Governance Reform and the Judicial Role in Municipal Bankruptcy

90 Pages Posted: 29 Jul 2015 Last revised: 29 Mar 2016

See all articles by Clayton P. Gillette

Clayton P. Gillette

New York University School of Law

David A. Skeel

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)

Date Written: 2016

Abstract

Recent proceedings involving large municipalities such as Detroit, Stockton, and Vallejo illustrate both the utility and the limitations of using the Bankruptcy Code to adjust municipal debt. In this article, we contend that, to truly resolve the distress of a substantial city, municipal bankruptcy needs to do more than simply provide immediate debt relief. Debt adjustment alone does nothing to remedy the fragmented decision-making and incentives for expanding municipal budgets that underlie municipal distress. Unless bankruptcy also addresses governance dysfunction, the city may slide right back into financial crisis. Governance restructuring has long been an essential element of corporate bankruptcy. Given the monopoly position of local governments as providers of local public goods, governance reform is even more important in the municipal bankruptcy context.

Some might argue that reducing a city’s debt is the best bankruptcy courts can do, because a more comprehensive approach would, among other things, interfere with state sovereignty. In our view, these concerns do not withstand inspection. Based on a careful analysis of the historical origins of the current municipal bankruptcy provisions, as well as an assessment of recent Supreme Court jurisprudence, we argue that governance reform is permitted even under existing law. To be sure, the states themselves, rather than a bankruptcy court, ideally should be the ones to effect municipal governance reform. But political factors and the salience of the fiscal crisis make state intervention unlikely, thus underscoring the need for a more comprehensive approach to municipal bankruptcy.

Keywords: Chapter 9, section 904, Chapter 11, reorganization, municipal budget policy, judicial intervention in local governance, local government debt, separation of powers, federalism, state constitutions, National Federation of Independent Businesses v. Sebelius

JEL Classification: G33, H12, H74, H77, K39

Suggested Citation

Gillette, Clayton P. and Skeel, David A., Governance Reform and the Judicial Role in Municipal Bankruptcy (2016). Yale Law Journal, Vol. 125, Pg. 1150, 2016 ; U of Penn, Inst for Law & Econ Research Paper No. 15-28; NYU Law and Economics Research Paper No. 15-10; NYU School of Law, Public Law Research Paper No. 15-28. Available at SSRN: https://ssrn.com/abstract=2637445 or http://dx.doi.org/10.2139/ssrn.2637445

Clayton P. Gillette

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-998-6749 (Phone)
212-995-4692 (Fax)

David A. Skeel (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-573-9859 (Phone)
215-573-2025 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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