Bankruptcy Court Judge: Michigan State Law No Bar To Detroit’s Chapter 9

The Bankruptcy Court Judge presiding over the Chapter 9 Bankruptcy filed by the City of Detroit has overruled the state law objections filed by various interest groups and ruled that Detroit’s petition can go forward:

Detroit — A bankruptcy judge has overruled objections to the city’s bankruptcy filing, freezing several lawsuits filed against Detroit and will allow the bankruptcy case to proceed in federal court.

U.S. District Judge Steven Rhodes also decided Wednesday that an automatic stay triggered by Detroit’s Chapter 9 filing extends to Emergency Manager Kevyn Orr, Gov. Rick Snyder and members of the restructuring team as well as State Treasurer Andy Dillon.

The judge noted that in recent Chapter 9 cases, it was the bankruptcy court that determined all of the eligibility issues raised by creditors.

Rhodes’ decision comes after city lawyers — during a hearing that lasted almost two hours over the biggest municipal bankruptcy case in U.S. history — argued Wednesday morning that Detroit would be “irreparably harmed” if retirees were able to block its Chapter 9 filing.

Retirees and city pension fund lawyers have been trying to fight the bankruptcy case because, they say, the filing is trying to violate constitutional protections of vested pension benefits.

Lawyers for the city and several creditors, including unions and pension funds, sparred in court before Rhodes as he convened the first hearing in Detroit’s historic bankruptcy case Wednesday morning.

City lawyer Heather Lennox argued Wednesday the city would be “prevented from accessing necessary protections” of a Chapter 9 bankruptcy filing.

From the Detroit Free Press:

U.S. Bankruptcy Judge Steven Rhodes ruled that bankruptcy court is the jurisdiction to decide whether lawsuits filed by Detroit’s pension systems, retirees and workers pertaining to the city’s financial crisis can move forward while the city has filed for bankruptcy.

Rhodes emphasized that the court is not making a decision today on whether the city is eligible for bankruptcy.

“The court is making no ruling whatsover on whether the city is eligibility to be a debtor under Chapter 9” or on whether (Gov. Rick) Snyder was right to file for bankruptcy given Michigan’s constitutional protections for pension benefits, Rhodes said.

Nor, he said, was he ruling on whether the city’s bankruptcy plan will ultimately win approval.

A status conference on the case is set for Aug. 2.

In addition, all issues related to bankruptcy “must be decided by the bankruptcy court exclusively,” Rhodes ruled. Rhodes added that nothing in 10th Amendment supports the argument that constitutionality of state’s pension protections must be decided by state courts.

(…)

Rhodes said after the court reconvened that in all other recent Chapter 9 cases, it was the bankruptcy court that determined all eligibility issues raised by all the parties

Nonetheless, Ed McNeil, special assistant to AFSCME Council 25 President Al Garrett, said outside court that it appeared to him that the judge was leaning toward siding with the city’s lawyers. He was correct.

“My hint is that he may bring everything in his courtroom,” meaning the judge would not let stand state court rulings seeking to block the bankruptcy from proceeding, McNeil added. “I think there’s an obligation for this governor to uphold the state Constitution.”

In the end, there really isn’t an argument here. Under the Supremacy Clause of the Constitution, Federal Law trumps state law and, under the Bankruptcy Code, the filing of a Bankruptcy petition places an automatic stay on all state court proceedings involving the debtor. This includes any state court based proceedings questioning the authority of the debtor to file for bankruptcy to begin with. Indeed the state court order that was entered last week after the petition had already been valid was technically invalid on its face because of the stay. If there is a valid argument that Detroit had no authority at all to initiate the filing, its up to the Bankruptcy Court to decide that question unless the Court enters an order divesting the matter to a state court. Now, the case will move forward and the parties will make their arguments.  Whether Detroit can get out of its financial mess is, of course, is another question.

FILED UNDER: Law and the Courts, Quick Takes, ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Dave Schuler says:

    The most surprising thing was that the state court stay on the bankruptcy was treated as though it had any merit by the media.




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  2. Dave,

    Very true. I didn’t hear a single one of cable news’s much-vaunted legal talking heads even use the words “automatic stay.”

    They were probably too burned out on Zimmerman trial coverage to bother.




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  3. PD Shaw says:

    Has anybody ever offered an explanation as to why the state judge directed a copy of her order be sent to Obama? Her ruling was premised on the idea that this was purely a matter of state law. It strikes me as a political move on her part.




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  4. al-Ameda says:

    In the end, there really isn’t an argument here. Under the Supremacy Clause of the Constitution, Federal Law trumps state law and, under the Bankruptcy Code, the filing of a Bankruptcy petition places an automatic stay on all state court proceedings involving the debtor.

    Here in California, in the case of the city of Stockton’s bankruptcy, there was significant legal maneuvering, particularly over the issue of public employee pensions and retirement health care. The door is open, many more distressed cities are seeing bankruptcy as a way to reduce their long-term pension liabilities.




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  5. al-Ameda says:

    @Dave Schuler:

    The most surprising thing was that the state court stay on the bankruptcy was treated as though it had any merit by the media.

    Actually Dave, the least surprising thing is that the media generally does not do any due diligence or research of the issues when this type of story is reported. Unless it’s a business page or legal affairs type of story I expect there to be little background or context.




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  6. Very informative blog. I really learned a lot from it. So the filing of bankruptcy still needs to be approved by the court to proceed. It can’t be done that easily as there are numerous requirements.




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