In the case of City of New York v. Feiring, Trustee in Bankruptcy (1940), the Supreme Court ruled that a city's claim for unpaid taxes is not subject to reduction under Section 57n of the Bankruptcy Act. The dispute arose when Samuel Feiring, as trustee in bankruptcy for a bankrupt estate, sought to reduce New York City’s tax claims by arguing they were penalties rather than debts and therefore could be reduced according to federal law. However, Justice Frankfurter delivered the opinion of the court stating that municipal tax claims are not penalties but instead represent an obligation owed by citizens for benefits received from living within a municipality. Therefore, such obligations cannot be diminished or discharged through bankruptcy proceedings under federal law because it would interfere with state sovereignty over its internal affairs.

In the dissenting opinion for the City of New York v. Feiring case, it was argued that a municipality should not be allowed to collect taxes from a bankrupt entity's estate before other creditors are paid. The dissenting justices believed this contradicted federal bankruptcy laws designed to ensure equitable distribution among all creditors. They pointed out that allowing municipalities such priority would mean they could effectively drain an insolvent debtor’s assets, leaving nothing for other claimants and undermining the purpose of bankruptcy proceedings. Furthermore, they disagreed with the majority's interpretation of relevant statutes and felt there was no clear legislative intent granting such preferential treatment to municipal claims in bankruptcy cases.