Ochadleus v. City of Detroit (In re City of Detroit), 15-2194
| Decision Date | 03 October 2016 |
| Docket Number | No. 15-2353,No. 15-2379,No. 15-2194,No. 15-2337,No. 15-2371,15-2194,15-2337,15-2353,15-2371,15-2379 |
| Parties | In re: CITY OF DETROIT, MICHIGAN, Debtor. WILLIAM OCHADLEUS, et al. (15-2194); JOHN P. QUINN (15-2337); DENNIS TAUBITZ and IRMA INDUSTRIOUS (15-2353); LUCINDA DARRAH (15-2371); WILLIAM DAVIS (15-2379), Appellants, v. CITY OF DETROIT, MICHIGAN, et al., Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 16a0248p.06
Appeal from the United States District Court for the Eastern District of Michigan at Detroit.
No. 2:14-cv-14872—Bernard A. Friedman, District Judge.
Before: BATCHELDER, MOORE, and McKEAGUE, Circuit Judges.
ARGUED: Jamie S. Fields, Detroit, Michigan, for Appellants in 15-2194. John P. Quinn, Detroit, Michigan, for Appellant in 15-2337. Dennis Taubitz, Irma Industrious, St. Thomas, Virgin Islands, for Appellants in 15-2353. Marc N. Swanson, MILLER CANFIELD PADDOCK & STONE PLC, Detroit, Michigan, for Appellees. ON BRIEF: Jamie S. Fields, Detroit, Michigan, for Appellants in 15-2194. John P. Quinn, Detroit, Michigan, for Appellant in 15-2337. Dennis Taubitz, Irma Industrious, St. Thomas, Virgin Islands, for Appellants in 15-2353. Heather Lennox, JONES DAY, Cleveland, Ohio, Beth Heifetz, Anthony J. Dick, G. Ryan Snyder, JONES DAY, Washington, D.C., for Appellees. Lucinda J. Darrah, Detroit, Michigan, pro se, in 15-2371. William Davis, Detroit, Michigan, pro se, in 15-2379.
BATCHELDER, J., delivered the opinion of the court in which McKEAGUE, J., joined. MOORE, J. (pp. 16-29), delivered a separate dissenting opinion.
ALICE M. BATCHELDER, Circuit Judge. This appeal arises out of the City of Detroit, Michigan's municipal bankruptcy under Chapter 9 of the Bankruptcy Code, 11 U.S.C. § 109(c). In resolving its bankruptcy, the City crafted a complex network of settlements and agreements with its thousands of creditors and stakeholders, memorialized those agreements in a comprehensive Plan, and obtained the bankruptcy court's ratification of that Plan in a final Confirmation Order. One aspect of the plan involved the reduction of certain municipal-employee pension benefits under the City's General Retirement System (GRS). Several GRS pensioners, resisting any reduction in their benefits, challenged the Confirmation Order in the district court. The City moved the district court to dismiss those actions as equitably moot and the court agreed, dismissing them pursuant to Federal Rule of Civil Procedure 12(b)(1). When those pensioners appealed here, we consolidated their appeals and, finding that equitable mootness applies and prohibits their challenges to the Confirmation Order, we AFFIRM.
The City of Detroit filed for municipal bankruptcy on July 18, 2013, pursuant to Chapter 9 of the Bankruptcy Code, 11 U.S.C. § 109(c). At the time of filing, the City had over $18 billion in escalating debt, over 100,000 creditors, hundreds of millions of dollars of negative cash flow, crumbling infrastructure (e.g., some 78,000 abandoned structures, half classified as "dangerous"; another 66,000 blighted vacant lots; a crumbling water and sewer system; 40% nonfunctioning streetlights; outdated computer systems and software), and could not provide "the basic police, fire[,] and emergency medical services that its residents need[ed] for their basic health and safety." In re City of Detroit, 504 B.R. 191, 192 (Bankr. E.D. Mich. 2013).
In bankruptcy, the City crafted a series of "intricate and carefully woven" settlements with almost all of its creditors and stakeholders. Those settlements were memorialized in the Eighth Amended Plan for the Adjustment of Debts of the City of Detroit ("Plan"). After extensive hearings, the bankruptcy court confirmed the Plan in a Confirmation Order dated November 12, 2014.
The appellants here are participants in the City's General Retirement System ("GRS")—City employees, retirees, or beneficiaries thereof—who oppose the provisions of the Plan that reduce their pension benefits; that is, they want the full benefits the City promised them prior to bankruptcy. The GRS has two components: a traditional pension plan ("GRS Defined Benefit Plan" or "Pension Plan") and a 401(k)-style employee-contribution retirement savings program ("GRS Annuity Savings Fund" or "ASF"). The City is the sole sponsor of the Pension Plan and fully responsible for its funding (or deficiency thereto). The City is not responsible for funding the ASF, but some $387 million of City money had been wrongly directed into it (and distributed from it) in order to ensure each participant a promised 7.9% annual return regardless of the returns on the ASF investments, and the bankrupt City was obliged to recoup that money. That, however, would be easier said than done given the magnitude and complexity of the situation.
Moreover, the Pension Plan was underfunded by some $1.879 billion and the City did not have, and would not have, the resources to fully fund it over time. The City was therefore faced with having to reduce each GRS pension by 27%. Instead, the City orchestrated the "Grand Bargain," in which it obtained "outside funding" to bolster the Pension Plan in exchange for a settlement of GRS claims at less than the full promised pension amount. The outside funding, which totaled $816 million, came from agreements by and among the City, the State of Michigan, and certain philanthropic foundations. The "Global Retiree Settlement" between the City and the GRS Board of Trustees1 reduced all GRS pensions by 4.5% and eliminated cost-of-living increases; reduced retiree healthcare coverage and eliminated dental, vision, and life insurance; and set out a mechanism for the partial recoupment of excess ASF distributions.2 The GRS pension claimants (designated "Class 11" for purposes of bankruptcy) voted 73% in favor of accepting the Plan, including the Grand Bargain and the Settlement.3
Overall, the Plan eliminated approximately $7 billion in debt and freed approximately $1.7 billion in revenue for reinvestment into City services and infrastructure, including public services, blight remediation, information technology, and public transportation. The Plan took effect on December 10, 2014, and the City began implementation immediately. As the district court noted in an opinion dated September 29, 2015, the City had by that date already issued $287.5 million in bonds and $720 million in new notes; irrevocably transferred all Detroit Institute of Art assets to a perpetual charitable trust; recouped money from all but five ASF account holders; transferred certain real property interests pursuant to separate settlement agreements within the Plan; and implemented a two-year City budget. See In re City of Detroit, No. 14-CV-14872, 2015 WL 5697702, at *3 (E.D. Mich. Sept. 29, 2015).4 In its briefs on appeal, filed in January and February 2016, the City identified numerous additional aspects of the Plan that have been implemented or completed, including: the City issued over $1 billion in bonds; the State of Michigan transferred $195 million to the retirement systems; the Detroit Institute of Art and others transferred $23 million to the retirement systems; the retirement systems reduced pension amounts as planned in the Global Retiree Settlement and adopted new methods of governance and financial oversight; the City optioned the sale or lease of certain real estate, including the Joe Lewis Arena and the Windsor Tunnel; the emergency manager resigned, restoring day-to-day management to the mayor and city council; the Governor terminated the City's financial emergency status and removed the City from receivership, though maintaining oversight of the City's finances via the Michigan Financial Review Commission; the City cooperated in the creation of the Great Lakes Water Authority to provide water and sewer services; the City established the Beneficiary Associations to provide healthcare to municipal retirees; the City invested millions in public services, including $8.4 million to the police department, $3.8 million to the fire department, $3.5 million for blight remediation, and $1.9 million for information technology; and the City paid to settle with certain claimholders, including $72 million on the City's limited-tax general obligation bonds (Class 7), $288 million on the City's unlimited-tax general obligation bonds (Class 8), $88 million on certificates of participation (Class 9), $493 million to the Beneficiary Associations (Class 12), $3.7 million on claims regarding the Downtown Development Authority (Class 13), and some $21 million to settle other various unsecured claims (Class 14).
Several GRS pensioners (Class 11 claimants) appealed to the district court, challenging the reduction in their pensions, the ASF Recoupment, and other things, including a release provision that prevented retirees from asserting claims against the State of Michigan. They urged the court to strike the challenged provisions from the Confirmation Order and remand to the bankruptcy court with instructions to exempt pensions from adjustment. In response, the City moved to dismiss the appeals as equitably moot and the court agreed, concluding that "[a]ll three factors of the equitable mootness analysis weigh in favor of dismissing appellants' appeal as moot: appellants did not obtain a stay; the confirmed Plan has been substantially consummated; and reversal of the Plan would adversely impact third parties and the success of the Plan." In re City of Detroit, 2015 WL 5697702 at *8. Granting the City's motion, the district court dismissed the appeals pursuant to Federal Rule of Civil Procedure 12(b)(1).
When those GRS pensioners appealed here, we consolidated their five separate appeals.5 While these appellants, together, raise several diverse issues or arguments, the determinative issue is the applicability of the equitable mootness doctrine in this case, including...
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