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November 07, 2013

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nosedive

You correctly point out the essential argument against citizens committees. City residents elected folks to manage the city and they in turn decided to file for bankruptcy. Then you ignore your point by saying that voters shouldn't have to live with the consequences of the decisions of the people that they elect.

What specific rights/powers would you advocate a "citizens committee" be afforded?

Scott Pryor

Outside bankruptcy creditors are on their own but the BC provides for collective, debtor-financed unsecured creditor representation through committees. Ditto in limited cases for shareholders. The justification for such subsidies is the collective, legally binding effects of bankruptcy reorganization. Service recipients (and taxpayers) are practically as much stakeholders as creditors; there is no principled reason to subsidize the collective action of one and not the others. It's equally the case that creditors "made their bed" with city government when they extended credit as did voters when they elected the city council but the former get Code-authorized representation while voters don't. The net effect is to shift risk away from market participants who generally are able to evaluate/hedge the risks and to residents who aren't. I think this is unfair.

nosedive

You cannot equate the position of unsecured creditors with city residents/taxpayers, except to the extent that both would rather that the municipality was financially healthy. Their positions are not remotely the same. As a general proposition, the debtor municipality is a representative of its taxpayers/residents and is deemed to represent their interests before the bankruptcy court.

Not sure if what you advocate would create a situation where a debtor municipality would want a plan confirmed over the objections of a committee of its own residents.
As a practical matter how do you advocate that members of a citizens' committee be chosen? Should they be elected by residents?

I get that your practical point is that residents/taxpayers can get a bad deal in a bankruptcy plan. Beholden elected officials under pressure don't seek to reduce pension obligations in the plan, etc. No doubt that possibility exists. The solution is to elect officials that will seek to better protect their residents in bankruptcy. The perils of democracy.

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