Beyond the Great Divide: Federalism Concerns in Municipal Insolvency

71 Pages Posted: 5 Mar 2016 Last revised: 15 Sep 2016

See all articles by Andrew Dawson

Andrew Dawson

University of Miami - School of Law

Date Written: March 3, 2016

Abstract

A growing number of municipalities are experiencing extreme financial distress, a problem which states have sought to address either under state law or with the aid of federal bankruptcy relief. There is an unresolved tension in how these two options interact. If a state chooses the bankruptcy option, do state laws nonetheless operate to protect the interests of certain classes of creditors? If a state does not use bankruptcy, might bankruptcy law nonetheless limit the state’s ability to adjust the municipality’s debts?

These questions raise important federalism concerns that have frequently been analyzed under what this article calls the Great Divide Model of municipal bankruptcy federalism. This model formalistically allocates to Congress the exclusive power to adjust debts and to states the exclusive power to address local governance.

This article challenges this model as inconsistent with the practical realities of municipal financial distress and its resolutions. Debt and governance often go hand in hand, both in causing and resolving financial distress. The federalism questions in municipal insolvency are better framed within a functionalist model of municipal bankruptcy, which involves analyzing the limits of the bankruptcy power in this realm and the state interests in local governance.

Keywords: municipal bankruptcy, insolvency, federalism

Suggested Citation

Dawson, Andrew, Beyond the Great Divide: Federalism Concerns in Municipal Insolvency (March 3, 2016). Harvard Law & Policy Review, Forthcoming, University of Miami Legal Studies Research Paper No. 16-15, Available at SSRN: https://ssrn.com/abstract=2741804 or http://dx.doi.org/10.2139/ssrn.2741804

Andrew Dawson (Contact Author)

University of Miami - School of Law ( email )

P.O. Box 248087
Coral Gables, FL 33146
United States

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