Decision Summary: Federal Judge Rules Detroit Eligible For Bankruptcy

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A judge has ruled that Detroit’s bankruptcy can move forward. The following is a summary of of the judge’s decision:

Bankruptcy Judge Steven Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan today found that the City of Detroit is eligible to be a debtor under chapter 9 of the federal bankruptcy code.

The City had filed a petition under chapter 9 on July 18, 2013. Case No.13-53846.

In his summary of his opinion in court today, Judge Rhodes first turned away the objecting creditors’ claim that chapter 9 of the bankruptcy code violates the Tenth Amendment of the US Constitution. The judge found that the Supreme Court had previously sustained the federal municipal bankruptcy law in Bekins v. United States and that Bekins was still good law. The judge also found that because chapter 9 requires state consent to a municipal bankruptcy filing, it is consistent with the principles of federalism that the Tenth Amendment reflects.

Judge Rhodes found that under the language of the Michigan Constitution, municipal pension rights are contract rights, and that the impairment of such contract rights in a municipal bankruptcy case is a regular part of the process. When the state consents to the bankruptcy filing of a municipality, impairment of the municipality’s contracts does not offend the Tenth Amendment. Judge Rhodes determined that it was appropriate to determine this issue at this time because the objecting creditors had raised the issue and requested a ruling.

The judge also turned away challenges that the chapter 9 violates the Contracts Clause of the US Constitution and the requirement in the Constitution that bankruptcy laws be “uniform.”

Also rejected were challenges that Public Act 436 of 2012 violates the Pensions Clause of the Michigan Constitution. P.A. 436 is the law that allowed the governor to authorize this bankruptcy. Specifically, Judge Rhodes determined that the voters’ rejection of Public Act 4 in the November 2012 election did not prohibit the Michigan legislature from later enacting P.A. 436, even though they are very similar. He also held that even if the Michigan legislature did include appropriations provisions in P.A. 436 to evade the constitutional right of referendum, it is not unconstitutional. He further held that P.A. 436 does not violate the home rule provisions of the Michigan Constitution.

The judge found that Governor Snyder’s authorization to file the petition was valid under the Michigan Constitution even though his authorization did not prohibit the City from impairing pension rights. He also found that Emergency Manager Orr was properly authorized to file the City’s bankruptcy petition.

Judge Rhodes voided a July 19, 2013 state court judgment declaring P.A. 436 unconstitutional. He found that because the judgment was entered after the bankruptcy case was filed, the state court no longer had jurisdiction. The state court judgment was also void because it was entered in violation of the automatic stay of bankruptcy.

The opinion included the following important findings:

• Under the Michigan Constitution municipal pension rights are contract rights. Therefore, because the State of Michigan authorized the filing of this case, municipal pension rights in Michigan can be impaired in this bankruptcy case, just like any other contract rights.

• The City was insolvent when it filed bankruptcy.

• The City desires to effect a plan.

• Although the City did not negotiate in good faith with its creditors before filing bankruptcy, the law did not require that in this case because such negotiations were impracticable, mostly due to the very large number of creditors – over 100,000.

• Based on the totality of the circumstances leading up to the City’s bankruptcy filing, the City filed its bankruptcy petition in good faith.

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