Jurisdictional Issues / Chapter 9 Bankruptcy -

     Under the Supremacy Clause of the U.S. Constitution, in general terms, if there is a conflict between state and federal law, federal law prevails. However, the federal bankruptcy court's power is limited by the 10th Amendment to the U.S. Constitution, which prohibits the federal government from interfering with the sovereign powers of the states. This means that in Chapter 9 cases, the federal bankruptcy court is substantially less involved than in other chapters under the Bankruptcy Code. This is to ensure that Chapter 9 continues to be constitutional, and that the federal court does not overreach and try to usurp the power of the States in matters of politics and government.

Limited Power of the Federal Court

     This limited power of the federal court is codified in Bankruptcy Code Section 903, which provides: "[C]hapter 9 does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of the municipality, including expenditures for such exercise", with two exceptions: a state law setting forth a method of composition of municipal debt does not bind any non-consenting creditor; and any judgment entered under such state law does not bind a non-consenting creditor.

Bankruptcy Code Section 904

     Also, Bankruptcy Code Section 904 goes on to further limit the federal bankruptcy court's powers. It provides that the court may not: "interfere with (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property", unless the plan provides otherwise or the municipality consents. The federal court in essence provides the forum for the debt adjustment plan, and essentially adopts a "hands-off" approach insofar as the debtor's daily operations and business are concerned.

Written by Henry Rendler