As a follow up to the prior post reporting on the bankruptcy filing of Detroit, now a Michigan court has ruled that the bankruptcy filing is unconstitutional. The decision can be accessed here.
The background of this legal battle raises a lot of legal questions. The events are as follows. First, Detroit announces it will be declaring bankruptcy. Then, lawsuits are filed to block bankruptcy filings/proceedings. An emergency hearing is scheduled on Thursday (last week) in front of a judge about blocking the bankruptcy proceedings. Five (5) minutes before the Thursday hearing, Detroit files a petition for bankruptcy. Afterwards, another hearing is set for Friday.
On Friday, the Ingham County Court ruled against the city. The court relied on Michigan’s state constitution, which prohibits actions that diminish or impair pension benefits of public employees. Because Detroit was aware that declaring bankruptcy would affect negatively the pension benefits of public employees, the court ruled that it acted unconstitutionally.
Michigan’s Attorney General Schuette stated that Detroit will be appealing the ruling. The Attorney General also stated that they will be requesting a stay on the bankruptcy proceedings until the appeal is heard.
This background is so interesting because it raises a lot of legal questions. Filing a Chapter 9 petition gives the bankruptcy court exclusive jurisdiction over the debtor’s (Detroit) assets. The interesting predicament is that Detroit filed a petition for bankruptcy five (5) minutes before the Thursday hearing — before any order from the Ingham County Court.
Yet, the state court is ordering the Governor to “(1) direct the Emergency Manager to immediately withdraw the Chapter 9 petition filed on July 18, and (2) not authorize any further Chapter 9 filing which threatens to diminish or impair accrued pension benefits.”
Some of the questions include how to reconcile the state’s and the bankruptcy’s court jurisdictions. For example, can the state court order state officials (like the Governor) to withdraw the petition? How can a bankruptcy proceeding reconcile itself with Michigan’s state constitution? Are the plaintiffs subject to sanctions for violating a stay in bankruptcy court?
The Huffington Post has an interesting tidbit:
Michigan is one of nine states that explicitly protects public employee pensions in its state constitution. But the state of Michigan doesn’t guarantee the money to public employees if a city defaults or can’t pay those bills…
The law of bankruptcy is enshrined in the U.S. Constitution. And the limited case law of Chapter 9 bankruptcy, which applies to cities and municipalities, doesn’t say whether a judge can legally subvert Michigan’s constitution to lessen Detroit’s obligations to its pensioners.
You can read more about Michigan’s constitution protecting public employees’ pensions here. Some other notable Chapter 9 bankruptcy proceedings nuclide Jefferson County, Alabama (2011) and Orange County, California (1994).