Michigan State Judge Rules Detroit Chapter 9 Unconstitutional; Ruling Being Appealed
Less than twenty-four hours after we learned that the City of Detroit was filing a petition under Chapter 9 of the Bankruptcy Code, a Michigan state court Judge issued an order purporting to find the filing unconstitutional under state law and ordering it being withdrawn, but the matter is already being appealed:
An Ingham County judge says Thursday’s historic Detroit bankruptcy filing violates the Michigan Constitution and state law and must be withdrawn.
But Attorney General Bill Schuette said he will appeal Circuit Judge Rosemarie Aquilina’s Friday rulings and seek emergency consideration by the Michigan Court of Appeals. He wants her orders stayed pending the appeals, he said in a news release.
In a spate of orders today arising from three separate lawsuits, Aquilina said Gov. Rick Snyder and Detroit emergency manager Kevyn Orr must take no further actions that threaten to diminish the pension benefits of City of Detroit retirees.
“I have some very serious concerns because there was this rush to bankruptcy court that didn’t have to occur and shouldn’t have occurred,” Aquilina said.
“Plaintiffs shouldn’t have been blindsided,” and “this process shouldn’t have been ignored.
Lawyers representing pensioners and two city pension funds got an emergency hearing with Aquilina Thursday at which she said she planned to issue an order to block the bankruptcy filing. But lawyers and the judge learned Orr filed the Detroit bankruptcy petition in Detroit five minutes before the hearing began.
Aquilina said the Michigan Constitution prohibits actions that will lessen the pension benefits of public employees, including those in the City of Detroit. Snyder and Orr violated the constitution by going ahead with the bankruptcy filing, because they know reductions in those benefits will result, Aquilina said.
“We can’t speculate what the bankruptcy court might order,” said assistant Attorney General Brian Devlin, representing the governor and other state defendants.
“It’s a certainty, sir,” Aquilina replied. “That’s why you filed for bankruptcy.”
Devlin said Snyder has to follow both the Michigan Constitution and the U.S. Constitution.
Schuette’s office issued a statement saying an appeal has been filed on behalf of the governor in all three cases before Aquilina.
“In addition, the Attorney General filed motions to stay the trial court rulings and any future proceedings while the appeals proceed,” spokeswoman Joy Yearout said. “Later today, we expect to file additional motions seeking emergency consideration.”
Aquilina issued a declaratory judgment that says the bankruptcy filing violated the Michigan Constitution.
“In order to rectify his unauthorized and unconstitutional actions … the Governor must (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,” she said in her order.
John Canzano, a Southfield attorney representing retirees, cautioned there are no contempt implications for Snyder if he doesn’t follow the judge’s instructions. But he said he will likely return to court seeking further relief if Snyder doesn’t instruct Orr to withdraw the bankruptcy filing.
Asked what the judge could then do, Canzano said: “I will have to do my homework.”
Douglas Bernstein, a partner with Plunkett Cooney in Birmingham, said Aquilina’s ruling is surprising.
“This is generally how bankruptcies occur: You file bankruptcy when there is an impending crisis at the eleventh hour,” Bernstein said. “You file bankruptcies to stave off litigation.”
University of Michigan law professor John Pottow said the issue could travel up the court system, all the way to the Michigan Supreme Court. Or it could be answered decisively and quickly in bankruptcy court, he said.
“There’s nothing that precludes a federal judge from adjudicating the constitutionality of the Michigan statute,” Pottow said. “The bankruptcy judge can interpret Michigan law.”
Indeed, this is what I would normally expect to see happen. With the understanding that I am not familiar with those provisions of Michigan law upon which Judge Aquilina based her opinion, it strikes me as a tremendous legal stretch to say that Michigan state law would impose a per se bar on any filing of a petition under Chapter 9 of the Bankruptcy Code. Instead, a more reasonable view of the law would seem to be that Michigan law may give pension beneficiaries some set of rights in bankruptcy that would have an impact on how their claims against the city can properly be dealt with. As a general rule, though, the idea that state law can prevent any individual or entity, including a municipality, from exercising their rights under Federal Law seems to be way of the mark. I would expect to see this ruling set aside, either at the appellate level in Michigan, or in Bankruptcy Court itself.
Update: The Detroit News account of today’s hearing includes what I can only call some rather odd comments by the Judge:
Aquilina, who granted the restraining order, clearly was irked.
Prior to her ruling on Friday, she criticized the Snyder administration and Attorney General’s Office for what appeared to be hasty action to outflank pension board attorneys.
“It’s cheating, sir, and it’s cheating good people who work,” the judge told assistant Attorney General Brian Devlin. “It’s also not honoring the (United States) president, who took (Detroit’s auto companies) out of bankruptcy.”
Aquilina said she would make sure President Obama got a copy of her order.
“I know he’s watching this,” she said, predicting the president ultimately will have to take action to make sure existing pension commitments are honored.
Excuse me, Judge Aquilina? What, exactly are you insinuating here? That the Administration should be intervening in Court proceedings to favor one side over the other? And if that’s what she did here, regardless of the law, then it strikes me as highly improper.
Here are Judge Aquilina’s orders: