Lyda v. City of Detroit (In re City of Detroit)

• Decision Date: 14 November 2016
• Docket Number: No. 15-2236,15-2236
• Citation: 841 F.3d 684
• Parties: In re: City of Detroit, Mich., Debtor. Maurikia Lyda, John Smith, Nicole Hill, Rosalyn Walker, Annette Parham, Janice Ward, Sylvia Taylor, Scott Eubank, Joanne Jackson, and Tammika R. Williams, individually and on behalf of all others similarly situated; Michigan Welfare Rights Organization; People's Water Board; National Action Network—Michigan Chapter; Moratorium Now!, Plaintiffs–Appellants, v. City of Detroit, Mich.; Detroit Water and Sewerage Department, Defendants–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

841 F.3d 684

In re: City of Detroit, Mich., Debtor.

Maurikia Lyda, John Smith, Nicole Hill, Rosalyn Walker, Annette Parham, Janice Ward, Sylvia Taylor, Scott Eubank, Joanne Jackson, and Tammika R. Williams, individually and on behalf of all others similarly situated; Michigan Welfare Rights Organization; People's Water Board; National Action Network—Michigan Chapter; Moratorium Now!, Plaintiffs–Appellants,

v.City of Detroit, Mich.; Detroit Water and Sewerage Department, Defendants–Appellees.

No. 15-2236

United States Court of Appeals, Sixth Circuit.

Argued: August 2, 2016

Decided and Filed: November 14, 2016

ARGUED: Mark P. Fancher, ACLU FUND OF MICHIGAN, Detroit, Michigan, for Appellants. Marc N. Swanson, MILLER, CANFIELD, PADDOCK AND STONE, P.L.C., Detroit, Michigan, for Appellees.

ON BRIEF: Mark P. Fancher, ACLU FUND OF MICHIGAN, Detroit, Michigan, Alice B. Jennings, EDWARDS & JENNINGS P.C., Detroit, Michigan, Kurt Thornbladh, THORNBLADH LEGAL GROUP PLLC, Dearborn, Michigan, John C. Philo, MAURICE & JANE SUGAR LAW CENTER FOR ECONOMIC & SOCIAL JUSTICE, Detroit, Michigan, for Appellants. Marc N. Swanson, Jonathan S. Green, Sonal H. Mithani, Ronald A. Spinner, MILLER, CANFIELD, PADDOCK AND STONE, P.L.C., Detroit, Michigan, for Appellees.

Before: SUTTON, GRIFFIN, and DONALD, Circuit Judges.

OPINION

GRIFFIN

, Circuit Judge.

This appeal stems from an adversary proceeding in the City of Detroit's chapter 9 bankruptcy case. Plaintiffs are customers, and the purported representatives of customers, of the Detroit Water and Sewerage Department (DWSD). Relying primarily on 42 U.S.C. § 1983

and Monell v. Department of Social Services , 436 U.S. 658, 98 S.Ct. 2018, 56 L.Ed.2d 611 (1978), they filed a complaint alleging a series of claims arising from DWSD's termination of water service to thousands of residential customers. The legal theories underlying plaintiffs' claims are varied, but the relief requested uniform: “preliminary and permanent injunctive relief stopping water shut offs and restor[ing] service,” and an order directing DWSD “to implement a water affordability plan with income based payments” for residential customers.

Section 904 of the Bankruptcy Code

explicitly prohibits this relief. Whether grounded in state law or federal constitutional law, a bankruptcy court order requiring DWSD to provide water service at a specific price, or refrain from terminating service, “interfere[s]” with the City's “political [and] governmental powers,” its “property [and] revenues,” and its “use [and] enjoyment of ... income-producing property.” 11 U.S.C. § 904. Plaintiffs' due process and equal protection claims are, moreover, inadequately pled. Because plaintiffs cannot recover on their state-law or constitutional claims, we affirm the order of the district court affirming the bankruptcy court's order of dismissal.

I.

The City of Detroit filed for chapter 9 bankruptcy protection in July 2013. See In re City of Detroit , No. 13–53846 (Bankr. E.D. Mich. filed July 8, 2013). At the time, the City and its residents faced problems “run[ning] wide and deep”—including the affordable provision of basic utilities. In July 2014, plaintiffs filed an adversary complaint seeking to intervene in the case. As the district court explained:

Plaintiffs are ten residents of the City of Detroit, Michigan, who are residential customers of the Detroit Water and Sewerage Department (“DWSD”), and four organizations who claim to “represent[ ] members throughout the City of Detroit who are residential customers of DWSD.” The individual plaintiffs allege that in 2013 or 2014 the DWSD turned off their water, or threatened to do so, because their water bills were in arrears. Six of the plaintiffs indicate that their water service was turned off but then restored after they or their landlords paid a portion of the arrearage (generally one-third) and entered into payment plans, sometimes with advocacy assistance from one of the plaintiff organizations. Of the other four individual plaintiffs, two say they could not afford to pay the arrearage or the terms of the payment plan, or both, and remain without water; and the other two avoided service interruption when they, or their landlord, entered into payment plans. All plaintiffs find the cost of DWSD's water service to be unaffordable.

Plaintiffs purported to represent themselves and a proposed class of “all persons living in households who have been issued notices of water-shutoffs,” and “who have had their water or sewerage service shutoff.”

Their amended complaint included seven counts. In Count I, plaintiffs alleged that terminating service constituted a “[b]reach of [e]xecutory [c]ontract[s]” in violation of 11 U.S.C. § 365

. In Count II, they alleged DWSD violated their procedural due process rights by terminating service “without sufficient prior notice, without the opportunity for a hearing, or without an effective post termination hearing process.” In Count III, they alleged DWSD violated their right to equal protection by “treating residential account holders in arrears differently than [delinquent] commercial account holders” who did not face termination of service. In Count IV, they alleged defendants created a “public health emergency” in violation of the Michigan Constitution. In Count V, they alleged estoppel, on the ground that customers reasonably relied on DWSD's former policy of “allow[ing] the accumulation of large unpaid water bills without shut-offs.” In Count VI, plaintiffs sought declaratory and injunctive relief enjoining the “mass water shut offs.” And in Count VII, they alleged defendants violated their rights as humans, and as beneficiaries of the public trust, to water. Although not alleged in a specific count, the bankruptcy court also read the allegations to include a substantive due process claim for continued water service at an affordable rate.

With the exception of a request for costs and attorney's fees, plaintiffs prayed only for declaratory and injunctive relief, including: preliminary and permanent injunctions “stop[ping] all water shut offs and restor[ing] service to DWSD residential customers”; a declaration that DWSD's billing and shutoff procedures violated due process and equal protection rights, as well as the “human right to water” and the “public trust doctrine”; a declaration that the water provided by defendants is held in the public trust; and an order requiring “DWSD to implement a water affordability plan with income based payments for DWSD residential customers.”

Shortly after initiating suit, plaintiffs moved for a temporary restraining order (TRO) requiring DWSD to restore service to residential customers and prohibiting further shutoffs. Defendants objected to the request and moved for dismissal. In support of their motion, defendants relied primarily on 11 U.S.C. § 904

. That statute provides:

Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with—

(1) any of the political or governmental powers of the debtor;

(2) any of the property or revenues of the debtor; or

(3) the debtor's use or enjoyment of any income-producing property.

11 U.S.C. § 904

. As defendants saw it, “§ 904 explicitly prevent[ed]” the bankruptcy court from granting the relief sought, regardless of the theory under which plaintiffs asserted their claims. “Since the Court cannot grant effectual relief to the Plaintiffs even if they prevail,” defendants urged the court to dismiss the adversary proceeding. Insofar as § 904 did not resolve the matter, they argued that Counts I through VII failed to state a claim upon which relief could be granted.

Plaintiffs responded. They countered that as DWSD customers, they shared executory contracts with DWSD, and § 904

“do[es] not deprive the Court of supervision of assumption and rejection[ ] of executory contracts under Section 365 of the Bankruptcy Code.” Plaintiffs argued the bankruptcy court could, and should, leverage this “supervis[ory]” authority to “compel Defendant[s] to assume executory contracts” including the relief sought.

The bankruptcy court held hearings on both motions. Delivering its initial ruling from the bench, the court granted defendants' motion to dismiss and denied plaintiffs' motion for a TRO.

In response, plaintiffs filed four motions for reconsideration, each of which included a request for permission to file a second amended complaint. Finding no palpable defect the correction of which would result in a different disposition of the case, see L.B.R. 9024–1(a)(3) (E.D. Mich.), the bankruptcy court denied the motions. It likewise denied plaintiffs' requests to amend as untimely. “However, in light of certain arguments plaintiffs raise[d],” the court found it “necessary to supplement and clarify” its earlier ruling. It stated:

The Court concludes the City's motion to dismiss was properly granted, and thus the plaintiffs' several motions for reconsideration must be denied, for the following three reasons:

(1) Under § 904 of the bankruptcy code

, except as to the plaintiffs' constitutional claims, this Court lacks the authority to grant the injunctive relief requested.

(2) While issues arising under § 365 of the bankruptcy code relating to executory contracts do fall within the Court's core jurisdiction, the relationship between DWSD and its customers is not an executory contract. Moreover, even if the relationship is an executory contract, the relief that the plaintiffs seek is outside of the scope of § 365 and is prohibited by § 904.

(3) Although the plaintiffs' allegations of violations of due process and equal protection are not subject to § 904 because they are constitutional claims, they fail to state claims on which relief can be granted.

Finally, the Court concludes, in the alternative, that the evidence presented at the hearing ... does not establish that the Court should grant a preliminary injunction.

Plaintif...