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Republicans back Bankruptcy Expansion

posted by Alan White

For states.  Republicans including Newt Gingrich and Texas Senator John Cornyn are advocating amendments to the Bankruptcy Code to permit states to file for relief from their debts.  Last week's New York Times front-page article gives added heft to this idea, as did Penn law prof David Skeel's article in the Weekly Standard.

Obviously, these Republicans' agenda is to shift credit crisis losses from state taxpayers to public sector union employees, consistent with their efforts to shift auto industry losses to workers in that industry.  Bankruptcy reform for homeowners is anathema, because it shifts losses from middle class people to banks and institutional investors.  It is unclear how bankruptcy for the states could be used to stiff union pension funds without also wreaking havoc with the bond market, and bond investors would normally be a favored Republican constituency.  For this reason, other conservatives are not so crazy about this idea.  Presumably, any legislative proposals for Chapter 9.5 would carefully craft priorities for favored constituencies.

Comments

Any thoughts on how to read 11 USC 943(b)(7)'s requirement that the plan be "in the interests of creditors"? Is that a best interest test, similar to 1129(a)(7)? If so, what on earth would that mean? How does one determine the liquidation value of California? Is there any going concern value in Illinois?

It wouldn't make much sense to read 1129(a)(7) back into Chapter 9, when Section 901(a) carefully incorporates most of 1129 except for subsection (a)(7) and some other obviously inapplicable subsections. I think this is a recognition that a hypothetical liquidation is not a concept easily applied to a government entity. So courts are left to determine something more akin to a Chapter 13 disposable income test, i.e. will there be a fair allocation of future tax revenues between past debts and future services.

As we're started to get more empirical data points on the losses bondholders will take on bankruptcies (looks like 40% on Vallejo, as read on http://lumesis.wordpress.com), I think that we will see more defaults on the municipalities. Right now states are saying no way, but the opportunity to cut almost half their debt through re-org might be tough to pass up if it becomes an option. But I can't imagine the option being allowed- the carnage in the market would be unprecedented

I wonder how strongly Republicans feel about the position. Would be fantastic if they were willing to make a trade that allows for some relief for student loans through bankruptcy. I'm sure that is not in the cards, however, despite NACBAs push. Many in our nation would rejoice if it were.

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