In the 1898 case of Louisville v. Third National Bank, the U.S Supreme Court was tasked with determining whether a city could be held liable for damages caused by its negligence in maintaining public infrastructure. The dispute arose when a sewer system maintained by the City of Louisville collapsed, causing significant damage to property owned by Third National Bank. The bank sued for compensation and won at trial court level; however, this decision was reversed on appeal as it was ruled that municipalities were not responsible for such damages under Kentucky law. The case then reached the Supreme Court which upheld the appellate court's ruling stating that cities are immune from liability arising from their governmental functions unless explicitly stated otherwise in their charter or state legislation. This principle is known as municipal immunity and has been applied widely across American jurisprudence since this landmark ruling.

In the dissenting opinion for Louisville v. Third National Bank, it was argued that the city of Louisville should not be held liable for damages incurred by a bank due to changes in street grade levels. The dissenting justices contended that such alterations were part of necessary public improvements and did not constitute an infringement on private property rights warranting compensation under eminent domain laws. They maintained that any damage suffered by the bank was incidental and indirect, rather than a direct result of government action. Therefore, they believed it fell outside the scope of constitutional protections against taking private property without just compensation. This perspective emphasized municipal authority to make urban planning decisions in service to public welfare without being unduly burdened with liability claims from affected parties.