In re City of Detroit

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.

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).

Opinion Regarding Eligibility

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

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

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

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 Constitutionality of Chapter 9 of the Bankruptcy Code and Public Act 436

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

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

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 Authorization Did Not Prohibit the City from Impairing

Pension Rights

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

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

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

XIX.

Conclusion: The City is Eligible and the Court Will Enter an Order for Relief

190

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).

II. Introduction to the Eligibility Objections

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).

A. The Process

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 City's...