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Abstract: This article provides a rationale for a potential model law for the treatment of distressed local public entities (LPEs). Building upon our previous work, a first-of-its-kind global study of the treatment of LPEs in distress, we contend that a model law for LPE distress should take a modular approach, outlining alternative options that can be tailored to different jurisdictions' distinct legal traditions and cultures. Although most of the countries in our study do not have a comprehensive system in place to address LPE distress, the commonalities that emerged across the jurisdictions studied can provide a foundation to support a model law in this area. While we leave the task of drafting a model law to future work, this article moves the discussion forward by articulating the principles, gleaned from our study, that should guide the creation of a model law on this subject.
A model law for the treatment of distressed LPEs will have significant value because countries that lack a comprehensive framework for addressing these cases subject their LPEs, and the communities and creditors that depend on and invest in them, to heightened risks and hardship. Currently, the treatment of distressed LPEs varies from country to country, and most countries lack such a comprehensive framework. In many countries, the lack of a comprehensive system for addressing LPE distress means that, in practice, higher-level governmental authorities intervene in an ad hoc and disorganized fashion whenever distress occurs. A model law will provide a roadmap of best practices for jurisdictions to consider. Adoption of these best practices would bring more clarity, consistency, and legal certainty to the treatment of distressed LPEs, allowing investors and other creditors to better understand and mitigate the risks of lending to an LPE.
LPEs play a critical role in state economies. When they experience financial distress or insolvency, risk abounds to members of the local community, who risk deprivation of essential public services; to nearby regions, which risk the effects of contagion; and to investors, who risk a loss or diminution of their investment. Due to the rich variety of activities in which LPEs are engaged, and the various ways in which they contribute to the quality of public life, LPE distress can create systemic risks. Consequently, a comprehensive system for addressing LPE distress should be a part of any jurisdiction's legal system. In this way, investors, creditors, the public, and all those who interact with or receive services from an LPE can clearly understand how the distress of that LPE will be handled and can take steps to mitigate risks relating to LPEs.
Although future work will develop the exact contours of a model law for distressed LPEs, this article lays the groundwork for such a law. Drawing upon original research of the treatment of distressed LPEs in twenty jurisdictions around the world, this paper demonstrates the value of a model law and outlines some key features and guiding principles to consider for its development.
The article proceeds as follows. Part I describes the current treatment of LPEs in distress, drawing heavily on information collected from our study. Part II examines the consequences flowing from current approaches to distressed LPEs. Using specific examples, Part II illustrates that many current approaches create commercial uncertainty and legal unpredictability. Yet, as divergent as these approaches are, they share some common goals: collectivity, continuity of essential public services, and protection of vulnerable stakeholders. In Part III, we outline our proposals for the guiding principles behind a model law for distressed LPEs and illustrate the extent to which these proposals are aligned with the insolvency principles articulated by the United Nations Commission on International Trade Law (UNCITRAL) with respect to insolvencies more generally. We do this to show that, at bottom, LPE distress is not so different from the insolvency or distress of other entities and, consequently, a model law will be useful in the LPE distress context, much as UNCITRAL's model laws are useful in the general insolvency law context. Part III also identifies and addresses some concerns and challenges that may be raised in response to the development of a model law. Part IV concludes.
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