Bankrupting States: Newt Wants To Destroy Contract Law & The Rule of Law

01-11-2011 • NakedCapitalism.com/

First, the obstacle to states filing for bankruptcy is a Constitutional issue, namely sovereign immunity (which is conferred both by the Constitution itself and reinforced by the 11th Amendment). The reason is that bankruptcy court is a Federal court, so it cannot have jurisdiction over a state. So I don’t see how a mere bill changes this issue and the odds of getting a Constitutional amendment passed are just about zero. What am I missing here? Second, the Gingrich crowd is keen to restrict the judges from imposing new taxes in a bankruptcy. Isn’t this also a Constitutional issue and hence open to court challenge? Third, the proponents are stressing that the purpose of the bill is to allow states to repudiate union pension funds. There is no mention of, say, getting out of bad swap contacts or renegotiations other creditor interests. Yet the a bankruptcy process puts all creditors on hold as the judge sorts out who gets what based on the seniority of claims and the borrower ability to pay. If the bill is going to restrict judges in terms of options for dealing with the bankrupt estate, does that also mean that it will try to restrain judges from restructuring state obligations ex pensions? Then again, while it would be nice to think that the Constitutional issues make this all a lot of sound and fury signifying very little except to further intimidate unions, I wouldn’t place much faith in the Roberts court doing the right thing.