Detroit, Emergency Manager Law, Emergency Managers — July 18, 2013 at 2:49 pm

UPDATED: Detroit has filed for bankruptcy, largest city in US history to do so


It was inevitable

The Detroit Free Press is reporting this afternoon that Detroit Emergency Manager Kevyn Orr may file Chapter 9 municipal bankruptcy paperwork as early as tomorrow morning in an effort to stave off multiple lawsuits from various pension groups.

The City of Detroit is in final preparations to file for federal bankruptcy as early as Friday morning, several sources told the Free Press today.

The filing would begin a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities. […]

Plunkett Cooney bankruptcy lawyer Doug Bernstein, who is not involved in the bankruptcy and is not representing any parties related to it, said today he had no direct information about whether or when the city would file, but said he understands the strategy if the city were to do so Friday or perhaps over the weekend.

On Monday, an Ingham County Circuit Court judge is scheduled to hold a hearing on the city workers’ and retirees’ challenge to stop the city from filing bankruptcy.

The employee groups, and separately the city’s two pension funds in another lawsuit, argue that the governor — who under Michigan law must authorize any bankruptcy filing — cannot do so if the filings include plans to reduce pension benefits, because the state’s constitution explicitly protects public pensions.

Bernstein said preventing the court hearing on Monday is likely a key part of the strategy behind a Chapter 9 petition by the city, because a ruling in favor of the employees could put a halt, at least temporarily, to any moves by Orr and Snyder to proceed with a bankruptcy petition. A bankruptcy filing immediately stays all such court proceedings.

The bankruptcy would have to be approved by Governor Rick Snyder. If the bankruptcy proceeds, it will be the largest municipal bankruptcy in the history of the United States of America.

I’m happy about this. I see no other way out of the pit that Detroit is in. As I said in op-ed at, a Chapter 9 bankruptcy preserves democracy while protecting city assets, putting the tough decisions in the hands of a non-partisan, apolitical judge rather than a political appointee:

The main thrust of Mr. Bomey’s argument is that Chapter 9 bankruptcy is an unpredictable, frightening prospect where municipalities lose control, union contracts are rejected, wages & benefits of employees cut, city vendors take a hit, and hard decisions are made by a single individual who doesn’t answer to the local community.

Every single one of these things describes exactly what occurs when an EM takes over a government. But you know what does not happen? The bankruptcy judge cannot simply do away with inconvenient elected officials. A bankruptcy judge cannot unilaterally dispose of the municipality’s assets to raise funds (despite what is claimed in the op-ed).

Section 904 of the law that governs Chapter 9 bankruptcies is very clear about this, limiting the ability of the bankruptcy court to “interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor’s use or enjoyment of any income-producing property” unless the city agrees.

The law also provides a mechanism for the assignment of a judge to oversee the process. While these judges are described in Mr. Bomey’s op-ed as uncaring and dispassionate, the law’s intent is to ensure that politics don’t play a role in how the bankruptcy plays out. When one looks at the people chosen as EMs in Michigan, bean-counting experts in outsourcing and union-busting, a non-political, neutral judge begins to sound a bit less scary.

No one doubts that Detroit’s future is going to be very painful. Municipal bankruptcy is a sound choice and the right choice to ensure Detroit’s assets are protected and that democracy has been preserved.

Godspeed, Detroit. You know we love you.

UPDATE: The paperwork has been filed. If approved by Governor Snyder and the city is found to be eligible (which is highly likely) this will be the largest city in America to ever go bankrupt.

[Photo by Chris Savage | Eclectablog]