Restructuring

Contributed by Charles Persons
The United States Post Office has been in the news lately.  Facing losses of close to $16 billion in 2012 and $41 billion in the last five years, and proposing to end Saturday delivery as a way of cutting its expenses, the USPS has garnered headlines asking whether it might be “bankrupt.”  That started us thinking about whether the USPS could be a debtor under the Bankruptcy Code.  It may be an academic question because federal law limits how much the USPS can borrow, provides that all USPS debt is guaranteed by the U.S. Government, and requires the USPS to provide universal service, so restructuring its debts and operations in bankruptcy might never be possible without legislative changes.  But we thought it would be interesting to explore whether a hybrid organization like the USPS, with some attributes of a governmental agency and some of a private corporation, could be a debtor under the Bankruptcy Code.
Section 109 of the Bankruptcy Code lays out who can be a debtor.  At first glance, chapter 9 might seem an appropriate mechanism, but section 109(c) limits chapter 9 filings to “municipalities.” The term “municipality” means a “political subdivision or public agency or instrumentality of a State” – a definition that plainly does not include federal agencies or instrumentalities.  So with chapter 9 out of the question, the USPS would have to qualify for relief under chapters 7 or 11. 
Sections 109(b) and 109(d), which define who may be a debtor under chapter 7 and chapter 11, respectively, generally open the doors of the bankruptcy courts to a “person.” “Person,” as defined in section 101(41), includes the terms “individual, partnership, and corporation, but does not include a governmental unit . . . .”  Therefore, if the USPS is a “governmental unit” it can’t file for chapter 7 or 11 under existing law.
The exclusion of a governmental unit—defined in the Bankruptcy Code as a “department, agency, or instrumentality of the United States”— at first glance looks like a death knell for a USPS bankruptcy filing.  Review of the unique history of the USPS and several of its organizational features, however, reveals some reasons why the USPS might not be characterized as a department, agency, or instrumentality of the federal government.
From the birth of our nation, our postal service was run by the General Post Office, as established by George Washington when he signed the Postal Service Act into law in 1792.  In 1829, the General Post Office was renamed the Post Office Department, and became an official cabinet department whose budget and operations were subject to governmental approval.  It remained this way for more than 140 years until stringent, but ultimately ineffective, Congressional oversight, coupled with a devastating postal strike, led to passage of the Postal Reorganization Act in 1970. 
Prior to the Postal Reorganization Act, there is little doubt that the Post Office Department would have been a “governmental unit.”  But when the Postal Reorganization Act took effect on July 1, 1971, the Post Office Department was reborn as the United States Postal Service: “an independent establishment of the executive branch of the government of the United States. . . .”  This new independent status dramatically changed the organization and governance of the postal system.  No longer was the postal service under the full control of the executive branch of the federal government.  Instead, responsibility for governance of the USPS was vested in a Board of Governors (members of which are appointed by the President and confirmed by the Senate).  Among its many new powers, the USPS had the authority to issue debt to finance infrastructure and to bargain collectively with its unions.  It no longer enjoyed the benefits of sovereign immunity. It also began to set its own rates, subject to regulatory oversight by the Postal Regulatory Commission.  In other words, the new, independent USPS started to look much like, well, a private corporation—or at least very unlike a typical federal “department” or “agency.”  At the same time, however, Congress did not take away all governmental features.  For example, the USPS remains subject to the Freedom of Information Act and must make its records available to the public, as do most federal agencies.  It pays no federal taxes.  Its ability to borrow money is limited by statute — one factor contributing to the organization’s financial problems – and all USPS debt is guaranteed by the federal government. 
While no court has ever considered whether the USPS could file for bankruptcy, the U.S. Supreme Court has considered whether the USPS is a governmental unit for other purposes.  In a 2004 case, U.S. Postal Service v. Flamingo, the Supreme Court reviewed the unique status and history of the Postal Service to determine whether Congress intended it to be subject to the Sherman Antitrust Act.  Despite recognizing that the USPS had “a high degree of independence from other offices of the Government,” the Court concluded that it “remains part of the Government” and therefore was not subject to the antitrust laws.  This precedent, while not directly on point, would have to be distinguished to avoid the conclusion that the USPS is a governmental unit under the Bankruptcy Code and therefore not qualified to be a debtor. 
USPS debt is federally guaranteed, and much of it is in fact borrowed from the Federal Financing Bank.  Further, Congress has kept tight control over USPS’s funding of its pension obligations.  Any restructuring therefore will require difficult decisions of the political branches of government.  While it’s not clear that the organization could be a debtor under current law, as the General Motors and Chrysler cases showed, if the circumstances are dire enough, the bankruptcy process can produce successful outcomes even when the U.S. Government is a major creditor and the restructuring requires controversial political choices.  We will have to wait and see if the USPS ever tries to deliver a petition for relief under the Bankruptcy Code. . .just don’t look for it to come on a Saturday.