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Abstract

What happens when unresolvable public debt meets an unmovable political stalemate? Without Congressional action, some U.S. municipalities may find out. Currently, a financially insolvent municipality has only one option for bankruptcy protections: Chapter 9. Under federal law, this singular option is only available if the distressed municipality is “expressly” authorized to file a Chapter 9 bankruptcy petition by their respective state. This requirement is not purely the product of Congressional policymaking, but rather the result of the Supreme Court’s interpretation of the U.S. Constitution’s federalism restrictions. The many states have offered their authorizations in a myriad of ways, with differing standards and requirements depending on the geographic location of the distressed municipality. This status quo has alleviated federalism concerns regarding the issue of municipal bankruptcy, but it has also created a competing constitutional issue involving the uniformity requirement. This requirement stems from the Constitution’s Bankruptcy Clause, which requires that federal bankruptcy laws be uniform throughout the United States. Are the federal bankruptcy laws truly uniform if a municipality in one state is denied the same opportunity to seek bankruptcy protections as a municipality in another state? Allowing states the discretion to grant or prohibit their subdivisions from filing Chapter 9 protections inevitably reduces the uniformity of federal bankruptcy laws. Likewise, any federal law that reduces a state’s ability to control its own subdivisions implicates the Constitution’s federalism restrictions. The key to resolving this constitutional tension is to balance a state’s right to exert control over the financial dealings of its own political subdivisions, while ensuring that similarly situated municipal debtors will be treated equally under the law, regardless of their geographic location. This Note proposes a system where a subdivision will be considered implicitly authorized to petition for Chapter 9 bankruptcy if its respective state has granted it a certain degree of fiscal autonomy. Under this system a state can categorically eliminate a municipality’s ability to seek Chapter 9 protections only if it fails to grant the municipality the kind of self-determinative authority that would allow for insolvency without prior state approval in the first place. This Note refers to this system as the “Bridgeport” standard, based on a set of criteria used by a federal court during Bridgeport, Connecticut’s Chapter 9 bankruptcy proceeding in 1991.

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