In re City of Detroit

Majority - Steven Rhodes

Yes, the City of Detroit is eligible to be a debtor under Chapter 9 of the U.S. Bankruptcy Code, as it satisfies all statutory requirements for eligibility and the constitutional challenges raised against Chapter 9 and Michigan's Public Act 436 are rejected. The Court first asserted its authority to determine the constitutionality of Chapter 9 and P.A. 436, distinguishing Stern v. Marshall by noting that eligibility issues arise directly under the Bankruptcy Code and fall within the "public rights" doctrine, which is central to the bankruptcy process. The Court then systematically addressed each eligibility requirement and objection: 1. Municipality Status (11 U.S.C. § 109(c)(1)): The parties stipulated that Detroit is a "municipality," satisfying this element. 2. State Authorization (11 U.S.C. § 109(c)(2)): The Court concluded that Public Act 436 (P.A. 436) is constitutional under the Michigan Constitution and validly authorized the City's emergency manager, Kevyn Orr, to file for Chapter 9. Challenges based on the referendum right (after P.A. 4's rejection), home rule provisions, and the pension clause were dismissed. The Court held that the Michigan Legislature could re-enact similar laws and that courts do not inquire into legislative motive for appropriations shielding a law from referendum. It found P.A. 436 consistent with home rule because municipal powers are subject to general state law. Crucially, the Court determined that Michigan's pension clause (Art. IX, § 24), which defines pension benefits as "contractual obligations," does not grant them extraordinary protection from federal bankruptcy impairment when the state consents to a Chapter 9 filing. Federal bankruptcy power, authorized by the Bankruptcy Clause, supersedes state constitutional limitations on contract impairment. Mr. Orr's authority to file, despite not being an elected official, was valid under P.A. 436, and the Governor's authorization was proper, as any contingency attempting to prohibit pension impairment would be invalid under federal law. Furthermore, the Ingham County Circuit Court's "Order of Declaratory Relief" in Webster v. Michigan (entered after Detroit's Chapter 9 filing) was declared void ab initio because, upon the bankruptcy filing, the federal bankruptcy court gained exclusive jurisdiction over eligibility (28 U.S.C. § 1334(a)), and the state court's action violated the automatic stay (11 U.S.C. § 362(a)(3)). 3. Insolvency (11 U.S.C. § 109(c)(3)): Detroit was found to be "insolvent" under both definitions of the Bankruptcy Code: it was "generally not paying its debts as they become due" (evidenced by deferred pension contributions, missed COPs payments, and cessation of payments to trade creditors) and was "unable to pay its debts as they become due" in the future (evidenced by massive projected cash flow deficits, structural financial imbalances, and severe degradation of essential public services, termed "service delivery insolvency"). 4. Desire to Effect a Plan (11 U.S.C. § 109(c)(4)): The City demonstrated a clear desire to effect a plan to adjust its debts, as evidenced by Emergency Manager Orr's pre-petition proposal to creditors and his testimony. The intent to impair pensions is consistent with the remedial purpose of Chapter 9, which fundamentally involves contract impairment. 5. Negotiation/Impracticability (11 U.S.C. § 109(c)(5)): The Court concluded the City did not negotiate with its creditors in good faith under § 109(c)(5)(B) because its June 14, 2013, proposal was too summary, lacked sufficient information for meaningful counter-proposals, and the City explicitly stated the meetings were "not negotiations." However, the City was unable to negotiate with creditors because such negotiation was "impracticable" under § 109(c)(5)(C). This was due to the immense number of creditors (over 100,000), the lack of formal representatives able to bind individual retirees or bondholders, the inflexible position of some retiree associations, and the City's severe, rapidly worsening financial crisis. 6. Good Faith Filing (11 U.S.C. § 921(c)): The City filed its petition in good faith. Its financial problems were of a type contemplated by Chapter 9 (profound insolvency, inability to negotiate). The filing's purpose aligned with Chapter 9's remedial goals (debt adjustment, revitalization). The City made significant (though ultimately unsuccessful) efforts to improve its finances pre-petition. Most importantly, dismissing the case would severely prejudice Detroit's residents, who were suffering from "service delivery insolvency" and would face further decline without debt restructuring. The Court acknowledged the objectors' "bad faith" narrative regarding the lead-up to the filing but found the evidence insufficient to establish bad faith for dismissal. The Court will therefore enter an order for relief under Chapter 9.