Ordinance-Authorized Municipal Revenue Pledges Are Consensual (Not Statutory) Liens, and Pennsylvania Gaming “Operation Fees” Are Not “Special Excise Taxes” in Chapter 9

1. Introduction

In re: City of Chester, Pennsylvania (3d Cir. July 17, 2026) arises from the City of Chester’s 2022 Chapter 9 municipal bankruptcy after decades of fiscal distress. Prior to filing, Chester pledged multiple revenue streams to secure municipal bond financing and related obligations—most notably: (i) casino-related payments tied to Pennsylvania’s gaming statutes (slot-related distributions and table-game distributions), (ii) a separately negotiated contractual payment from the casino (“Additional City Consideration”), and (iii) host fees paid under a waste-incinerator “Host Community Agreement.”

The core dispute was whether creditors’ liens on those revenue streams survived the bankruptcy filing, and whether the indenture trustee was required to turn over “excess” funds held in a revenue fund. The principal parties were the City of Chester (debtor/appellee), PHCC LLC d/b/a Preston Hollow Community Capital; Preston Hollow Capital, LLC and U.S. Bank Trust Company, N.A. (bondholder and indenture trustee, appellants in No. 24-3144), and County of Delaware (appellant in No. 24-3145).

The Third Circuit largely affirmed the bankruptcy court, but remanded for closer contract-focused analysis on (a) whether certain post-petition receipts are “proceeds” preserved under 11 U.S.C. § 552(b)(1), and (b) whether “Pre-Petition Accruals” (amounts owed but unpaid as of the petition date) are prepetition property subject to liens.

2. Summary of the Opinion

  • No statutory liens: The court held that the creditors’ liens were not “statutory liens” because they did not arise “solely by force of a statute”; they depended on contracts—the Contribution Agreement (County) and the Trust Indenture (bond parties). Therefore, they are consensual/security interests potentially cut off by 11 U.S.C. § 552(a).
  • No “special revenues” tax treatment: The court held that the Slot Machine Revenues and Table Game Revenues arise from fees paid for gaming privileges, not from “taxes,” and therefore do not qualify as “special excise taxes” that would be protected as “special revenues” under Chapter 9.
  • Excess funds must be transferred: The court affirmed the order requiring U.S. Bank to transfer “excess” funds in the revenue fund to the City under the unambiguous terms of the Trust Indenture; the “account specified in writing” language was not a condition precedent.
  • Remand on proceeds and accruals: The court remanded because the bankruptcy court’s proceeds analysis did not fully consider the Trust Indenture’s broader “Granting Clause” language (assigning “right, title and interest”), and because the bankruptcy court had not addressed the Pre-Petition Accruals issue.

3. Analysis

3.1. Precedents Cited

A. Lien classification: statutory vs. consensual

  • Graffen v. City of Phila.: Cited for the Bankruptcy Code’s tripartite lien taxonomy (“judicial, statutory, and consensual”). This framing anchored the court’s threshold move: classification determines whether § 552(a)’s post-petition cutoff applies.
  • In re Schick and In re Lionel Corp.: Used to emphasize that a statutory lien “arises automatically and is not based on an agreement,” reinforcing the court’s insistence that contractual dependence defeats “solely by force of a statute.”
  • In re Rones: Supported the proposition that § 101(53)’s definition of “statutory lien” excludes consensual liens even if a statute is necessary to make the agreement “fully effective.” This was central to rejecting the creditors’ effort to characterize ordinance-enabled security interests as statutory liens.
  • In re Fin. Oversight & Mgmt. Bd. for P.R., 899 F.3d 1: Cited for the proposition that § 552(a)’s general cutoff applies to “lien[s] resulting from [a] security agreement” and not to statutory liens—clarifying why lien classification is dispositive for post-petition attachment.
  • Cloverleaf Trailer Sales Co. v. Pleasant Hills: Cited for the notion that a municipal ordinance can be treated as a “statute” under Pennsylvania law. The Third Circuit assumed without deciding the ordinance-as-statute premise because the liens still depended on contracts.

B. “Special revenues” and “tax vs. fee” characterization

  • In re United Healthcare Sys., Inc.: Provided the controlling Third Circuit methodology for identifying a “tax” in bankruptcy: state law helps “ascertain” attributes, but the ultimate characterization is a federal question resolved through a “functional examination.” The opinion also referenced, but declined to apply independently, the Lorber-Suburban factors.
  • City of New York v. Feiring: Cited for the federal-law primacy in tax characterization for bankruptcy purposes (state labels informative but not dispositive).
  • United States v. Reorganized CF & I Fabricators of Utah, Inc. and New Jersey v. Anderson: Cited for the classic definition of “tax” as a pecuniary burden imposed to support government.
  • F.C.C. v. Consumers' Research and Nat'l Cable Television Ass'n, Inc. v. United States: Cited for the fee/tax distinction: a “fee” is paid for a benefit not shared by the public generally. This supplied the functional test that matched the gaming “operation fee” structure.
  • Tex. Ent. Assoc., Inc. v. Hegar: Cited for the interpretive point that statutory text and labels are strong evidence of legislative intent (even if not dispositive), supporting the court’s reliance on Pennsylvania’s “fee” terminology.
  • In re Szczyporski and United States v. Sotelo: Used to explain how courts “look behind the label” while recognizing labels are not dispositive—here, labels aligned with function.
  • In re Lorber Indus. of Cal., Inc. and In re Suburban Motor Freight, Inc.: Referenced as sources of the “Lorber-Suburban” factors, acknowledged as helpful but not constraining under In re United Healthcare Sys., Inc.
  • Meriwether v. Garrett: Used to reject the claim that “Additional City Consideration” was a tax; it was “payment of money founded upon contract.”

C. “Proceeds” under § 552(b)(1): collateral, payment rights, and postpetition streams

  • In re Bumper Sales, Inc. and In re Lease-A-Fleet, Inc.: Cited for the premise that “applicable non-bankruptcy law” (here, the Pennsylvania UCC) supplies the definition and treatment of “proceeds” for § 552(b)(1).
  • In re EDG Holdings, Inc. and In re Gateway Access Sols., Inc.: Cited as authority recognizing that payment rights (contractual receivables) can constitute collateral distinct from the cash received, supporting a proceeds-preservation theory.
  • In re Froid and In re Las Vegas Monorail Co.: Cited as counter-authority warning that a lien on the revenue stream itself, without a separate collateral right, may not generate “proceeds” preserved postpetition.
  • Johnson v. Cottonport Bank and In re Cnty. of Orange: Cited to frame the fact-intensive distinction between (i) a prepetition “right to receive” payments (which may continue postpetition), and (ii) merely an interest in amounts “collected” (which may not).
  • Smoker v. Hill & Associates and In re Kizis: Served as the opinion’s key contrast pair on drafting: broad assignments of “right, title, and interest” in future commissions (Smoker) can preserve postpetition receipts as § 552(b) proceeds, while narrower descriptions that treat the commissions themselves as the collateral (Kizis) do not.
  • In re Fin. Oversight & Mgmt. Bd. for P.R., 385 F.Supp.3d 138: Cited for the possibility that even if a right-to-payment collateral exists, purported “proceeds” may still fail if the receivable did not exist (was indeterminate) on the petition date because it required postpetition computations and facts.

D. Contract interpretation: mandatory transfer of excess funds; conditions precedent

  • Atkinson v. LaFayette Coll.: Cited for the basic Pennsylvania contract rule: unambiguous language controls.
  • Mellon Bank, N.A. v. Aetna Bus. Credit, Inc.: Cited for Pennsylvania’s rule that conditions precedent must be expressed with clear language; otherwise the term is construed as a promise/covenant.

3.2. Legal Reasoning

A. Why the ordinances did not create “statutory liens”

The creditors’ primary strategy was to avoid § 552(a)’s postpetition cutoff by recharacterizing their liens as “statutory liens” (which are not “resulting from [a] security agreement”). The Third Circuit rejected that attempt by applying the “solely by force of a statute” requirement in 11 U.S.C. § 101(53).

Although the 2009 and 2017 Ordinances used lien-creating language and authorized pledges, the court treated them as incomplete without the later executed contracts: the 2009 Ordinance directed execution of, and performance “in accordance with,” the Contribution Agreement; the 2017 Ordinance required a Trust Indenture “under which the Bonds will be issued and secured,” and even allowed the indenture to remove revenue streams. Those features showed the lien’s “efficacy” depended on the agreements, making the liens consensual security interests, not statutory liens.

B. Why the gaming-related revenues were “fees” rather than “taxes” (and thus not “special excise taxes”)

To qualify as protected “special revenues” in Chapter 9, the creditors needed the Slot Machine Revenues and Table Game Revenues to arise from “special excise taxes.” Using In re United Healthcare Sys., Inc.’s functional approach, the court concluded the relevant payments were not taxes at all.

The statutory structure mattered: Pennsylvania separately imposes “slot machine tax” and “table game tax” provisions, while the Chester distributions were keyed to a “slot machine license operation fee” and a “local share assessment” paid for the privilege of operating table games. Functionally, the payments were exchanged for a benefit “not shared by other members of society” (casino gaming privileges), matching the Supreme Court’s fee definition in F.C.C. v. Consumers' Research. Without a “tax,” the court did not need to decide whether any “excise tax” was “special.”

C. Why the “proceeds” issue required remand

The Third Circuit agreed with the bankruptcy court’s general framing: § 552(b)(1) preserves liens on “proceeds” of prepetition collateral only if (i) the security agreement reaches proceeds and (ii) applicable nonbankruptcy law recognizes them as proceeds. But it held the bankruptcy court’s analysis was incomplete because it focused on language granting an interest in revenues “to be received” and did not squarely analyze the Trust Indenture’s broader “Granting Clause,” which assigned “all of the right, title and interest” in the pledged revenues.

The court emphasized the question is drafting- and transaction-specific: did the agreement convey merely the revenue stream (postpetition property, generally cut off), or did it convey a prepetition intangible “right to payment” that can generate postpetition “proceeds”? The opinion’s comparison of Smoker v. Hill & Associates (broad assignment) to In re Kizis (narrow collateral description) shows the Third Circuit is treating proceeds disputes as hinging on the precise collateral description and whether it creates a distinct prepetition “payment right.”

The court also flagged a second, independent obstacle the bankruptcy court could address on remand: even if a right-to-payment collateral exists, the supposed proceeds may have been too indeterminate on the petition date (depending on postpetition volume of waste processed or casino activity), invoking reasoning like In re Fin. Oversight & Mgmt. Bd. for P.R., 385 F.Supp.3d 138.

D. Why U.S. Bank had to transfer the “Disputed Excess Funds”

The Trust Indenture required that once the required amounts for the next debt service payment were on deposit, “any” excess pledged revenues “shall” be transferred to the City. Applying Atkinson v. LaFayette Coll., the court treated “shall be transferred” as mandatory and unambiguous. It also rejected the argument that the City’s failure to specify an account in writing barred transfer; under Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., the “account specified in writing” phrase was not drafted as a clear condition precedent.

3.3. Impact

  • Municipal finance documentation discipline: The decision underscores that “ordinance pledge” rhetoric will not, by itself, convert a bond lien into a bankruptcy-robust statutory lien if the lien depends on an indenture or contribution contract. Creditors seeking Chapter 9 resilience must confront § 101(53)’s “solely by force of a statute” boundary and structure transactions accordingly.
  • Narrower Chapter 9 “special revenues” arguments for gaming distributions: By holding that Chester’s gaming-related inflows were “fees” for privileges, the opinion limits attempts to treat similar gaming distributions as “special excise taxes” under §§ 902 and 928. Municipalities and creditors in jurisdictions with gaming revenue sharing should expect closer “fee vs. tax” scrutiny rather than reliance on revenue labels like “assessment.”
  • Proceeds litigation likely to increase and become more textual: The remand signals that postpetition survival may turn on whether collateral is drafted as a prepetition “right to payment” (an intangible) versus mere future receipts. Expect heightened attention to granting clauses (“right, title and interest”), UCC collateral categories (e.g., “payment intangible”), and the extent to which postpetition facts are necessary to “create” the receivable.
  • Indenture trustees’ operational practices: The affirmation on excess-fund turnover constrains trustee practices that rely on “direction letters” when the indenture uses mandatory transfer language. Trustees may need to implement default transfer mechanics consistent with the document, rather than treating administrative directions as gating conditions.

4. Complex Concepts Simplified

Chapter 9
A bankruptcy chapter for municipalities (cities, counties, certain public entities), with special rules reflecting state sovereignty and the need to maintain public services.
Statutory lien vs. consensual (security interest)
A statutory lien arises automatically because a law says it does (no contract needed). A consensual lien (security interest) arises because the debtor agreed by contract to give collateral. This matters because 11 U.S.C. § 552(a) generally stops prepetition security agreements from attaching to property acquired after the bankruptcy filing.
11 U.S.C. § 552(a) and § 552(b)(1) (“proceeds” exception)
Section 552(a) is the cutoff rule: postpetition property is usually not encumbered by prepetition security agreements. Section 552(b)(1) is an exception: if the creditor had a lien on prepetition collateral, that lien can continue in certain “proceeds” of that collateral, as recognized by nonbankruptcy law (often the UCC).
“Special revenues” in Chapter 9
Chapter 9 contains protections for certain revenue-backed financings, but the creditor must show the pledged revenues fit statutory categories (e.g., certain taxes or system revenues). Here, the creditors argued Chester’s gaming distributions were “special excise taxes”; the court held they were fees, so the argument failed at step one.
Tax vs. fee
A tax generally supports government broadly and is imposed as a burden. A fee is paid in exchange for a particularized benefit or privilege (like operating slot machines) not shared by the public at large. The court treated the gaming payments as the latter.

5. Conclusion

In re: City of Chester, Pennsylvania sets a clear Third Circuit marker in municipal bankruptcy and public finance disputes: (1) ordinance-authorized pledges do not become “statutory liens” when their effectiveness depends on indentures or contribution agreements; (2) Pennsylvania gaming “operation” payments and local-share assessments to Chester function as privilege-based fees, not “special excise taxes,” and thus do not survive as protected “special revenues” on that theory; and (3) indenture language requiring transfer of excess funds will be enforced as written absent clear conditional drafting.

At the same time, the remand highlights an important frontier: whether careful collateral drafting can preserve postpetition value as “proceeds” under § 552(b)(1), and how courts will treat “accrued but unpaid” amounts at the petition date in Chapter 9.