Chapter 9 Plan Confirmation Standards and the Role of State Choices

Abstract

Because so few municipalities have ever filed for bankruptcy, none of the Chapter 9 confirmation standards have 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, it is undesirable from a public policy standpoint. States can choose whether to permit their municipalities to file for bankruptcy, and clear plan confirmation standards can inform a state in deciding whether or not to permit filing and in fashioning its own municipal financial distress resolution program.

This essay, prepared for a municipal bankruptcy symposium at Campbell Law School, explores the relationship between the unique structure and goals of Chapter 9 and its confirmation standards in the context of the confirmation battles taking place 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. The essay 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.

Keywords: bankruptcy, municipal bankruptcy, Chapter 9, pensions

JEL Classification: K00, K19, K39, G33