Article by:
Juliet M. Moringiello

37 Campbell L. Rev. 71 (2015)


ABSTRACT. Because so few municipalities have ever filed for bankruptcy, the Chapter 9 confirmation standards have not benefitted from extensive judicial scrutiny. The standards are particularly undeveloped as applied to cities and counties, whose debt structure and service obligations are more complicated and diverse than those of the special-purpose districts, whose cases generate the vast majority of Chapter 9 judicial opinions. The lack of clarity is not only bad for distressed cities and their creditors, but it is also undesirable from a public-policy standpoint. States can choose whether to permit their municipalities to file for bankruptcy. Clear plan confirmation standards can inform a state’s decision whether to permit filing and its fashioning of a municipal financial distress resolution program.

This Article explores the relationship between the unique structure and goals of Chapter 9 and its confirmation standards in the context of the plan confirmation issues that arose in Stockton and Detroit. Congress designed municipal bankruptcy law to assist states in resolving the financial distress of their municipalities. Although several courts have made clear that once a municipality files for bankruptcy, the Supremacy Clause renders ineffective state laws governing priorities, little attention has been paid to the amount of deference that a court should give to choices that a state makes during a municipality’s bankruptcy that affect the treatment of creditors. This Article proposes a clearer role for state choices in the bankruptcy process, but concedes that because states do not always participate in the financial rehabilitation of their cities, a clearer role for the state may not always be the answer to interpreting the Chapter 9 confirmation standards.

AUTHOR. Juliet M. Moringiello is a Professor of Law at Widener University School of Law.

Download the full article.