This Article builds on the municipal bankruptcy literature by showing why the common analogy between corporate shareholders and city residents does not hold in the case of certain special purpose municipal entities. For example, some scholars argue that “local residents” are best situated to avoid municipal financial distress by preventing it ex ante through the political process or remedying it ex post by repaying creditors through increased taxes. But residents’ ability to avoid financial distress is limited when a special purpose municipal entity spans political boundaries or tax jurisdictions because it is not clear who counts as a “local resident” in such cases. These boundary-spanning entities include certain hospitals and institutions of higher education. Instead of residents, this Article concludes that either creditors or the state are better situated to address the financial distress of boundary-spanning special purpose municipal entities, such as public institutions of higher education. This Article also reviews every decision where eligibility for relief under chapter 9 of the Bankruptcy Code was contested and distills a set of definitions for “municipality” that can be used to determine whether an entity must seek relief under chapter 9 (or if chapter 11 is available). Then, this Article applies those definitions to public institutions of higher education and determines that they, unlike private institutions, are eligible for relief only under chapter 9 of the Bankruptcy Code. This is the same set of provisions under which Detroit, Michigan and Stockton, California sought relief. But because many states restrict access to chapter 9 entirely, access to the bankruptcy courts may be completely unavailable for public institutions of higher education in those states.
Matthew A. Bruckner,
Special Purpose Municipal Entities and Bankruptcy: The Case of Public Colleges,
Emory Bankr. Devs. J.
Available at: https://scholarlycommons.law.emory.edu/ebdj/vol36/iss2/1