In re City of Detroit
Citation | 504 B.R. 97 |
Decision Date | 05 December 2013 |
Docket Number | No. 13–53846.,13–53846. |
Parties | In re CITY OF DETROIT, MICHIGAN, Debtor. |
Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan |
504 B.R. 97
In re CITY OF DETROIT, MICHIGAN, Debtor.
No. 13–53846.
United States Bankruptcy Court,
E.D. Michigan,
Southern Division.
Dec. 5, 2013.
[504 B.R. 106]
Bruce Bennett, Los Angeles, CA, Eric D. Carlson, Jonathan S. Green, Detroit, MI, Robert S. Hertzberg, Southfield, MI, Deborah Kovsky–Apap, Pepper Hamilton LLP, Southfield, MI, Heather Lennox, New York, NY, Marc N. Swanson, Miller Canfield Paddock and Stone, P.L.C, Detroit, MI, for Debtor in Possession.
Sean M. Cowley, United States Trustee, Detroit, MI, for Daniel M. McDermott (U.S. Trustee).
STEVEN RHODES, Bankruptcy Judge.
The Congress shall have Power To ... establish ... uniform Laws on the subject of Bankruptcies throughout the United States....
Article I, Section 8, United States Constitution
No ... law impairing the obligation of contract shall be enacted.
Article I, Section 10, Michigan Constitution
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.
Article IX, Section 24, Michigan Constitution
Table of Contents |
I |
Summary of Opinion |
110 |
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||
II. |
Introduction to the Eligibility Objections |
110 |
A. |
The Process |
110 |
B. |
Objections Filed by Individuals Without an Attorney |
111 |
C. |
Objections That Raise Only Legal Issues |
111 |
D. |
Objections That Require the Resolution of Genuine Issues of Material Fact |
112 |
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||
III. |
Introduction to the Facts Leading up to the Bankruptcy Filing |
112 |
A. |
The City's Financial Distress |
113 |
1. |
The City's Debt |
113 |
2. |
Pension Liabilities |
114 |
3. |
OPEB Liabilities |
115 |
4. |
Legacy Expenditures—Pensions and OPEB |
115 |
5. |
The Certificates of Participation |
115 |
a. |
The COPs and Swaps Transaction |
115 |
b. |
The Result |
116 |
c. |
The Collateral Agreement |
116 |
d. |
The City's Defaults Under the Collateral Agreement |
116 |
e. |
The Forbearance and Optional Termination Agreement |
117 |
f. |
The Resulting Litigation Involving Syncora |
117 |
g. |
The COPs Debt |
118 |
6. |
Debt Service |
118 |
7. |
Revenues |
118 |
8. |
Operating Deficits |
118 |
9. |
Payment Deferrals |
119 |
B. |
The Causes and Consequences of the City's Financial Distress |
119 |
1. |
Population Losses |
119 |
2. |
Employment Losses |
119 |
3. |
Credit Rating |
119 |
4. |
The Water and Sewerage Department |
119 |
5. |
The Crime Rate |
120 |
6. |
Streetlights |
120 |
7. |
Blight |
120 |
8. |
The Police Department |
120 |
9. |
The Fire Department |
120 |
10. |
Parks and Recreation |
120 |
11. |
Information Technology |
120 |
C. |
The City's Efforts to Address Its Financial Distress |
121 |
D. |
A Brief History of Michigan's Emergency Manager Laws |
121 |
E. |
The Events Leading to the Appointment of the City's Emergency Manager |
122 |
1. |
The State Treasurer's Report of December 21, 2011 |
122 |
2. |
The Financial Review Team's Report of March 26, 2012 |
123 |
3. |
The Consent Agreement |
123 |
4. |
The State Treasurer's Report of December 14, 2012 |
124 |
5. |
The Financial Review Team's Report of February 19, 2013 |
124 |
6. |
The Appointment of an Emergency Manager for the City of Detroit |
125 |
F. |
The Emergency Manager's Activities |
126 |
1. |
The June 14, 2013 Meeting and Proposal to Creditors |
126 |
2. |
Subsequent Discussions with Creditor Representatives |
127 |
G. |
The Prepetition Litigation |
128 |
H. |
The Bankruptcy Filing |
128 |
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IV. |
The City Bears the Burden of Proof |
128 |
|
||
V. |
The Objections of the Individuals Who Filed Objections Without an Attorney |
129 |
|
||
VI. |
The City of Detroit Is a “Municipality” Under 11 U.S.C. § 109(c)(1) |
129 |
|
||
VII. |
The Bankruptcy Court Has the Authority to Determine the |
129 |
A. |
The Parties' Objections to the Court's Authority Under Stern v. Marshall |
129 |
B. |
Stern, Waldman, and Global Technovations |
130 |
C. |
Applying Stern, Waldman, and Global Technovations in This Case |
131 |
D. |
Applying Stern in Similar Procedural Contexts |
132 |
E. |
The Objectors Overstate the Scope of Stern |
133 |
1. |
Stern Does Not Preclude This Court from Determining Constitutional Issues |
133 |
2. |
Federalism Issues Are Not Relevant to a Stern Analysis |
134 |
F. |
Conclusion Regarding the Stern Issue |
135 |
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VIII. |
Chapter 9 Does Not Violate the United States Constitution. |
136 |
A. |
Chapter 9 Does Not Violate the Uniformity Requirement of the Bankruptcy Clause of the United States Constitution |
136 |
1. |
The Applicable Law |
136 |
2. |
Discussion |
137 |
B. |
Chapter 9 Does Not Violate the Contracts Clause of the United States Constitution |
137 |
C. |
Chapter 9 Does Not Violate the Tenth Amendment to the United States Constitution |
138 |
1. |
The Tenth Amendment Challenges to Chapter 9 Are Ripe for Decision and the Objecting Parties Have Standing |
138 |
a. |
Standing |
139 |
b. |
Ripeness |
140 |
2. |
The Supreme Court Has Already Determined That Chapter 9 Is Constitutional |
141 |
3. |
Changes to Municipal Bankruptcy Law Since 1937 Do Not Undermine the Continuing Validity of Bekins |
143 |
a. |
The Contracts Clause of the United States Constitution Prohibits States from Enacting Municipal Bankruptcy Laws |
144 |
b. |
Asbury Park Is Limited to Its Own Facts |
144 |
4. |
Changes to the Supreme Court's Tenth Amendment Jurisprudence Do Not Undermine the Continuing Validity of Bekins |
145 |
a. |
New York v. United States |
145 |
b. |
Printz v. United States |
146 |
c. |
New York and Printz Do Not Undermine Bekins |
147 |
d. |
Explaining Some Puzzling Language in New York |
148 |
5. |
Chapter 9 Is Constitutional As Applied in This Case |
149 |
a. |
When the State Consents to a Chapter 9 Bankruptcy, the Tent h Amendment Does Not Prohibit the Impairment of Contract Rights That Are Otherwise Protected by the State Constitution |
150 |
b. |
Under the Michigan Constitution, Pension Rights Are Contractual Rights. |
150 |
|
||
IX. |
Public Act 436 Does Not Violate the Michigan Constitution |
154 |
A. |
The Michigan Case Law on Evaluating the Constitutionality of a State Statute |
155 |
B. |
The Voters' Rejection of Public Act 4 Did Not Constitutionally Prohibit the Michigan Legislature from Enacting Public Act 436 |
156 |
C. |
Even If the Michigan Legislature Did Include Appropriations Provisions in Public Act 436 to Evade the Constitutional Right of Referendum, It Is Not Unconstitutional |
157 |
D. |
Public Act 436 Does Not Violate the Home Rule Provisions of the Michigan Constitution |
158 |
E. |
Public Act 436 Does Not Violate the Pension Clause of the Michigan Constitution |
161 |
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||
X. |
Detroit's Emergency Manager Had Valid Authority to File This Bankruptcy Case Even Though He Is Not an Elected Official |
161 |
|
||
XI. |
The Governor's Authorization to File This Bankruptcy Case Was Valid Under the Michigan Constitution Even Though the |
162 |
|
||
XII. |
The Judgment in Webster v. Michigan Does Not Preclude the City from Asserting That the Governor's Authorization to File This Bankruptcy Case Was Valid |
162 |
A. |
The Circumstances Leading to the Judgment |
162 |
B. |
The Judgment Is Void Because It Was Entered After the City Filed Its Petition |
165 |
C. |
The Judgment Is Also Void Because It Violated the Automatic Stay |
166 |
D. |
Other Issues |
167 |
|
||
XIII. |
The City Was “Insolvent” |
168 |
A. |
The Applicable Law |
168 |
B. |
Discussion |
168 |
1. |
The City Was “Generally Not Paying Its Debts As They Become Due” |
169 |
2. |
The City Is Also “Unable to Pay Its Debts As They Become Due.” |
169 |
3. |
The City's “Lay” Witnesses |
170 |
4. |
The City's Failure to Monetize Assets |
170 |
|
||
XIV. |
The City Desires to Effect a Plan to Adjust Its Debts |
171 |
A. |
The Applicable Law |
171 |
B. |
Discussion |
172 |
|
||
XV. |
The City Did Not Negotiate with Its Creditors in Good Faith |
172 |
A. |
The Applicable Law |
172 |
B. |
Discussion |
174 |
|
||
XVI. |
The City Was Unable to Negotiate with Creditors Because Such Negotiation Was Impracticable |
176 |
A. |
The Applicable Law |
176 |
B. |
Discussion |
177 |
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||
XVII. |
The City Filed Its Bankruptcy Petition in Good Faith |
179 |
A. |
The Applicable Law |
180 |
B. |
Discussion |
180 |
1. |
The Objectors' Theory of Bad Faith |
181 |
2. |
The Court's Conclusions Regarding the Objectors' Theory of Bad Faith |
183 |
3. |
The City Filed This Bankruptcy Case in Good Faith |
187 |
a. |
The City's Financial Problems Are of a Type Contemplated for Chapter 9 Relief |
187 |
b. |
The City's Reasons for Filing Are Consistent with the Remedial Purpose of Chapter 9 |
187 |
c. |
The City Made Efforts to Improve the State of Its Finances Prior to Filing, to No Avail |
188 |
d. |
The Residents of Detroit Will Be Severely Prejudiced If This Case Is Dismissed |
188 |
C. |
Conclusion Regarding the City's Good Faith |
189 |
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XVIII. |
Other Miscellaneous Arguments |
189 |
A. |
Midlantic Does Not Apply in This Case |
189 |
B. |
There Was No Gap in Mr. Orr's Service as Emergency Manager |
190 |
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XIX. |
Conclusion: The City is Eligible and the Court Will Enter an Order for Relief |
190 |
[504 B.R. 110]
I. Summary of Opinion
For the reason stated herein, the Court finds that the City of Detroit has established that it meets the requirements of 11 U.S.C. § 109(c). Accordingly, the Court finds that the City may be a debtor under chapter 9 of the bankruptcy code. The Court will enter an order for relief under chapter 9.
Specifically, the Court finds that:
• The City of Detroit is a “municipality” as defined in 11 U.S.C. § 101(40).
• The City was specifically authorized to be a debtor under chapter 9 by a governmental officer empowered by State law to authorize the City to be a debtor under chapter 9.
• The City is “insolvent” as defined in 11 U.S.C. § 101(32)(C).
• The City desires to effect a plan to adjust its debts.
• The City did not negotiate in good faith with creditors but was not required to because such negotiation was impracticable.
The Court further finds that the City filed the petition in good faith and that therefore the petition is not subject to dismissal under 11 U.S.C. § 921(c).
The Court concludes that it has jurisdiction over this matter under 28 U.S.C. § 1334(a), and that the matter is a core proceeding under 28 U.S.C. § 157(b)(2).
The matter is before the Court on the parties' objections to the eligibility of the City of Detroit to be a debtor in this chapter 9 case under 11 U.S.C. § 109(c).
By order dated August 2, 2013, the Court set a deadline of August 19, 2013 for parties to file objections to eligibility. (Dkt. # 280) That order also allowed the Official Committee of Retirees, then in formation, to file eligibility objections 14 days after it retained counsel.
One hundred nine parties filed timely objections to the...
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