In Seven Counties Services, the Sixth Circuit addressed this issue in the context of a nonprofit mental health provider in Kentucky. Despite the public purpose of the nonprofit, the court found that it was not an instrumentality of the state.

Debtor’s Preference for Chapter 11 over Chapter 9
A gatekeeping issue for any potential debtor is eligibility to file bankruptcy. Section 109 of the Bankruptcy Code sets forth who may be a debtor. Under the Code, a “person” may file under chapter 11 if that person is eligible to file under chapter 7. A “person” is defined as an individual, a partnership or a corporation. With few exceptions, a person may not be a “governmental unit.” Thus, a governmental unit generally is not eligible to file under chapter 11. An example of a governmental unit is an instrumentality of a state or commonwealth. But beyond these statutory definitions, caselaw offers limited guidance on what the terms mean. In a widely cited opinion, Hon. Bruce A. Markell synthesized three factors to consider: (1) the power of the entity, (2) the purpose of the entity and (3) the treatment by the state of the entity.

If an entity is a governmental unit ineligible to file under chapter 11, it may instead file under chapter 9. Some examples of recent filings under chapter 9 include those of Jefferson County, Ala., and Detroit. A case under chapter 9 is much like one under chapter 11. For example, a debtor under chapter 9 may reject executory contracts and borrow money as an administrative expense. However, there are also significant differences — namely, that the court in a chapter 9 case may not interfere with the property or revenues of the debtor.

OVERVIEW OF BANKRUPTCY LAW
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) imposed the most significant changes to U.S. bankruptcy law in 35 years, affecting both consumer and business bankruptcies. Section 503(c) of the revised law imposed several restrictions on the use of retention plans for insiders in the context of a bankruptcy proceeding. If a company’s key employee retention plan (KERP) does not provide for incentive compensation (performance-based) and is solely based on the employee’s retention, it is subject to the restrictions under § 503(c)(1). This section prohibits retention payments to “insiders” (defined in more detail below) unless the following criteria are satisfied: