Fair and Unfair Discrimination in Municipal Bankruptcy

Abstract

Some bankrupt municipalities have proposed plans of reorganization that offer substantially greater recoveries to their active workers and retirees than those offered to other creditors. Because these greater recoveries are not mandated by a priority enjoyed by the active workers and retirees, a judge can only approve such a plan if it does not “discriminate unfairly” against a class of disfavored creditors that votes against the plan. This paper describes the law defining the unfair discrimination standard, identifies the categories of circumstances in which discrimination between co-equal classes is permitted, and argues that the claims of retirees and active workers do not fall into any of these categories. We conclude that current law does not allow a judge to approve a reorganization plan that provides retirees and active workers with a greater recovery.

Keywords: Municipal bankruptcy