The U.S. Supreme Court case Faitoute Iron & Steel Co. et al. v. City of Asbury Park in 1941 dealt with the issue of municipal bankruptcy and bondholder rights, specifically whether a New Jersey statute that allowed municipalities to restructure their debt violated the Contract Clause of the Constitution which prohibits states from passing laws impairing contractual obligations. The city of Asbury Park had defaulted on its bonds during the Great Depression and sought to adjust its debts under this law by reducing interest rates and extending maturity dates without obtaining consent from all bondholders, one being Faitoute Iron & Steel Company who objected claiming it impaired their contract rights. In a decision written by Justice William O Douglas, the court upheld New Jersey's statute stating that while it did alter contracts between cities and creditors, such alterations were permissible if they served an important public purpose - in this case preventing municipal bankruptcy - as long as they were reasonable and appropriate for achieving those ends.

In the dissenting opinion for FAITOUTE IRON & STEEL CO. et al. v. CITY OF ASBURY PARK, Justice Roberts argued that the New Jersey statute in question violated the Contract Clause of the Constitution by allowing a municipality to alter its contractual obligations without consent from all parties involved. He contended that this case was not about whether or not states could pass laws to assist municipalities in financial distress but rather if they could do so at the expense of creditors' rights under existing contracts with those municipalities. The majority's decision, he believed, set a dangerous precedent where state legislatures could interfere with private contract rights and impair their obligation whenever it deemed necessary for public welfare - an interpretation he found inconsistent with previous rulings on similar matters.