Not-So-Deep Pockets: Lawsuits Are Bankrupting Counties

It’s not uncommon for lawsuits to bankrupt local governments, according to a recent article in Governing – and there is little a county can do to protect itself, aside from maintain healthy reserve funds. While only 54 local governments have filed for bankruptcy since 1980, legal judgments played a factor in nearly 30 percent of those.

Governing reports on Nebraska’s rural Gage County, where a federal jury awarded $28.1 million in damages plus attorney’s fees last year to six people wrongfully convicted of rape and murder. With 22,000 residents and an insurance carrier which declines to cover the liability, there is little more Gage can do.

“No county could prepare for that,” Myron Dorn, chairman of the county Board of Supervisors, said in an interview.

Increasing taxes to cover the judgment would be difficult, because Nebraska’s property tax cap limits the county from raising taxes by more than about $3.7 million. Residents could theoretically vote to exceed the state-imposed limit, but that is unlikely.

The county has appealed the verdict and is awaiting a decision; in the meantime, officials have hired bankruptcy attorneys to explore their options in case they lose the appeal.

Boise County, Idaho filed for bankruptcy six years ago after receiving a judgment of $5.4 million for a Fair Housing Act violation. It managed to stay solvent after paying the judgment using bond proceeds and receiving state legislative approval to raise property taxes so it could repay the bond. Governing provides a number of other examples in its article here.

MACo engaged in a contentious battle last session to protect counties against a bill which would have increased counties’ exposure to litigation by making it easier for courts to award attorney’s fees to prevailing plaintiffs for Maryland constitutional law violations. HB 903 / SB 705 died in the Senate, but only after coming to the floor, getting recommitted to the Senate Judicial Proceedings Committee, and returning to the floor again. Read about it in MACo’s 2017 End of Session Wrap-Up: Government Liability & Courts.