Michigan’s Emergency Manager law faces legal challenge from Flint & Pontiac retirees for favoring banks over people


This isn’t going away, governor

Retired government employees from both Flint and Pontiac have filed a complaint with the U.S. District Court in Detroit to have Public Act 436 and its predecessor Public Act 4 — Michigan’s anti-democratic Emergency Manager laws — declared illegal under the Bankruptcy Clause and Contracts Clause of the US Constitution, as well as Chapter 9 of Title 11 of the United States Code. The complaint (pdf) rests largely on the argument that these laws favored one set of creditors over others. Namely, they claim retirees and unions have seen their contracts negatively impacted while banks have gotten away without taking a hit.

The plaintiffs are Beverly Stubbs, a City of Pontiac municipal retiree; Sherri Murphy of the United Retired Governmental Employees Local #1; Walter Moore, the former mayor for the City of Pontiac; and Janice Gaffney, a member of the City of Pontiac Retired Employees Association.

Defendants are Gov. Rick Snyder, state Treasurer Andy Dillon, Director of Licensing and Regulatory Affairs Steve Arwood, Director of Management and Budget John Nixon, former or current Emergency Managers Ed Kurtz, Louis Schimmel, and Michael Brown, and the cities of Flint and Pontiac.

The complaint alleges that, under both PA 436 and PA 4, the state “impermissibly discriminated among creditors, in violation of the Bankruptcy Clause and Contracts Clause, as well as Chapter 9 of the United States Bankruptcy Code.”

While union and retiree contracts were taking a negative hit from the actions of Emergency Managers, the suit contends that state officials were busy assuring the credit rating agencies that banks would be fine.

Defendants Dillon, Nixon and Snyder have met privately with the three primary credit rating bureaus for municipalities. The clear purpose of these meetings was to enhance the state’s credit rating, and to convey the ways in which Defendants and their political allies were hoping to accomplish that goal.

These meetings began in May of 2011, when, among other things, the Defendants assured the bureaus that the recent pension tax increase would be upheld by the Michigan Supreme Court, although no decision had been issued at that time. {…}

The last known meeting between Defendants and credit bureaus was in New York in March of this year, around the time that Kevyn Orr’s appointment as emergency manager for Detroit was announced. At the March meeting, Defendants discussed the Detroit receivership and gave the bureaus their assurances that the interests of bondholders will be protected at the expense of public sector retirees and municipal residents.

This is a smart approach, in my opinion. One of the things that has outraged me most about these laws is the preferential treatment given to banks. As I wrote in March:

Banks receive special dispensation and protection under the new version of the Emergency Manager law passed by Michigan Republicans and signed into law by Governor Rick Snyder, Public Act 436. The new law replaces one sent to the rubbish bin by Michigan voters last November and goes into effect later this month. One aspect of the law that hasn’t gotten much attention is Section 11(1)(b):

Sec. 11. (1) An emergency manager shall develop and may amend a written financial and operating plan for the local government. The plan shall have the objectives of assuring that the local government is able to provide or cause to be provided governmental services essential to the public health, safety, and welfare and assuring the fiscal accountability of the local government. The financial and operating plan shall provide for all of the following:

(a) Conducting all aspects of the operations of the local government within the resources available according to the emergency manager’s revenue estimate.

(b) The payment in full of the scheduled debt service requirements on all bonds, notes, and municipal securities of the local government, contract obligations in anticipation of which bonds, notes, and municipal securities are issued, and all other uncontested legal obligations.

So, not only have the big banks reaped hundreds of millions of dollars in fees and avoided taxes by walking away from foreclosed properties, they are first in line to get paid when Detroit’s debt problem is resolved. To add insult to financial injury, the banks will be paid “in full”, not risking anything if the city goes into bankruptcy. This is in contrast to other creditors who may get paid only pennies on the dollar if Detroit eventually does go through Chapter 9 municipal bankruptcy, something newly-minted Emergency Financial Manager Kevyn Orr says may be a possibility.

This one sentence buried on page 10 of the 22-page law is a big wet kiss to the banks that have already profited handsomely as Detroit circles the drain. And it’s going almost completely unnoticed.

I wish these retirees well. It is my hope that they will prevail where others have failed at repealing these odious laws.