During February 2011 the prospect of creating a state-bankruptcy chapter burst into the national conversation. This debate largely centered on the necessity of state bankruptcy as a means of averting state bailouts, and leading commentators emphasized the need to tread gingerly on state prerogatives under the Tenth Amendment. The constitutionality of bankruptcy for states demands closer scrutiny, given that the Supreme Court’s recent Tenth Amendment jurisprudence has evolved toward protecting state sovereignty.
The principles handed down from a pair of cases in the 1930s involving the constitutionality of municipal bankruptcy would likely support upholding a state-bankruptcy chapter that is carefully drawn to respect state sovereignty. Though highly relevant, these cases are not dispositive, however, because the legal landscape has changed a great deal since the 1930s. Even a broad state-bankruptcy chapter would be constitutional, because recent Tenth Amendment jurisprudence does not preserve traditional state functions. The Court has already upheld many similar infringements on state sovereignty, such as the interference with state contractual obligations.
Assuming a state-bankruptcy chapter is constitutional, is it a good idea? The main justification expressed for the creation of a state bankruptcy chapter is that it is necessary to avoid a massive federal bailout, because states are too big to fail. This justification concludes that the grim logic of bailouts applies to the states because they are significantly interconnected with the financial markets.
Cite as 42 Golden Gate Univ. L. Rev. 217 (2012).
David E. Solan,
State Bankruptcy: Surviving A Tenth Amendment Challenge, 42 Golden Gate U. L. Rev.