Detroit Bankruptcy and the Tactful Use of State Ordered Declaratory Relief in Federal Proceedings

JURIST Guest Columnist Patrick Brady, University of Maine School of Law Class of 2014, discusses Detroit's bankruptcy and pension holders' proactive defense of their rights...

Although the pension holders of the city pension funds are at the heart of Detroit's financial woes, the holders are at a severe disadvantage with respect to their ability to proactively and personally defend their rights to their pension funds. While judicial efficiency calls for the spirit of the Ingham County Circuit Court ruling to be given effect at the time of confirmation, the petitioner's desire to be proactive in defending their rights required that they use state ordered declaratory relief to protect themselves in the federal bankruptcy system.

In a motion filed by pension holders against the governor of Michigan, Richard Snyder, and the treasurer of the state of Michigan, Andy Dillon, the Ingham County Circuit Court issued a declaratory relief order [PDF] ruling that the City of Detroit's Chapter 9 bankruptcy filing was unconstitutional because, according to Article IX of Section 24 of the Michigan constitution, no Michigan city can take any action that threatens public pension plans. Prior to filing the bankruptcy petition on July 18, the Detroit city emergency manager, Kevyn Orr, made formal recommendations to the city to file for bankruptcy and further recommended to cut some, or perhaps all, the city pension plans in the eventual plan. This statement prompted pension holders to file suit and they were ultimately successful at the state circuit court level in being awarded a favorable declaratory relief order.

The primary purpose of a declaratory relief motion in Michigan, and as a general rule, for most other courts nationwide, is for a court to state the legal rights of the parties so as to guide their future conduct. This involves a court articulating what certain parties can and cannot do. This gives the court a broad range of discretion in the scope of its ruling and in the situation at hand, it is interesting to note what the court said the parties could and could not do. The court did not say that the city could proceed with the filing as long as they did not cut the pension plans. The court did say that the filing was moot because there was possible aggression toward the pension funds and that discussion made the filing unconstitutional. While the former skirts a very dangerous line of a state court judge telling a federal bankruptcy court judge what can and cannot be in a bankruptcy plan, the latter denies the city many of the benefits conferred from simply existing in bankruptcy court. Furthermore, this litigation is far from over as the bankruptcy court, and subsequent appeals courts, have ordered that the automatic stay applies. The petitioners will most likely petition to have the stay lifted and then the declaratory relief will almost certainly be appealed as well. Should the stay be lifted and defendants lose on appeal, the petition will have to be withdrawn and the city will be forced to re-file while making some sort of express promise not to cut pensions. All of this litigation has now been created when, at the end of the day, the result would still be the same had the state court passed on the ruling and allowed the case to reach the confirmation hearing in the bankruptcy court.

The result would be the same and the plan could not be confirmed by the bankruptcy court because, under chapter 9, a plan cannot be confirmed if the debtor is prohibited by law from taking any action necessary to carry out the plan. As long as someone at the confirmation hearing recognizes that the Michigan constitution prohibits the city from cutting the pension plans and objects, then the result is the same and this declaratory ruling was simply unnecessary and created unnecessary litigation. Unfortunately for the pension holders, they cannot object at the plan confirmation hearing. This means that the pension holders must put all of their faith in the judge and city recognizing, and raising, the issue. This is certainly not a very comforting situation to be in when all your post-retirement financial independence rests on the astuteness of a bankruptcy judge who, while on point, resides in a state with comparatively few bankruptcy proceedings and is presiding over the largest municipal bankruptcy in history, and a city that has expressly said they wish to cut your pension plans.

The reason that the pension holders cannot object is simple: chapter 9 does not let them. Under chapter 9, the only parties that have standing to challenge a plan are "special tax payers." The code further defines a "special tax payer" as an owner of real property against which a special assessment or special tax has been levied and the proceeds of the tax or special assessment is the sole source of revenue for an obligation incurred as a result of an improvement on that real property. As pension holders, the petitioners would not meet this burden and would therefore not have standing to challenge the confirmation of the plan. This is in sharp contrast to a chapter 11 bankruptcy proceeding where a party in interest may challenge a plan. Under the relevant chapter 11 statutes, the pension holders would be qualified to object. Unfortunately for the pension holders, this is not chapter 11. So, with no opportunity to object to the plan, the pension holders' only option was to seek declaratory relief.

To obtain declaratory relief in Michigan, the litigant must have standing and under Michigan law — if the litigant satisfies MCR 2.605 [PDF], the litigant has standing. MCR 2.605 states that declaratory relief may be granted to a litigant if it is a case of actual controversy within the court's jurisdiction. The hurdle in establishing standing for declaratory relief, then becomes, assuming it is within the court's jurisdiction, whether there is an actual controversy. To satisfy this standard, Michigan requires that there be a disagreement between parties respecting their rights with reference to the subject of the litigation. It is important to note that there is no requirement of a concrete or materialized injury to invoke declaratory relief. In this way, the burden of establishing standing in Michigan to invoke declaratory relief is, with all things considered, a comparatively small and manageable burden.

Furthermore, when considering the stakes, it is all the more impressive that these pension fund holders can use such a relaxed standard to gain such power and traction in a chapter 9 proceeding and grind it to a halt. Even though this ruling is interesting in that a state court is causing such commotion in the largest municipal bankruptcy case in the history of the bankruptcy code, it is even more interesting as an example of the very limited role that parties as adversely effected as these pension holders who stand to lose the very ground they built their retirement on play in a chapter 9 bankruptcy proceeding and the innovative ways that those holders and other creditors must use to gain power and protect their interests. While the amount of litigation that flows from this ruling remains to be measured, the effects of giving creditors a very limited roll in municipal bankruptcy proceedings can already be seen in the form of reduced judicial efficiency that spans both state and federal courts.

Patrick Brady earned his BS in Civil Engineering from University of Maine. His professional experience includes potions with Baker Newman Noyes, US Department of Transportation, and legal services for the elderly in Maine.

Suggested citation: Patrick Brady, Detroit Bankruptcy and the Tactful Use of State Ordered Declaratory Relief in Federal Proceedings , JURIST - Dateline, Sept. 5, 2013, http://jurist.org/dateline/2013/9/patrick-brady-detroit-bankruptcy.php.


This article was prepared for publication by Fangxing Li, an associate editor for JURIST's student commentary service. Please direct any questions or comments to him at studentcommentary@jurist.org

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