US Government Debt Different - Finance Department - University of ...

Donald S. Bernsteinis what most bankruptcies do. They permit a distressed debtor tofree itself from its valid debts to restore the debtor’s financial health. 3On this view, there is nothing inconsistent between the FourteenthAmendment and the discharge of debts of the United States pursuantto the bankruptcy power conferred on Congress.239As a corporate reorganization lawyer, nothing appeals to me morethan the idea that the bankruptcy clause of the Constitution, mystock in trade, trumps all, and, from the point of view of a commerciallaw expert, Professor Mooney’s distinction between validityand enforceability rings true. I was for a number of years the Chairof the TriBar Opinion Committee, which is the leading bar organizationsetting standards for third-party legal opinions rendered bylaw firms, and the idea that bankruptcy affects the enforceability ofa debt but not its validity is consistent with customary legal opinionpractice.Still, I have misgivings about Professor Mooney’s broad reading ofthe bankruptcy clause of the Constitution. The proposition that, inthe face of the Fourteenth Amendment, the United States can passa law to declare itself bankrupt and then impose a “bankruptcy repudiation”of its own debts feels like “bootstrapping.” Though thereis scant historical record, it appears that the bankruptcy clause wasintended to permit Congress to preempt the hodgepodge of lawsthe several states applied to their own bankrupt citizens, allowingthe marshaling of debtors’ assets and resolution of debts across statelines. This undoubtedly accounts for the reference to “uniform laws”in the text of the clause. 4 It is difficult to see how the bankruptcy3 This of course is typically in the interest of the debtor’s creditors in a reorganizationcase under Chapter 11 of the federal Bankruptcy Code because the going concernvalue of the enterprise is preserved and made available in the form of equity tothe holders of discharged claims.4 That the Fourteenth Amendment was directed at allowing Congress to reconcilethe differences among the states’ bankruptcy laws is apparent from the brief referenceto the bankruptcy clause in The Federalist Papers. In Federalist No. 42, Madisonstates that:“The power of establishing uniform laws of bankruptcy is so intimately connectedwith the regulation of commerce, and will prevent so many frauds where theparties or their properties may lie or be removed into different States, that theexpediency of it seems not likely to be drawn into question.”The Federalist No. 42 (James Madison) (the powers conferred by the Constitutionfurther considered).