U.S. Bankruptcy Judge Steven Rhodes )
Detroit’s bid to be declared eligible for Chapter 9 bankruptcy isn’t yet complete before U.S. Bankruptcy Judge Steven Rhodes, but the contours of the battle are.
They come down to this:
First, Gov. Rick Snyder, patron and supervisor of Emergency Manager Kevyn Orr, clearly decided that Detroit’s downward financial spiral would culminate in bankruptcy, notwithstanding Snyder’s claim that a filing was “a last resort.” They acted accordingly, even intentionally, exposing themselves to charges of bad-faith bargaining over a predetermined outcome.
Second, the entire case for the unions, pension funds and retirees is less about derailing the bankruptcy and more about preserving vested pension benefits. Judging by the repeated lines of questioning, their lawyers clearly are determined to do it by persuading the court to uphold the state constitutional protection for public pensions.
And, third, none of the city’s most valuable assets can be excluded from the process. In testimony this week, Orr confirmed that everything — city-owned pieces in the Detroit Institute of Arts collection, the precious Detroit Water and Sewerage Department, city assets of varying worth and more — truly is on the table, an inescapable reality of bankruptcy.
For all of its precedent-setting potential, the largest municipal bankruptcy in American history so far is projecting an air of predictability familiar to a town steeped in labor-management confrontation. The filers play the sober technocrats who saw no other option, while the aggrieved unions, pension funds and retirees seek refuge in a state constitutional protection that may prove to be no such thing.
The gulf is palpable. Snyder, in his rare testimony, made a point to say that Article IX, Section 24 of the state constitution says vested pensions should be treated as a “contractual obligation.” Because federal bankruptcy, by definition, can be used to void and restructure contracts, the governor’s reference opens a window into the legal strategy Orr and his pricey legal team are pursuing.
The unions, pension funds and retirees rely on different parts of the same passage, quoted in its entirety: “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.”
Effective in January 1964, it doesn’t say who pays, the state or its “political subdivisions.” The language doesn’t address insolvency or bankruptcy. It doesn’t anticipate an inability to pay, probably unthinkable on such a massive scale nearly 50 years ago. And, as Rhodes asked from the bench: What does “thereby” mean in this context?
Excruciating legalese it may be. But the arc of the eligibility trial, poised to enter its third week when Orr returns to the witness stand Monday, is hurtling toward a ruling on what is probably one of the central questions in the Detroit bankruptcy: does the state constitution protect pensioners in a federal proceeding?
“Chapter 9 recognizes that there are limitations on the power of the bankruptcy court,” Harold S. Horwich and Christopher L. Carter, attorneys with Bingham McCutchen LLP, wrote earlier this year in the American Bankruptcy Institute’s journal. “A plan cannot be confirmed if the results would be that ... the municipality would be in violation of state law.
“However, not every violation of state law is beyond the power of the bankruptcy laws to discharge. Cases have clearly recognized that bankruptcy law supersedes state laws protecting contract rights, even where the state constitution expressly protects contract rights. Construing the intent of state constitutions presents a serious quandary for a bankruptcy court.”
All of which is unspooling in a federal courtroom as Detroiters wait for signs of the change they’ve been promised. They’re on the outside looking in, mostly, wondering where the improvements to basic services are, how long it will be until they arrive and whether a brutal restructuring in bankruptcy will improve daily lives burdened by the weight of continuing decline and empty rhetoric.
Seven months into Orr’s stint as EM, too many streetlights remain dark. Violent crime rages, despite the arrival of yet another police chief. Garbage collection is shoddy, if it comes at all. Blight metastasizes. And the biggest news of the past two weeks is the hiring of another deputy emergency manager with no track record in municipal government.
Seriously. None of this historic legal wrangling will mean much if it doesn’t improve the lot of folks living with daily reminders of the city’s epic dysfunction and mismanagement. It mostly hasn’t, so far.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.