In the United States v. Bekins et al., Trustees, et al., 1937 case, the Supreme Court ruled that a California law allowing municipalities to reorganize their debt under federal bankruptcy laws was constitutional. The court held that this did not violate the Tenth Amendment's reservation of powers to states because it was voluntary and required state approval before being implemented. This ruling overturned an earlier decision in Ashton v. Cameron County Water Improvement District No. 1 (1936), where similar legislation had been struck down as unconstitutional on grounds of infringing upon states' rights by forcing them into involuntary bankruptcy proceedings without their consent.

In the United States v. Bekins case, Justice Butler dissented from the majority opinion. He argued that Congress does not have the power to enact a law allowing municipalities to reorganize their debts under federal bankruptcy laws because it infringes upon state sovereignty. According to him, such an act is unconstitutional as it violates the Tenth Amendment which reserves all powers not delegated by the Constitution to states or people. Furthermore, he contended that this legislation interferes with states' rights and responsibilities in managing their internal affairs including fiscal matters of its subdivisions like cities and counties. Therefore, he believed that permitting municipal bankruptcies undermines state governments' authority over local entities within their jurisdiction.