to access CWA property – asserting that the CWA’s request appears to be a “setup” to support Clark Hill’s argument before the district court that the access order’s vacatur should justify reversing the sanctions order.

The city challenges the narrative the CWA has presented to the court regarding Moody’s Investors Service’s June 2025 downgrade of the CWA’s credit rating. According to the filing, Moody’s rating action was driven by two factors: “the decline in debt service coverage and liquidity caused by a contraction in usage by a major wholesale customer” and uncertainty surrounding Chester’s attempt to monetize CWA’s assets.

The city argues that the CWA consistently ignores the first factor entirely. The city notes that in 2022, the CWA issued $42.8 million in short-term water revenue bonds at an interest rate of 3% when the federal discount rate was 0.5%, with a balloon payment of $40.1 million due Dec. 1, 2026. By the time CWA refinanced those bonds in 2025, the federal discount rate had risen to 4.5%, a ninefold increase, according to the city.

The city asserts that the CWA’s decision to rely on short-term financing, rather than the long-term debt “any responsible municipal water authority would have” issued, was the primary driver of its refinancing difficulties, and accuses CWA of not being “candid with this Court on multiple occasions” regarding its financial position.

Lift-Stay Objection

The Pennsylvania Supreme Court noted that while its decision “definitively resolve[d]” the city’s declaratory judgment action concerning the CWA assets, it did not answer all remaining issues regarding the underlying trust petition. The court remanded the remaining matters related to the trust petition to the Delaware County Court of Common Pleas for further proceedings.

The trust petition seeks authority to transfer the CWA’s assets into a formal trust “in furtherance of [the CWA’s] constitutional obligations under the Environmental Rights Amendment of the Pennsylvania Constitution … and the Pennsylvania Supreme Court’s mandate that such assets should be treated in accordance with private trust principals,” according to the CWA’s lift-stay motion.

Chester asserts that it retains a protectable property interest on two independent grounds. First, the Pennsylvania Supreme Court’s ruling explicitly held that the city, Delaware County and Chester County together “wield section 5622(a)’s conveyance power” under the MAA, a shared statutory right the city contends remains a contingent property interest shielded by section 362(a)(3) of the Bankruptcy Code.

Turning to the Act 73 challenge, the city reiterates that a successful challenge “will return to the City the unilateral power to dissolve CWA,” preserving a contingent interest warranting continued stay protection.

The city contends that the CWA’s effort to characterize the trust petition as a purely in rem proceeding against no party ignores that Chester was served, appeared and actively litigated in the underlying orphan’s court action and that a CWA victory there would collaterally estop the city from asserting its MAA rights. The city also contends that prepetition in rem jurisdiction should not override the automatic stay.

Chester asserts that the CWA “utterly failed to articulate cause” for stay relief, adding that the CWA’s motion revealed its true purpose: ensuring that the city cannot “attempt further legal challenges to the MAA.”

Chester says that if the stay were lifted and the trust approved, the result would be a “catastrophic evisceration of the city’s statutory rights” over an asset central to paying its creditors.