Bankruptcy expert David Skeel makes the case that federal bankruptcy has precedent over state law. Skeel isn’t suggesting a federal bailout, but isn’t that the next step? If pension debt by irresponsible states becomes every state’s problem, then why wouldn’t a fiscally responsible state want to succeed from the union? The unintended consequences of federal bankruptcy law may be that we’re all in this together whether we like it or not. Stay tuned.
A very similar argument, along with a related argument about state sovereignty, led the Supreme Court to strike down the first municipal bankruptcy law passed by Congress in 1936. But two years later, in United States v. Bekins, the court reversed course, concluding that a slightly amended bankruptcy law didn’t violate the Contracts Clause or interfere with state sovereignty.
Detroit’s pensioners, in short, would ultimately prevail only if they could persuade the Supreme Court to overturn Bekins—which would in effect invalidate federal municipal bankruptcy law altogether, since the same logic would apply not just to pensions but to any obligation protected under state law.
It is unlikely the Supreme Court would take this step. The court has interpreted Congress’s bankruptcy powers (which also are spelled out in the Constitution) very broadly. And the power to facilitate the adjustment of debt lies at the heart of bankruptcy.