The Bankruptcy Code states that municipalities may only proceed under chapter 9 of the Bankruptcy Code if, among other things, they are specifically authorized to do so by their respective state law. As a result, municipal bankruptcies are governed by both the Bankruptcy Code and the state law of the relevant municipality. Under the Bankruptcy Code, the good faith of the parties involved is of primary importance due to its role in the approval or rejection of a debtor’s petition for chapter 9 bankruptcy protection. Given the fact that a successful petition has the ability to significantly alter the fortunes of municipal debtors and creditors alike, the meaning of good faith matters to all parties involved. Alternatively, under state law, the good faith of the parties matters only to the extent that it is dispositive under state law.
Given the importance of good faith in municipal bankruptcies, this Article will explain the meaning of good faith in the context of a chapter 9 case. Part I will examine the case law related to the concept of good faith as it pertains to municipal bankruptcies under the Bankruptcy Code. Part II will examine the decisions of In Re City of Stockton, and In re City of Detroit, to determine how the state laws of California and Michigan have incorporated the concept of good faith, and how bankruptcy courts in these states interpret the concept of good faith under the Bankruptcy Code. Part III will explain the implications that the case studies addressed in Part II will have on municipal bankruptcies going forward.