Ordinance-Authorized Municipal Revenue Pledges Are Consensual (Not Statutory) Liens; Pennsylvania Gaming “Local Share” Payments Are Fees (Not Special Excise Taxes) in Chapter 9

I. Introduction

Case: In re: City of Chester, Pennsylvania, Nos. 24-3144, 24-3145 (3d Cir. July 17, 2026).
Court: United States Court of Appeals for the Third Circuit.
Parties: Debtor/Appellee City of Chester; Appellants PHCC LLC d/b/a Preston Hollow Community Capital, Preston Hollow Capital, LLC (collectively “Preston Hollow”), U.S. Bank Trust Co., National Association (indenture trustee), and Delaware County.

Chester, a financially distressed Pennsylvania municipality, filed Chapter 9 in 2022 after decades of oversight and attempted redevelopment projects. Before the petition date, Chester pledged multiple revenue streams—most notably gaming-related distributions and a trash-incinerator host fee—to secure bond-related obligations reflected in a county “Contribution Agreement” (2009) and a trustee “Trust Indenture” (2017), both authorized by city ordinances.

The appeals presented three core legal questions:

  1. Statutory lien vs. consensual security interest: Were the creditors’ liens “statutory liens” arising solely from the ordinances, and thus not cut off by Bankruptcy Code § 552(a)?
  2. Special revenues (special excise taxes): Were the gaming-related revenue streams “special excise taxes” so that municipal-bond lien protections in Chapter 9 (11 U.S.C. §§ 902(2)(B), 928(a)) preserved the liens post-petition?
  3. Proceeds and timing: Even if § 552(a) generally cuts off post-petition property from prepetition security agreements, did § 552(b)(1) preserve liens in “proceeds” of prepetition collateral—and did contract language convey a prepetition “right to payment” capable of generating post-petition proceeds?

II. Summary of the Opinion

The Third Circuit largely affirmed the bankruptcy court but ordered a limited remand:

  • Affirmed (statutory liens): The liens were not statutory liens because they did not arise solely by force of an ordinance; their effectiveness depended on contractual instruments (the Contribution Agreement and Trust Indenture).
  • Affirmed (special revenues): The Slot Machine Revenues and Table Game Revenues were fees, not taxes, and therefore not “special excise taxes” qualifying as “special revenues” under Chapter 9.
  • Affirmed (excess funds transfer): The Trust Indenture unambiguously required transfer of “excess” pledged revenues from the trustee-controlled revenue fund to Chester once bond payment amounts were satisfied; no condition precedent required Chester to first provide account instructions.
  • Remanded (proceeds): The bankruptcy court analyzed “proceeds” using one clause (“to be received”) but did not address the Trust Indenture’s broader Granting Clause (“right, title and interest”), which could alter whether prepetition collateral existed (a “right to payment”) and thus whether post-petition receipts might be “proceeds” under § 552(b)(1).
  • Remanded (pre-petition accruals): The bankruptcy court had not decided whether amounts accrued by the petition date but not yet paid (the “Pre-Petition Accruals”) constituted prepetition property subject to liens.

III. Analysis

A. Precedents Cited

1. Lien classification: statutory vs. consensual

The court’s lien-classification analysis rests on the Bankruptcy Code’s tripartite taxonomy and Third Circuit precedent:

  • Graffen v. City of Phila., 984 F.2d 91 (3d Cir. 1992): provided the framework that bankruptcy law recognizes “judicial, statutory, and consensual” liens, and oriented the inquiry to whether the lien “results from” an agreement.
  • In re Schick, 418 F.3d 321 (3d Cir. 2005), and In re Lionel Corp., 29 F.3d 88 (2d Cir. 1994): reinforced that statutory liens arise automatically by operation of law and not from consent—highlighting the critical feature the creditors could not establish here.
  • In re Rones, 531 B.R. 526 (Bankr. D.N.J. 2015), rev'd in part on other grounds, 551 B.R. 162 (D.N.J. 2016): was used for the principle that the Code’s definition of statutory lien excludes consensual security interests even when a statute is necessary to make them fully effective.
  • In re Fin. Oversight & Mgmt. Bd. for P.R., 899 F.3d 1 (1st Cir. 2018): supplied a clean interpretive point about § 552(a)’s reach—its general cutoff applies to liens “resulting from” a security agreement, not statutory liens.
  • Cloverleaf Trailer Sales Co. v. Pleasant Hills, 76 A.2d 872 (Pa. 1950): cited for the proposition that municipal ordinances can be treated as “statutes” under Pennsylvania law, while the Third Circuit expressly avoided deciding whether that sufficed here because, regardless, the liens did not arise “solely” from the ordinances.

These authorities shaped the holding that the ordinances were at most authorizing instruments; the actual lien grant depended on contract terms (Contribution Agreement and Trust Indenture), pulling the liens into the consensual category governed by § 552(a).

2. “Special revenues” and the tax-versus-fee distinction

The special-revenues issue turned on whether the gaming distributions were “taxes” at all. The court used both state-law indicia and federal functional standards:

  • In re United Healthcare Sys., Inc., 396 F.3d 247 (3d Cir. 2005): supplied the methodological approach—look first to state law to “ascertain” attributes, but ultimately apply a federal functional characterization of “tax.”
  • City of New York v. Feiring, 313 U.S. 283 (1941): supported the proposition that federal law controls the bankruptcy classification of a tax, even if state law informs the inquiry.
  • United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213 (1996) (quoting New Jersey v. Anderson, 203 U.S. 483 (1906)): provided the classic definition of a tax as a pecuniary burden to support government.
  • F.C.C. v. Consumers' Research, 606 U.S. 656 (2025) (quoting Nat'l Cable Television Ass'n, Inc. v. United States, 415 U.S. 336 (1974)): supplied the fee definition used by the panel—payment for a benefit not shared by society generally.
  • Tex. Ent. Assoc., Inc. v. Hegar, 10 F.4th 495 (5th Cir. 2021): reinforced the interpretive weight (though not dispositiveness) of legislative labels (“fee” vs “tax”).
  • In re Szczyporski, 34 F.4th 179 (3d Cir. 2022), and United States v. Sotelo, 436 U.S. 268 (1978): supported looking beyond labels where necessary, while allowing labels to matter when consistent with function.
  • In re Lorber Indus. of Cal., Inc., 675 F.2d 1062 (9th Cir. 1982), and In re Suburban Motor Freight, Inc., 36 F.3d 484 (6th Cir. 1994): referenced as sources of the “Lorber-Suburban factors,” which the Third Circuit noted remain “helpful” but not controlling, consistent with United Healthcare.
  • Meriwether v. Garrett, 102 U.S. 472 (1880): used to reject the contention that the “Additional City Consideration” (a contractual payment) could be treated as a tax.

Guided by these precedents, the panel held the gaming-related amounts were fees tied to privileges (operating slot machines and table games), not taxes imposed broadly to support government—so they could not be “special excise taxes,” and the special-revenues lien-preservation arguments failed.

3. Proceeds under § 552(b)(1): right-to-payment collateral vs. mere revenues

The remand is anchored in a line of cases distinguishing between (i) a prepetition collateral assignment of a “right to payment” that can produce post-petition proceeds and (ii) an assignment that merely grabs post-petition revenues themselves:

  • In re Bumper Sales, Inc., 907 F.2d 1430 (4th Cir. 1990), and In re Lease-A-Fleet, Inc., 152 B.R. 431 (Bankr. E.D. Pa. 1993): supported the move to UCC “proceeds” definitions as “applicable nonbankruptcy law” for § 552(b)(1).
  • Smoker v. Hill & Associates, 204 B.R. 966 (N.D. Ind. 1997): exemplified broad collateral assignment (“all right, title, and interest” in commissions now due or later due) sufficient to treat postpetition commissions as within § 552(b)’s exception (as proceeds of the prepetition right).
  • In re Kizis, 238 B.R. 89 (Bankr. M.D. Pa. 1999): contrasted with Smoker; where the collateral was “commissions themselves” rather than the underlying contractual right, § 552(a) cut off the security interest postpetition.
  • In re EDG Holdings, Inc., 438 B.R. 154 (Bankr. S.D. Ill. 2010), and In re Gateway Access Sols., Inc., 368 B.R. 428 (Bankr. M.D. Pa. 2007): cited as examples treating payment rights as collateral.
  • In re Froid, 109 B.R. 481 (Bankr. M.D. Fla. 1989), and In re Las Vegas Monorail Co., 429 B.R. 317 (Bankr. D. Nev. 2010): cited as examples taking the narrower view—no distinct collateral exists if the pledge is only to revenues, not to the right from which revenues derive.
  • Johnson v. Cottonport Bank, 259 B.R. 125 (W.D. La. 2000), and In re Cnty. of Orange, 189 B.R. 499 (C.D. Cal. 1995): reinforced the fact-intensive nature of the inquiry—does the creditor have an interest in a prepetition right to collect/receive, or only in amounts collected/received?
  • In re Fin. Oversight & Mgmt. Bd. for P.R., 385 F.Supp.3d 138 (D.P.R. 2019): supplied a timing limitation relevant on remand—if postpetition computations based on postpetition facts are required, the “receivable” may not have existed as of the petition date.

These cases informed the Third Circuit’s directive: the bankruptcy court must analyze the specific contract language—especially the Trust Indenture’s Granting Clause conveying “all of the right, title and interest”—to decide whether a prepetition right-to-payment collateral existed and whether postpetition receipts can qualify as “proceeds” under § 552(b)(1).

4. Contract interpretation and “excess funds”

  • Atkinson v. LaFayette Coll., 460 F.3d 447 (3d Cir. 2006): supported enforcing unambiguous contract text as written; used to affirm that the Trust Indenture required transfer of excess funds to the City.
  • Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., 619 F.2d 1001 (3d Cir. 1980): applied to reject the argument that “account specified in writing” created a condition precedent; conditions precedent require clear language, otherwise construed as a covenant.

B. Legal Reasoning

1. Why the liens were not “statutory liens”

The court focused on the Bankruptcy Code’s definitional exclusion: a statutory lien must “aris[e] solely by force of a statute,” and it “does not include” a security interest “whether or not” it is dependent on statute to be effective. The creditors’ theory treated the 2009 and 2017 ordinances as self-executing lien creators. The Third Circuit rejected that framing because:

  • The ordinances expressly contemplated further contractual instruments (the Contribution Agreement and the Trust Indenture) to implement the transactions.
  • Those contracts contained operative lien-granting clauses themselves (Contribution Agreement § 4.01; Trust Indenture § 5.01 and the broader Granting Clause).
  • The 2017 ordinance’s amendment even allowed modification of pledged revenue streams through the Trust Indenture, underscoring that the parties’ agreement, not the ordinance alone, defined the collateral package.

This reasoning establishes a practical rule for municipal finance in bankruptcy: even if an ordinance uses “irrevocably pledge” language, a lien will likely be treated as consensual when the transaction’s security and collateral are operationally defined by an indenture or similar contract.

2. Why the gaming distributions were fees, not taxes (and thus not “special excise taxes”)

The creditors attempted to take advantage of Chapter 9’s special-revenue protections by recharacterizing Chester’s gaming-related streams as “special excise taxes.” The Third Circuit’s reasoning proceeded in two steps:

  1. State-law attributes: The relevant Pennsylvania statutes described the charges as a “slot machine license operation fee” and a “local share assessment,” while separately establishing distinct “tax” provisions for slot machines and table games. Labels were not dispositive, but were strongly consistent with fee treatment.
  2. Federal functional characterization: Applying the tax/fee definitions from United States v. Reorganized CF & I Fabricators of Utah, Inc. and F.C.C. v. Consumers' Research, the court held the payments were in exchange for a privilege limited to gaming licensees (a benefit “not shared by other members of society”), making them fees.

Once the streams were classified as fees rather than taxes, the panel did not need to decide whether they were “excise” or “special.” That narrowing move is important: litigants seeking § 928(a) protection must clear the threshold that the stream is tax-derived (or otherwise within § 902(2)’s categories) before debating “specialness.”

3. Why the “proceeds” question required remand

Section 552(a) generally cuts off a prepetition security interest from attaching to property the debtor acquires after the petition date. Section 552(b)(1) preserves attachment to postpetition “proceeds” of prepetition collateral where (i) the security agreement covers proceeds and (ii) applicable nonbankruptcy law recognizes them.

The bankruptcy court concluded there were no proceeds because there was no collateral distinct from the revenue streams—meaning nothing existed prepetition that could generate proceeds postpetition. The Third Circuit agreed that this may be correct for Delaware County’s Contribution Agreement, but emphasized a key textual difference:

  • Contribution Agreement: pledges a security interest “in and to” Slot Machine Revenues—language similar to In re Kizis, which tends to describe the revenues themselves as collateral.
  • Trust Indenture Granting Clause: assigns “all of the right, title and interest” in and to the Pledged Revenues—language similar to Smoker v. Hill & Associates, which can be read to convey an underlying payment right (an intangible) that exists prepetition and can throw off postpetition proceeds.

The remand thus reflects a contract-first approach: whether “proceeds” exist is not answered categorically by calling something a “revenue stream”; it depends on whether the debtor conveyed the underlying enforceable right to receive payment (prepetition collateral) as opposed to only the future payments themselves.

The panel also flagged a separate timing hurdle: even if a payment right was conveyed, the “proceeds” may still be unavailable if the amounts were indeterminate and depended on postpetition performance/measurements (e.g., tonnage of waste, volume of gaming activity), invoking the logic of In re Fin. Oversight & Mgmt. Bd. for P.R., 385 F.Supp.3d 138.

4. Why “excess funds” had to be transferred

On the Disputed Excess Funds, the decision was straightforward contract enforcement. Trust Indenture § 5.02(e) used mandatory language (“shall be transferred”) once deposits equaled the next due debt service, so the trustee’s past practice of seeking “direction letters” could not override unambiguous text. The attempt to convert “account specified in writing” into a condition precedent failed under Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., which requires clear conditional language.

C. Impact

1. Municipal finance structuring in the Third Circuit

The most consequential holding is the classification rule: pledges implemented through indentures, contribution agreements, or other security agreements are likely to be treated as consensual security interests—even when an ordinance uses “irrevocable pledge” language. For municipal issuers and bond counsel, this increases the importance of:

  • deciding whether to pursue lien structures that truly arise “solely” by statute (if available under state law), and
  • drafting security documents with clear intent regarding whether an underlying right-to-payment is being transferred (especially relevant to § 552(b)(1)).

2. Narrowing “special revenues” arguments based on gaming statutes

The fee-versus-tax holding makes it materially harder (at least on similar statutory language) to characterize gaming-related municipal distributions as “special excise taxes.” Creditors seeking Chapter 9 special-revenue protections should expect courts to scrutinize whether the stream is:

  • broad-based governmental support (tax), or
  • privilege-priced regulatory consideration (fee).

3. Litigation roadmap for § 552(b)(1) proceeds disputes

The remand signals that proceeds litigation will hinge on granular drafting:

  • “Right, title, and interest” language may support an argument that the collateral is a prepetition payment intangible.
  • “Revenues to be received” language may be read as merely describing future postpetition property, which § 552(a) cuts off.
  • Even with strong granting language, proceeds may fail if the receivable did not exist at filing due to postpetition computations or contingencies.

IV. Complex Concepts Simplified

  • Statutory lien vs. security interest: A statutory lien arises automatically because a law says it does, without needing a contract. A security interest arises because the debtor signed an agreement granting collateral.
  • Section 552(a) “cutoff”: In bankruptcy, a creditor with a prepetition security agreement usually cannot keep attaching its lien to property the debtor acquires after filing.
  • Section 552(b)(1) “proceeds” exception: If the debtor owned collateral before filing (for example, a prepetition right to receive payments) and that collateral generates proceeds after filing, the lien can continue in those proceeds—if the contract and UCC principles support it.
  • Special revenues (Chapter 9): Certain municipal revenue streams (including some tax-based streams) may remain pledged notwithstanding bankruptcy. But the stream must fit statutory categories; here, “fees for gaming privileges” did not qualify as taxes.
  • Condition precedent: A contractual “if and only if” trigger. Courts require clear language before treating a clause as a condition that blocks performance.

V. Conclusion

The Third Circuit’s decision delivers three key lessons. First, an ordinance-authorized pledge does not become a “statutory lien” when its operative force depends on an indenture or contribution agreement; such liens are consensual and subject to § 552(a)’s postpetition cutoff. Second, Pennsylvania gaming-related municipal distributions at issue were fees, not taxes, foreclosing “special excise tax” and “special revenues” protection on that theory. Third, whether postpetition receipts qualify as § 552(b)(1) “proceeds” is a drafting- and fact-intensive inquiry centered on whether the debtor conveyed a prepetition “right to payment”—a question the court sent back for closer analysis, alongside the unresolved treatment of the Pre-Petition Accruals.