In the case of Board of Liquidation v. Louisiana in 1900, the Supreme Court ruled on a dispute over bonds issued by New Orleans to fund railroad construction. The city had defaulted on these bonds and was sued by bondholders who sought repayment from both the city and state of Louisiana. The court held that while states have sovereign immunity from lawsuits, this does not extend to their municipalities or other political subdivisions such as cities or counties. Therefore, New Orleans could be sued for defaulting on its obligations even though it was an entity of the state government. However, because states are immune from suit under federal law unless they consent to being sued (a principle known as "sovereign immunity"), Louisiana itself could not be made liable for repaying these debts despite having authorized them initially.

In the dissenting opinion for the case of Board of Liquidation v. Louisiana, Justice Harlan argued that the majority's ruling violated principles of federalism by allowing a state to interfere with contracts between private parties and municipal corporations. He contended that such interference was unconstitutional under Article I, Section 10, which prohibits states from passing laws impairing contractual obligations. Furthermore, he asserted that this decision undermined public confidence in municipal bonds as secure investments because it suggested these contracts could be altered or invalidated by state legislation at any time. This would discourage investment in infrastructure projects funded through bond issues and thus hinder economic development. Ultimately, Justice Harlan believed that upholding contract rights should take precedence over considerations of local control or fiscal expediency.