Bankruptcy Law

When a municipality takes property, the former owners can allege a violation of the Takings Clause and try to recover just compensation. But what should happen when the municipality goes broke and enters municipal bankruptcy? Can the municipal bankruptcy code empower judges to release municipalities from their obligation to pay just compensation through a discharge? Or does the Takings Clause provide special constitutional protection to claims for just compensation from a municipality that immunizes the claims from discharge? This issue has played out in municipal bankruptcies in Detroit, Michigan; Stockton, California; and Puerto Rico—where courts are deeply divided on the right approach, resulting in a live circuit split. This Comment provides the first comprehensive analysis that shows takings claims are constitutionally dischargeable. As a threshold matter, the Comment shows that formalist considerations do not require immunizing takings claims from discharge. The Comment then shows that making takings claims dischargeable follows best from the original design of the Takings Clause given the host of procedural and political safeguards within municipal bankruptcy that would protect takings claimants against abuse. Lastly, the Comment shows that making takings claims dischargeable is normatively good.

Suppose you are a large investment fund that just loaned money to a company. Like many large lenders, you secured the loan with the company’s equipment as collateral. But unfortunately, the company missed an interest payment and defaulted under the terms of its notes. What’s worse, it subsequently filed for bankruptcy.