NC Bankruptcy Expert

06/15/2026

4th Cir.: Rock Spring Plaza II, LLC v. Investors Warranty of America, LLC — The “Maryland Twerk” Fails: You Can’t Fraudulently Dance Away from a 99-Year Lease: 4th Cir.: Rock Spring Plaza II, LLC v. Investors Warranty of America, LLC — The “Maryland Twerk” Fails: You Can’t Fraudulently Dance Away from a 99-Year Lease

Ed Boltz

Fri, 06/12/2026 - 22:35

The Fourth Circuit’s unpublished decision in Rock Spring Plaza II, LLC v. Investors Warranty of America, LLC is ostensibly a Maryland commercial lease case. But consumer bankruptcy lawyers will recognize a familiar pattern: a financially troubled enterprise attempting to isolate liabilities in a newly created entity, preserve the profitable assets, and leave creditors holding an empty bag.

The court affirmed a jury verdict finding that Investors Warranty of America (“IWA”) improperly assigned a 99-year ground lease to a newly formed LLC, Rock Springs Drive (“RSD”), as part of a plan designed to escape future lease obligations while shielding itself from liability. The jury found the assignment invalid, determined that RSD was merely IWA’s alter ego, and concluded that the transaction constituted a fraudulent conveyance under Maryland law.

What Happened?

IWA acquired a leasehold interest in a Bethesda office property after foreclosing on the original tenant's leasehold. Unfortunately for IWA, the lease was a financial disaster. Rent exceeded market rates and increased annually, while Bethesda office rents were trending downward. Internal communications described the lease as “worthless” and openly discussed finding an “exit strategy” to get it “off the books.”

The solution developed by consultants and counsel was elegant in its simplicity:

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Create a new single-purpose LLC (RSD).

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Assign the lease to RSD.

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Capitalize RSD with only enough money to survive a few years.

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Prevent meaningful communications with the landlord.

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Wait until Maryland’s fraudulent conveyance limitations period expired.

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Dissolve RSD and hand the keys back to the landlord.

The Fourth Circuit noted evidence that the structure was deliberately designed to run out the statute of limitations before the landlord discovered the true nature of the arrangement. RSD was prohibited from contacting the landlord without approval, was entirely dependent upon IWA for funding, and could be dissolved at IWA’s whim.

The jury was not impressed.

Nor was the Fourth Circuit.

Why the Assignment Failed

The Estoppel Agreement allowed IWA to assign the lease to a "third party" that assumed all lease obligations. The court held that RSD was neither.

First, RSD was not truly a "third party." IWA owned 98% of it, controlled its operations, controlled its finances, could dissolve it at any time, and retained veto power over major decisions. The court concluded that dealing with RSD was effectively dealing with IWA itself.

Second, RSD could not possibly "assume" all obligations under a lease running through 2089 because its governing documents required dissolution years before then. A company guaranteed to disappear could not meaningfully assume obligations extending decades into the future.

The assignment therefore violated the parties' agreements.

Fraudulent Conveyance and Alter Ego Findings

The court had little difficulty affirming the fraudulent conveyance verdict.

Maryland's fraudulent conveyance statute broadly applies to assignments of property interests and obligations made with intent to hinder, delay, or defraud creditors. The landlord qualified as a creditor because it possessed contractual rights to future rent payments.

The evidence supporting fraudulent intent included:

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Internal emails discussing an "exit strategy."

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Discussions about how to "walk away" from future obligations.

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Creation of RSD only days before the assignment.

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Capitalization sufficient for only a limited period.

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Restrictions on communications with the landlord.

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A dissolution structure timed suspiciously close to limitations periods.

The alter ego finding was equally straightforward. RSD had no meaningful independence. It existed largely as a shell through which IWA hoped to shed liability while retaining control. Under Maryland law, that was enough for veil piercing.

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Commentary

For bankruptcy lawyers, this case feels remarkably familiar.

The opinion reads like a judicial autopsy of a liability-management transaction. The facts differ, but the strategy echoes two trends we have been watching for years.

The Texas Two-Step

The most obvious comparison is the so-called "Texas Two-Step," where companies divide assets and liabilities between entities, placing tort liabilities into one company while preserving valuable assets elsewhere. Courts and creditors have increasingly scrutinized those transactions as efforts to manipulate corporate separateness while avoiding responsibility.

The Fourth Circuit never mentions the Texas Two-Step, but the underlying concern is identical: can a company use entity structuring to keep the benefits while shedding the burdens?

The answer here was no.

North Carolina Receiverships

The case also resembles some of the more aggressive uses of the North Carolina Receivership Act.

Receiverships can be valuable tools when used legitimately to preserve assets and maximize value. But they also can be used strategically to place distressed assets into a controlled structure that limits creditor remedies, delays collection efforts, and creates procedural obstacles for creditors attempting to reach the real decision-makers.

As in Rock Spring Plaza, the practical question is often not whether a separate legal entity technically exists. The real question is whether the new structure has any genuine economic independence or whether it is simply a liability sponge created to absorb losses before being discarded.

The Fourth Circuit looked beyond the paperwork and focused on economic reality.

That approach should sound familiar to bankruptcy practitioners, who routinely encounter shell entities, insider transfers, nominee arrangements, and other efforts to separate assets from liabilities without separating control.

The "ASS"-ignment and the Maryland Twerk

The opinion repeatedly refers to the lease assignment.

But perhaps "assignment" is too charitable a description.

What occurred here was not a conventional transfer to an independent third party willing and able to perform the lease. Instead, the evidence suggested a transfer to a captive entity that was expected to fail after serving its purpose.

The Texas Two-Step already has a catchy label.

Perhaps Maryland deserves one too.

If the Texas Two-Step is a corporate sidestep around liability, this transaction might fairly be called the "Maryland Twerk"—an attempted maneuver in which a company tries to shake loose unwanted obligations by transferring them to a controlled shell entity while hoping creditors are distracted long enough for the music to stop.

The Fourth Circuit's response was essentially:

Nice dance move. You're still on the hook.

And that may be the broader significance of this case. Whether the structure is called a divisional merger, a receivership strategy, a special-purpose entity, or an "ASS"-ignment, courts remain willing to look beyond formalities when the evidence shows that the transaction's real purpose was to hinder, delay, or escape creditors.

For bankruptcy lawyers, that is a lesson worth remembering. Fraudulent transfer law, alter ego doctrine, and equitable remedies continue to exist precisely because courts understand that sophisticated liability-avoidance schemes often look perfectly legitimate on paper.

Until someone reads the emails.

To read a copy of the transcript, please see:

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4th Circuit Court of Appeals

The Fourth Circuit’s unpublished decision in Rock Spring Plaza II, LLC v. Investors Warranty of America, LLC is ostensibly a Maryland commercial lease case. But consumer bankruptcy lawyers will recognize a familiar pattern: a financially troubled enterprise attempting to isolate liabilities in a n...

06/15/2026

The Fourth Circuit’s unpublished decision in Rock Spring Plaza II, LLC v. Investors Warranty of America, LLC is ostensibly a Maryland commercial lease case. But consumer bankruptcy lawyers will recognize a familiar pattern: a financially troubled enterprise attempting to isolate liabilities in a n...

06/11/2026

The Supreme Court's unanimous decision in Keathley v. Buddy Ayers Construction, Inc. may ultimately prove to be one of the most important consumer bankruptcy opinions of the decade—not because it answers every question about judicial estoppel, but because it refuses to allow lower courts to answer...

06/11/2026

S.Ct.: Keathley v. Buddy Ayers Construction—Judicial Estoppel Requires a Totality-of-the-Circumstances Analysis, Not Automatic Dismissal: S.Ct.: Keathley v. Buddy Ayers Construction—Judicial Estoppel Requires a Totality-of-the-Circumstances Analysis, Not Automatic Dismissal

Ed Boltz

Thu, 06/11/2026 - 17:57

The Supreme Court's unanimous decision in Keathley v. Buddy Ayers Construction, Inc. may ultimately prove to be one of the most important consumer bankruptcy opinions of the decade—not because it answers every question about judicial estoppel, but because it refuses to allow lower courts to answer those questions with rigid presumptions.

Justice Jackson, writing for a unanimous Court, vacated the Fifth Circuit's decision and held that courts considering whether a debtor's failure to disclose a claim was "inadvertent or mistaken" must examine the totality of the circumstances, rather than relying solely on whether the debtor knew of the claim and had a hypothetical motive to conceal it.

Importantly, the Court did not decide whether judicial estoppel should apply in bankruptcy cases at all. Nor did it decide whether Chapter 13 debtors have a continuing duty to disclose post-petition causes of action. Instead, it assumed both propositions for purposes of the opinion and focused narrowly on the Fifth Circuit's excessively rigid test.

The Facts Made This a Difficult Case for the Defendant

Thomas Keathley and his wife filed Chapter 13 in 2019. Their plan paid 100% of creditor claims, albeit without interest, in less than five years. After confirmation, he suffered a personal injury in an automobile accident and filed suit against the tortfeasor. He informed bankruptcy counsel of the claim but it was never disclosed to the bankruptcy court until the defendant raised judicial estoppel in the personal injury litigation.

Under Fifth Circuit precedent, that was essentially game over.

The district court concluded that because the debtor knew about the accident and could theoretically benefit from nondisclosure by avoiding additional payments or interest, the omission could not be inadvertent. Summary judgment followed. The Fifth Circuit affirmed, albeit with a concurrence expressing discomfort that an apparent "honest mistake" was being treated as intentional concealment.

Those facts were always likely to trouble the Court. This was not a case where creditors received pennies on the dollar while a debtor attempted to pocket a substantial undisclosed recovery.

According to the claims register, unsecured claims totaled only about $23,700, largely tax claims. Creditors were already receiving payment in full. The practical economic harm from the nondisclosure appears limited largely to the loss of possible interest payments—perhaps only a few thousand dollars over the life of the plan. As the noted in the opinion, the Chapter 13 staff attorney in this case submitted an affidavit that disclosure of this assset "not have had any effect on the administration of the bankruptcy.”

That reality seems to lurk beneath the Court's opinion.

What Did the Court Actually Hold?

The Court's holding is surprisingly modest.

The Fifth Circuit had reduced the inquiry to two questions:

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Did the debtor know about the claim?

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Did the debtor have any conceivable motive to conceal it?

If yes to both, judicial estoppel effectively applied.

The Supreme Court rejected that framework because it transformed an equitable doctrine into a mechanical rule. Equity, Justice Jackson explained, requires flexibility and case-by-case evaluation. Courts must be permitted to consider all relevant facts surrounding the omission.

The Court did not tell lower courts what factors matter most.

Instead, it handed the issue back to them.

The New Battlefield: Totality of the Circumstances

The real litigation now begins.

The Court's "totality of the circumstances" test leaves lower courts substantial room to develop the doctrine. Among the potential factors likely to matter are:

Bad Faith

The parties argued bad faith, but the Court largely sidestepped it.

That omission may be telling. Judicial estoppel historically targets intentional manipulation of the judicial process. Whether a debtor acted in bad faith seems likely to become a central factor going forward.

Reliance on Advice of Counsel

Another factor likely to emerge under the Court's totality-of-the-circumstances test is whether the debtor reasonably relied on the advice—or omission—of bankruptcy counsel.

In Keathley, the debtor submitted evidence that he informed his bankruptcy attorney about the personal injury claim and believed that he had done everything necessary to comply with his obligations. His bankruptcy counsel likewise provided an affidavit explaining that Keathley had disclosed the claim to him and that the debtor received no monetary benefit from the nondisclosure.

While reliance on counsel is not an absolute defense, it has long been relevant to determining intent, good faith, and whether a party acted deliberately or merely made a mistake. A debtor who affirmatively conceals information from counsel presents a very different case from one who fully discloses the relevant facts and reasonably assumes that counsel will take any required legal steps.

The importance of attorney advice is particularly evident where the underlying legal obligation itself is unsettled. As Footnote 1 recognizes, courts remain divided over whether Chapter 13 debtors have a continuing duty to disclose post-petition causes of action. Where both the facts and the law have been disclosed to counsel, it becomes considerably more difficult to infer that a debtor acted with the sort of intentional manipulation of the judicial process that judicial estoppel is intended to prevent.

The Fourth Circuit's decision in Sugar v. Burnett likewise reflects a broader reluctance to impose severe sanctions without careful consideration of intent, culpability, and the role of counsel. Although Sugar arose in a different context, it underscores an important principle: bankruptcy remedies should be tailored to actual misconduct, and courts should distinguish between deliberate abuse of the system and mistakes made in navigating a complex statutory scheme. Viewed through that lens, a debtor's disclosure of a claim to bankruptcy counsel—and reasonable reliance on counsel's advice regarding any further disclosure obligations—may become an important consideration in determining whether judicial estoppel serves equity or merely creates an unwarranted forfeiture.

The Duty to Disclose

Footnote 1 practically invites future litigation.

The parties proceeded on the assumption that Chapter 13 debtors have a continuing duty to disclose post-petition causes of action, but the Supreme Court expressly declined to decide whether such a duty actually exists. Instead, the Court cited the amicus brief filed by the National Consumer Bankruptcy Rights Center, the National Association of Consumer Bankruptcy Attorneys, and the National Consumer Law Center, which explained that courts remain divided on that issue. As a disclosure, I serve on the Board of NCBRC.

That unresolved question may itself become relevant under the Court's new totality-of-the-circumstances framework. If courts disagree about whether a disclosure duty exists, that disagreement may bear on whether a debtor's failure to disclose was intentional, inadvertent, or even legally significant. Future courts may have to consider not only whether the debtor knew about the claim, but also whether the underlying duty to disclose was sufficiently clear to support an inference of bad faith or manipulation of the judicial process.

The significance of Footnote 1 extends beyond judicial estoppel. By expressly declining to decide the disclosure-duty question, the Court avoided resolving an issue that was neither presented nor necessary to the decision. As a result, the existing debate over whether Chapter 13 debtors must amend schedules to disclose most post-petition causes of action remains very much alive—and is now likely to become part of the analysis rather than merely an assumption underlying it.

Footnote 1 should also serve as a caution to the Advisory Committee on Bankruptcy Rules. While the Committee has been considering proposals that would expressly require Chapter 13 debtors to disclose post-petition assets and causes of action, the Supreme Court has now acknowledged that the existence and scope of any such duty remains an unresolved legal question. Rulemaking may ultimately be the appropriate mechanism to establish a clear national disclosure requirement, but Keathley underscores that such a requirement cannot simply be assumed to already exist. Until Congress or the Supreme Court squarely resolves the issue, the Rules Committee and courts should be wary of treating the failure to disclose a post-petition claim as evidence of bad faith when the underlying disclosure obligation itself remains the subject of substantial judicial disagreement.

Dividend to Creditors

A debtor paying a zero-percent dividend may present a very different situation from a debtor already paying creditors in full.

The extent to which creditors were already protected will likely become a significant consideration.

Available Exemptions

The Court did not discuss exemptions, but bankruptcy lawyers certainly will.

For example, under the federal exemptions, a debtor may exempt up to a specified amount of personal injury recoveries under 11 U.S.C. § 522(d)(11)(D)- presently $31,575 and only for bodily injuries. In North Carolina, by contrast, claims and compensation for personal injury, including protection for emotional distress, see In re Bryant, and probably even consumer rights damages, see. Alston v. NCR, are generally exempt without a comparable dollar cap.

If a recovery would have been exempt anyway, the practical harm from nondisclosure may be substantially reduced.

Harm to Creditors and the Estate

Justice Thomas's concurrence focuses heavily on actual harm.

That emphasis suggests courts may increasingly examine whether creditors, trustees, or the bankruptcy process suffered any meaningful injury from the omission. This harm to creditors is not only in terms of reduction of the amounts that they may receive, but also reduces the feasibility of the plan and increases administrative expenses through liitigation.

Windfalls to Tortfeasors

One recurring criticism of judicial estoppel is that it often benefits the wrong party.

A negligent defendant may receive complete immunity because of conduct unrelated to the merits of the tort claim.

Several lower courts have struggled with the reality that judicial estoppel frequently punishes creditors while rewarding tortfeasors.

Alternative Bankruptcy Remedies

The Solicitor General's brief highlighted a point the Court appears receptive to: bankruptcy law already contains numerous remedies for debtor misconduct.

Those include:

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Dismissal;

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Conversion to Chapter 7;

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Plan modification;

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Denial of discharge;

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Revocation of discharge;

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Criminal referral; and

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Trustee administration of the claim.

These remedies are themselves constrained by the Bankruptcy Code, as the Court emphasized in decisions such as Czyzewski v. Jevic Holding Corp. and Law v. Siegel.

The Bigger Story: Judicial Estoppel May Be Living on Borrowed Time

The most interesting aspect of Keathley may be what it signals about judicial estoppel generally.

Not one Justice expressed enthusiasm for the doctrine.

The Court repeatedly emphasized that judicial estoppel is discretionary, equitable, and context-dependent. The opinion contains none of the language one would expect if the Court viewed judicial estoppel as a favored tool.

Indeed, the Supreme Court itself has used judicial estoppel only sparingly, most notably in New Hampshire v. Maine, a dispute between sovereign states. Keathley repeatedly cites that case but noticeably avoids expanding judicial estoppel's reach.

Viewed in that light, Keathley feels less like an endorsement of judicial estoppel and more like a warning against overuse.

Whether that eventually leads to further retrenchment remains to be seen.

Commentary

This result was not particularly surprising after oral argument. The debtor presented unusually favorable facts. All unsecured creditors were being paid in full. The alleged harm was comparatively modest. The debtor informed bankruptcy counsel about the claim. The claim was eventually disclosed. Meanwhile, the party seeking dismissal was the alleged tortfeasor.

Those facts made it difficult to portray the case as a classic example of a debtor attempting to cheat creditors.

The Court therefore did what the modern Supreme Court often does when confronted with an overbroad lower-court rule: it rejected the categorical test without replacing it with another categorical test.

Keathley also illustrates the importance of selecting the right cases to appeal. The debtor presented unusually favorable facts: creditors were being paid in full, the potential harm from nondisclosure was modest, he informed his bankruptcy counsel about the claim, and the party seeking dismissal was the alleged tortfeasor. Supreme Court cases often turn as much on facts as law. Had this case involved a debtor hiding a valuable asset while paying little to creditors, the result might have been very different. Good facts do not guarantee good law, but landmark decisions often begin with carefully chosen cases that allow courts to focus on the legal principle at stake.

The decision also provides yet another data point confirming Professor Ronald Mann's observation in Bankruptcy and the U.S. Supreme Court that the National Consumer Bankruptcy Rights Center is the most frequently cited bankruptcy amicus before the Supreme Court other than the United States Solicitor General. In Keathley, the Court cited the NCBRC/NACBA/NCLC amicus brief in Footnote 1 on an issue that may ultimately prove more important than the question on which certiorari was granted. By contrast, the Solicitor General's brief does not receive a specific mention until much later, in Justice Sotomayor's concurrence. For those of us involved with NCBRC, that citation is gratifying not because it recognizes any particular organization, but because it demonstrates that the Court continues to take seriously careful, debtor-focused scholarship regarding how bankruptcy law actually operates in practice.

NCBRC's work extends well beyond Supreme Court briefing. Consumer debtors and their attorneys seeking assistance with bankruptcy appeals can learn more through the organization's website:

National Consumer Bankruptcy Rights Center (NCBRC)

NCBRC relies heavily on donations and support from the bankruptcy community. Whether one practices consumer bankruptcy, Chapter 11, creditor representation, or appellate litigation, supporting NCBRC helps ensure that bankruptcy courts continue to hear well-developed arguments on issues affecting debtors, creditors, trustees, and the integrity of the bankruptcy system as a whole.

To read a copy of the transcript, please see:

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Federal Cases

The Supreme Court's unanimous decision in Keathley v. Buddy Ayers Construction, Inc. may ultimately prove to be one of the most important consumer bankruptcy opinions of the decade—not because it answers every question about judicial estoppel, but because it refuses to allow lower courts to answer...

06/10/2026

Law Review: Alvin Velazquez, Bankruptcy as Presidential Resistance, 53 Fordham Urb. L.J. Online, no. 2, 2025.: Law Review: Alvin Velazquez, Bankruptcy as Presidential Resistance, 53 Fordham Urb. L.J. Online, no. 2, 2025.

Ed Boltz

Wed, 06/10/2026 - 15:11

Available at: https://ir.lawnet.fordham.edu/uljo

Abstract:

Litigation against President Trump for withholding federal funds from cities in his “war on woke” and sanctuary cities has taken place either in Article III courts under the Administrative Procedure Act or in the Court of Federal Claims under the Tucker Act. However, there is a third place to resolve these disputes and allocate who bears the consequences of Presidential action that no one has yet discussed: bankruptcy courts. Federal grants make up about one-third of the average city’s budget, and the President could render a city insolvent by swiftly cutting off a city’s federal grants, through a process scholars call “appropriations presidentialism,” before a city could seek to enjoin such an action. When federal grants are cut off, thousands of workers, vendors, and creditors who rely on those funds as a source of payment would most likely file suit against these cities within weeks to seek payment. In other words, without federal grants, a city’s financial position would be like an “ice cube” rapidly melting away in the hot summer sun. This Essay argues that cities facing “governance by extortion” can use the filing of bankruptcy as an act of political resistance to manage a city’s presidentially induced bankruptcy. In many ways, bankruptcy courts are in a better position than Article III courts to provide relief in this situation. Bankruptcy courts have expertise that Article III courts lack and that indebted cities will need to handle, including creditor coordination problems that are likely to occur when federal grant funds run out. This Essay’s exploration of bankruptcy’s relationship with administrative law expands conversations about the institutional capacity of the judicial system to manage the effects of appropriations presidentialism. Additionally, this Essay situates bankruptcy as a device for coordinating political resistance to governance by extortion.

Summary:

This article proposes a novel use for municipal bankruptcy under Chapter 9. Rather than viewing bankruptcy as merely a response to traditional fiscal distress, the author argues that a city could use Chapter 9 as a defensive mechanism if a President attempted to coerce political compliance by withholding federal grant funding.

The article describes this phenomenon as "appropriations presidentialism"—the use of executive control over federal spending to pressure state and local governments into adopting federal policy preferences. Because federal grants constitute a substantial portion of many municipal budgets, a sudden cutoff could create an immediate liquidity crisis. The author contends that bankruptcy courts, with their expertise in coordinating competing creditor interests and managing financial distress, may be better suited than traditional Article III courts to address the practical fallout from such funding interruptions.

Under this framework, Chapter 9 becomes not merely a financial restructuring tool but a form of institutional resistance. A municipality could invoke bankruptcy protection to stay creditor collection efforts, preserve public services, and create breathing room while broader constitutional and administrative-law disputes over federal funding are resolved elsewhere.

Commentary:

This is an intellectually interesting article, but it is built on multiple layers of hypotheticals stacked atop one another.

First, it assumes that "appropriations presidentialism" is actually weaponized against a particular city in a manner severe enough to create genuine insolvency. Second, it assumes that the affected municipality is legally authorized under state law to file Chapter 9. As consumer bankruptcy attorneys know, Chapter 9 eligibility is extraordinarily restrictive. Municipalities cannot simply decide to file bankruptcy because they are unhappy with federal policy; they must satisfy the requirements of 11 U.S.C. § 109(c), including specific state authorization.

Third, the article assumes the city possesses the political will to file Chapter 9. That may be the largest hypothetical of all.

Municipal bankruptcy remains remarkably rare. Even when cities face severe financial distress, elected officials often resist bankruptcy because of its stigma, limitations, political consequences, potential effects on future borrowing, and the perception that local government has failed. Detroit, Stockton, San Bernardino, and Jefferson County demonstrate that municipalities generally view Chapter 9 as a last resort rather than a strategic political tool.

As a result, the article's thesis requires not merely financial distress but a unique convergence of legal authority, political incentives, and fiscal necessity.

The Missing Discussion of Section 525(a)

One surprising omission is the absence of any discussion of 11 U.S.C. § 525(a), which provides that:

"a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to ... a person that is or has been a debtor under this title."

The problem, however, is that municipalities likely receive no protection from this provision.

Under 11 U.S.C. § 101(41), a "person" includes an individual, partnership, or corporation, but specifically does not include a governmental unit. Meanwhile, 11 U.S.C. § 101(27) broadly defines "governmental unit" to include municipalities.

Accordingly, even if a city filed Chapter 9, § 525(a) would not appear to prohibit the federal government from denying or terminating grants on account of the municipality's bankruptcy status. Congress extended bankruptcy anti-discrimination protections to individuals and business entities, but not to governmental debtors.

That omission may be entirely logical given the rarity of Chapter 9 cases, but it weakens any argument that bankruptcy itself could protect a municipality from future federal funding decisions.

Strategic Bankruptcy as Political Resistance

The article's broader theme—using bankruptcy as political resistance—is intriguing because bankruptcy has historically served precisely that role for ordinary Americans.

Consumer bankruptcy exists largely because Congress concluded that overwhelming debt can threaten not only individual financial health but also broader economic participation and social stability. In that sense, bankruptcy has always been a mechanism through which debtors resist economic coercion.

Ironically, the article may overestimate the likelihood of municipalities using bankruptcy for political resistance while underestimating the historical role consumer bankruptcy already plays in that function.

The challenge, of course, is scale.

A Chapter 9 filing by a major city such as San Francisco, Chicago, or New York would instantly become national news and force policymakers to confront the underlying dispute. By contrast, thousands of individual Chapter 7 and Chapter 13 filings, while collectively significant, rarely generate the same level of public attention.

Moreover, municipal bankruptcies involve billions of dollars and essential public services. Individual bankruptcies generally involve much smaller debts dispersed among countless debtors. Organizing enough consumers to engage in a coordinated bankruptcy-based protest would be extraordinarily difficult, and the aggregate financial impact might still be insufficient to command the same attention as a major municipal filing.

Yet there is an interesting parallel. Just as the author views Chapter 9 as a potential response to governmental pressure, many consumer debtors already use Chapters 7 and 13 to resist financial pressures imposed by circumstances beyond their control—medical debt, student loans, predatory lending, wage garnishments, or economic dislocation. Bankruptcy has long functioned as a safety valve against economic coercion, even if it rarely receives that political label.

Final Thoughts

The article succeeds in provoking thought about the intersection of bankruptcy, federalism, and executive power. But its practical significance may be limited because every step of the proposed path requires another unlikely condition to occur. A President must aggressively weaponize federal funding. A city must be sufficiently dependent on those funds to become insolvent. State law must authorize Chapter 9. Local officials must be willing to endure the stigma and constraints of bankruptcy. And the bankruptcy itself must meaningfully alter the political calculus.

That is a lot of "ifs."

Still, the article performs a valuable service by reminding bankruptcy practitioners that insolvency is not merely a financial phenomenon. Bankruptcy reallocates power. Whether the debtor is an individual, a corporation, or a municipality, bankruptcy often serves as a mechanism through which parties facing overwhelming leverage can force a collective reckoning. The question raised here is not whether bankruptcy can do that—it clearly can—but whether any city would actually be willing to pay the price necessary to use Chapter 9 as a form of political resistance.
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