Feeling Insecure - A State View of Whether Investors in Municipal General Obligation Bonds Have a Mere Promise to Pay or a Binding Obligation

24 Pages Posted: 11 Apr 2015

See all articles by Randle B. Pollard

Randle B. Pollard

American University Washington College of Law

Date Written: February 10, 2015

Abstract

The City of Detroit's filing for municipal bankruptcy in July, 2013, has added to a continuing controversy of whether general obligation bondholders have a secured lien. The City of Detroit claimed its general obligation bondholders did not have a fully secured lien because the law of the state of Michigan did not create a statutory lien. Without the creation of a lien by state law, during the insolvency or bankruptcy of municipalities, general obligation bondholders will potentially have a mere promise to pay versus a binding obligation to pay, and therefore, will not have a secured lien. Treating otherwise secured general obligation bonds as unsecured will create more risk for investors and increase the cost of borrowing for cities. This article discusses the treatment of general obligation bonds in recent municipal bankruptcies; identifies the states that create a binding obligation to pay general obligation bondholders; describes problems of not treating general obligation bonds as secured; and proposes that states create clear laws that grant statutory liens for general obligation bondholders.

Keywords: municipal bonds, bankruptcy, general obligation, statutory lien

Suggested Citation

Pollard, Randle B., Feeling Insecure - A State View of Whether Investors in Municipal General Obligation Bonds Have a Mere Promise to Pay or a Binding Obligation (February 10, 2015). Widener Law Journal, Vol. 24, No. 19, 2015; Kelley School of Business Research Paper No. 15-39. Available at SSRN: https://ssrn.com/abstract=2592727

Randle B. Pollard (Contact Author)

American University Washington College of Law ( email )

Washington, DC
United States
317-698-2787 (Phone)
202-827-0046 (Fax)

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