In re City of Detroit

Decision Date20 December 2013
Docket NumberNo. 13–53846.,13–53846.
PartiesIn re CITY OF DETROIT, MICHIGAN, Debtor.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

504 B.R. 191

In re CITY OF DETROIT, MICHIGAN, Debtor.

No. 13–53846.

United States Bankruptcy Court,
E.D. Michigan,
Southern Division.

Dec. 20, 2013.


[504 B.R. 192]


Judy B. Calton, Honigman Miller Schwartz & Cohn LLP, Detroit, MI, Marc N. Swanson, Miller Canfield Paddock and Stone, P.L.C., Detroit, MI, Eric D. Carlson, Timothy A. Fusco, Jonathan S. Green, Stephen S. LaPlante, Detroit, MI, David Gilbert Heiman, Cleveland, OH, Robert S. Hertzberg, Kay Standridge Kress, Southfield, MI, Deborah Kovsky–Apap, Pepper Hamilton LLP, Southfield, MI, Heather Lennox, New York, NY, Bruce Bennett, Los Angeles, CA, for Debtor.

Sean M. Cowley (UST), Richard A. Roble (UST), United States Trustee, Detroit, MI, for U.S. Trustee.


Memorandum
I. Certification Under 28 U.S.C. § 158(d)(2)(A)(i)
II. Recommendation on Whether Direct Appeals Should Be Authorized
and
III. Parties' Request to Recommend Expedited Consideration of Appeals

STEVEN RHODES, Bankruptcy Judge.
Summary

Under 28 U.S.C. § 158(d)(2)(A), a court of appeals has jurisdiction over a direct appeal upon two conditions:

(1) a certification that one of the circumstances identified in subsections (i), (ii) or (iii) of § 158(d)(2)(A) exists; and

(2) an authorization for the direct appeal by the court of appeals.

These conditions raise separate and distinct questions and considerations.

The appeals from the Order for Relief do involve a “matter of public importance” under subsection (i) of § 158(d)(2)(A). Therefore, this Court is required to certify that fact. Part I of this memorandum complies with the requirements of Fed. R. Bankr.P. 8001(f) that apply when a bankruptcy court certifies that an appeal involves a matter of public importance.

Part II addresses the second, separate issue of whether the Court of Appeals should authorize the direct appeals. This Court recommends that even though these appeals do involve a matter of public importance, authorization for direct appeals be denied. The order on appeal—the Order for Relief—is an interlocutory order, and all of the traditionally accepted reasons for reserving appellate jurisdiction for final orders apply here. Further, there is no good cause to allow these interlocutory appeals.

Finally, in Part III of this memorandum, the Court denies the objecting parties' request that it recommend expedited consideration of the appeals. Rather, should the Court of Appeals authorize the direct appeals, the Court recommends that it consult with the mediator in the case, Chief District Judge Gerald Rosen, on whether expediting this interlocutory appeal is in the best interest of the City, its creditors and its residents.

I. Certification for Direct Appeal to the Court of Appeals

In certain narrow circumstances, 28 U.S.C. § 158(d)(2)(A) authorizes a direct

[504 B.R. 193]

appeal of an order of a bankruptcy court to the court of appeals. It states:

The appropriate court of appeals shall have jurisdiction of appeals described in the first sentence of subsection (a) if the bankruptcy court, the district court, or the bankruptcy appellate panel involved, acting on its own motion or on the request of a party to the judgment, order, or decree described in such first sentence, or all the appellants and appellees (if any) acting jointly, certify that—

(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance;

(ii) the judgment, order, or decree involves a question of law requiring resolution of conflicting decisions; or

(iii) an immediate appeal from the judgment, order, or decree may materially advance the progress of the case or proceeding in which the appeal is taken;

and if the court of appeals authorizes the direct appeal of the judgment, order, or decree.

28 U.S.C. § 158(d)(2)(A).


Fed. R. Bankr.P. 8001(f)(4)(A) states:

A certification of an appeal on the court's own initiative under 28 U.S.C. § 158(d)(2) shall be made in a separate document served on the parties in the manner required for service of a notice of appeal under Rule 8004. The certification shall be accompanied by an opinion or memorandum that contains the information required by [Fed. R. Bankr.P. 8001(f)(3)(C)(i)-(iv).]

Fed. R. Bankr.P. 8001(f)(3)(C) states:


A request for certification shall include the following:

(i) the facts necessary to understand the question presented;

(ii) the question itself;

(iii) the relief sought;

(iv) the reasons why the appeal should be allowed and is authorized by statute or rule, including why a circumstance specified in 28 U.S.C. § 158(d)(2)(A)(i)-(iii) exists; and

(v) an attached copy of the judgment, order, or decree complained of and any related opinion or memorandum.

This Part I addresses those five disclosure requirements of Fed. R. Bankr.P. 8001(f)(3)(C).

A. The Facts Necessary to Understand the Questions Presented
1. Introduction

As this Court observed in its Opinion Regarding Eligibility:

The City of Detroit was once a hardworking, diverse, vital city, the home of the automobile industry, proud of its nickname—the “Motor City.” It was rightfully known as the birthplace of the American automobile industry. In 1952, at the height of its prosperity and prestige, it had a population of approximately 1,850,000 residents. In 1950, Detroit was building half of the world's cars.

The evidence before the Court establishes that for decades, however, the City of Detroit has experienced dwindling population, employment, and revenues. This has led to decaying infrastructure, excessive borrowing, mounting crime rates, spreading blight, and a deteriorating quality of life.

The City no longer has the resources to provide its residents with the basic police, fire and emergency medical services that its residents need for their basic health and safety.

[504 B.R. 194]

Moreover, the City's governmental operations are wasteful and inefficient. Its equipment, especially its streetlights and its technology, and much of its fire and police equipment, is obsolete.

To reverse this decline in basic services, to attract new residents and businesses, and to revitalize and reinvigorate itself, the City needs help.

In re City of Detroit, Mich., 504 B.R. 97, 112–13, 2013 WL 6331931, at *4 (Bankr.E.D.Mich.2013).


Regarding the City's debt, this Court stated:

The City estimates its debt to be $18,000,000,000. This consists of $11,900,000,000 in unsecured debt and $6,400,000,000 in secured debt. It has more than 100,000 creditors.

According to the City, the unsecured debt includes:

$5,700,000,000 for “OPEB” through June 2011, which is the most recent actuarial data available. “OPEB” is “other post-employment benefits,” and refers to the Health and Life Insurance Benefit Plan and the Supplemental Death Benefit Plan for retirees;

$3,500,000,000 in unfunded pension obligations;

$651,000,000 in general obligation bonds;

$1,430,000,000 for certificates of participation (“COPs”) related to pensions;

$346,600,000 for swap contract liabilities related to the COPs; and

$300,000,000 of other liabilities[.]

Id. at 113–14.


The Court also found, “Detroit's population declined to just over 1,000,000 as of June 1990. In December 2012, the population was 684,799. This is a 63% decline in population from its peak in 1950.” Id. at 119.

On March 25, 2013, Kevyn Orr became the emergency manager for the City of Detroit under §§ 2(e) and 31 of the “Local Financial Stability and Choice Act,” Michigan Public Act 436 of 2012. M.C.L. §§ 141.1542(e) and 141.1571.

At Mr. Orr's request, on July 18, 2013, Governor Richard Snyder authorized the filing of this chapter 9 bankruptcy case under § 18(1) of Public Act 436. M.C.L. § 141.1558(1). On that same day, Mr. Orr filed this chapter 9 bankruptcy case on behalf of the City of Detroit.

Article IX, § 24 of the Michigan Constitution states, “The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.”

Nothing in Public Act 436 prohibits a municipality from seeking to impair pensions in a chapter 9 case. The governor's authorization to the City of Detroit to file this case did not include a condition prohibiting the City of Detroit from seeking to impair pensions in this case. Mr. Orr has stated that the City's plan of adjustment will propose to impair pensions because the City is unable to propose a plan that does not impair pensions.

2. The Several Constitutional Challenges to Chapter 9 of the Bankruptcy Code

Several objecting parties assert that as applied in this case, chapter 9 violates the Tenth Amendment of the United States Constitution. This Court held that if the Michigan Supreme Court were faced with the issue, it would hold that the pension clause in the Michigan Constitution gives pension rights the protection of contract rights. This holding is based on: (1) the language of the Michigan pension clause, stating that pension rights are a “contractual

[504 B.R. 195]

obligation”; (2) case law from the Michigan Supreme Court on point, Kosa v. Treasurer of State of Mich., 408 Mich. 356, 368–69, 292 N.W.2d 452, 459 (1980), In re Constitutionality of 2011 Pa. 38, 490 Mich. 295, 806 N.W.2d 683 (2011); and (3) the history of the pension clause, as quoted in Kosa. Accordingly, this Court held that United States v. Bekins, 304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137 (1938), is directly on point in authorizing the impairment of contract rights in a municipal bankruptcy and that the decision is binding.

This Court also rejected the objectors' challenges to chapter 9 under the bankruptcy and contract clauses of the United States Constitution.

3. The Several Challenges to Public Act 436 Under the Michigan Constitution

Several objectors also assert that Public Act 436 violates the pension clause of the Michigan Constitution. This Court rejected that...

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