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Case: City of Chester, Pennsylvania (Nos. 24-3144 & 24-3145, Third Circuit); Bankruptcy Case No. 2:22-bk-13032 (E.D. Pa.)
Case: City of Chester, Pennsylvania; Bankruptcy Case No. 2:22-bk-13032 (E.D. Pa.)
Decided: July 17, 2026

Overview

Municipal bankruptcies don't happen often, and when they do, the fight is rarely about whether a city can restructure its debt. It's about what the city gets to keep while it does. That question just got a significant answer.

On July 17, 2026, the U.S. Court of Appeals for the Third Circuit ruled that the bankrupt City of Chester, Pennsylvania can retain control of revenue streams tied to a local casino and a waste-to-energy plant, finding that creditor liens on those revenues did not survive the city's 2022 Chapter 9 filing. The decision affirms a 2023 bankruptcy court ruling and hands Chester continued access to funds it says are essential to exiting bankruptcy, while also sending part of the dispute back for further review.

For municipalities under financial strain, and for the bondholders, trustees, and counties who lend against their revenue, this ruling offers a rare and instructive look at how Chapter 9 actually treats secured debt.

The Underlying Dispute

Chester, the oldest city in Pennsylvania, filed for Chapter 9 protection in 2022 after years of structural budget deficits. On the same day, the city launched an adversary proceeding against several of its creditors, including Preston Hollow Community Capital, indenture trustee U.S. Bank, and Delaware County, alleging that these creditors were attempting to circumvent the bankruptcy process by claiming security interests in city revenues they were not actually entitled to.

The disputed money came from several sources: payments from Harrah's Philadelphia (a casino and racetrack located in Chester), payments from Covanta Delaware Valley LP (a waste-to-energy facility), and bond proceeds tied to Subaru Park, the soccer stadium Delaware County helped finance in 2009. Portions of these revenues had been pledged to back bonds issued by the city in 2017.

In 2023, the bankruptcy court sided with Chester, ruling that the creditors' liens did not survive the Chapter 9 filing and ordering U.S. Bank to turn over roughly $1.45 million in withheld funds. Pursuant to 28 U.S.C. § 158(d)(2), the creditors obtained direct certification to appeal the ruling directly to the Third Circuit, bypassing the District Court entirely. The court's willingness to grant direct appellate review underscores the significant public importance and high stakes of these Chapter 9 revenue-pledge questions for municipal finance.

What the Third Circuit Decided

The appellate panel, composed of Judges Patty Shwartz, Anthony J. Scirica, and Paul B. Matey, affirmed the core of the lower court's ruling on two key points:

1. The liens were not "statutory liens," and did not survive the bankruptcy filing. The creditors argued their liens arose automatically from two city ordinances authorizing the debt, and therefore counted as statutory liens, a category of lien that can survive a bankruptcy filing without further action. The Third Circuit disagreed, finding that the liens only took legal effect because of language in a separate contribution agreement and trust indenture, not the ordinances themselves. Because the liens depended on contract language rather than arising purely "by force of a statute," they didn't qualify for statutory-lien protection.

2. Casino revenue is a "fee," not a tax, and doesn't qualify as protected special revenue. The creditors also argued the gaming revenue pledged to their bonds counted as a "special excise tax," a category of revenue that can remain pledged to bondholders even in municipal bankruptcy. The court rejected this too, holding that fees tied to a specific licensed activity (operating slot machines and table games) function differently than a broadly imposed tax, and therefore don't carry the same protected status.

The practical result: Chester keeps the disputed revenue streams for now, a meaningful liquidity boost as the city works toward a confirmed plan of adjustment.

The Piece Still Unresolved

Notably, the Third Circuit didn't close the book entirely. It remanded a narrower question back to the bankruptcy court: whether the creditors might still hold valid security interests in certain proceeds of those revenue streams, separate from the underlying revenue itself, based on language the lower court may have overlooked in the city's prepetition contracts. The panel directed the bankruptcy court to closely examine the underlying contracts to determine whether they actually conveyed a right to be paid, or only conveyed the revenue stream in the abstract.

That distinction is not a technical one, but rather a substantive issue directly related to how to properly collateralize certain types of financial assets, and it is likely to matter well beyond Chester. It will directly shape how municipal bonds and revenue-pledge agreements are drafted going forward, and how carefully secured creditors need to define exactly what they are securing.

QPWB Perspective

"This case is a useful reminder that in bankruptcy, the words on the page matter enormously," said Rafael Zahralddin, Managing Partner of QPWB's Wilmington office and Leader of the firm's National Business Law and Commercial Litigation Practice Group. "The Third Circuit didn't say municipal creditors can never protect a revenue pledge, it said this particular pledge wasn't drafted in a way that survived the filing. For bondholders, trustees, and municipalities alike, that is the entire ballgame: whether your lien language does the legal work you think it does, well before a filing ever happens."

Zahralddin, who has written and spoken extensively on all areas of complex bankruptcy and insolvency issues for the American Bar Association, Turnaround Management Association, and American Bankruptcy Institute, added that the remanded proceeds question deserves close attention from practitioners advising on municipal finance deals. "The distinction between pledging a revenue stream and pledging the right to be paid from it isn't just semantics, it can determine whether a creditor walks away from a municipal bankruptcy with anything at all. Anyone structuring these deals going forward should be reading this opinion line by line."

Why This Matters Beyond Chester

Chapter 9 filings are rare compared to Chapter 11 or Chapter 15, which makes every appellate ruling in this space disproportionately influential.

"Creditors in the municipal bond space need to stay vigilant, this ruling shows that the courts will hold lien language to its precise terms, not its intent," said Mr. Zahralddin. "Chester is a clear signal to revisit existing agreements now, rather than finding out the hard way during the next distressed filing."

For QPWB clients involved in public finance, municipal lending, or creditors' rights, this decision raises practical questions worth revisiting now, before the next deal is on the table:

• Are your liens truly self-executing? If enforceability ultimately depends on a private contract layered on top of an authorizing ordinance, don't assume it will be treated as automatically surviving a Chapter 9 filing.
  
• Have you confirmed whether your pledged revenue legally qualifies as a 'tax' or a 'fee'? Not all pledged government-adjacent revenue is protected the same way. That distinction, easy to overlook during deal structuring, can determine whether pledged revenue is shielded from a municipal bankruptcy at all.
  
• Does your agreement pledge the revenue itself, the right to be paid from it, or both? Precise drafting is now a front-line defense. Chester's remand shows courts will now scrutinize this distinction closely, and ambiguity cuts against the creditor.
  
• What's your exposure if a municipal borrower files tomorrow? The case isn't fully resolved. The remanded proceeds question means Chester's own creditors still don't have full certainty, a reminder that even "resolved" Chapter 9 disputes can stay unsettled for years. The bankruptcy court's next ruling on the proceeds question will be worth watching closely.

Key Takeaways

• The Third Circuit affirmed that Chester's creditor liens on casino, waste-to-energy, and related revenues did not survive the city's Chapter 9 filing, since the liens depended on contract language rather than qualifying as pure statutory liens.
• Casino gaming revenue was classified as a fee rather than a special excise tax, stripping it of protections that might otherwise have let the liens survive bankruptcy.
• A narrower question, whether creditors hold valid interests in the proceeds of these revenue streams, was sent back to the bankruptcy court for further review.
• The ruling offers a timely lesson for anyone structuring or holding municipal revenue bonds: the precision of your lien language may ultimately decide what survives a bankruptcy filing.

About the Author

Rafael X. Zahralddin is a Partner and Chair of the national Business Law & Commercial Litigation practice at Quintairos, Prieto, Wood & Boyer, P.A., based in the firm's Wilmington, Delaware office. With over 30 years of experience, he oversees the group's Business & Bankruptcy matters, advising a global clientele on complex corporate and commercial litigation, bankruptcy, creditors' rights and workouts, and mergers & acquisitions.

If you have questions regarding this decision or would like to discuss how developments in municipal bankruptcy and creditors' rights may impact your business, bonds, or claims, Rafael can be reached at rafael.zahralddin@qpwblaw.com.

This article is intended for informational purposes only and does not constitute legal advice. Please consult with an attorney to discuss your specific legal situation.