Wrinkles in Detroit’s Bankruptcy Filing

Some of the mind-bending details that might otherwise be overlooked.

Wrinkles in Detroit’s Bankruptcy Filing

In this week’s Metro Times you will find articles examining what those on the outside of the Detroit fishbowl are saying about the city’s historic default and attempt to be declared legally bankrupt.

Here at the Hits, though, we’ve been immersed in the issue for a while, which means instead of the big-picture view others are providing, we’re here to bring you some of the mind-bending details that might otherwise be overlooked.

For example, there’s the not-so-insignificant fact that, as a result of the recent bankruptcy filing, all lawsuits against the city have been put on hold.

We found that out after being notified by attorney Shaun Godwin that a Freedom of Information lawsuit filed on our behalf against the city had been halted, at least temporarily. (We’re trying to pry loose a video of a meeting that took place earlier in the year between representatives of the Jones Day law firm, restructuring consultant Miller Buckfire and Detroit City Council staff. The suit was filed when the city failed to respond to our request asking for a copy of the video recording of that meeting.)

What the hell does a FOIA lawsuit have to do with bankruptcy? To get a definitive answer to that question, we went to Bill Nowling, spokesman for Emergency Manger Kevyn Orr.

“It’s the law,” replied Nowling via email. “When bankruptcy is filed, all litigation against the city is stayed.”

Emphasis should be put on the word all, regardless of whether the legal action seeks any sort of monetary payout from the cash-strapped municipality.

Along these same lines, we’ve also been wondering what effect, if any, last week’s rulings by U.S. Bankruptcy Court Judge Steven Rhodes might have on three federal court cases challenging the legality of the state’s emergency manager law.

The answer, obtained after consulting several attorneys working on the cases, was: “We’re not sure.”

It is an important question, at least to the team of highly opinionated non-lawyers here at the Hits. If, in fact, the state’s EM law — officially designated PA 436 — is deemed unconstitutional, wouldn’t that mean the bankruptcy filing it led to is invalid?

Before that is answered though, attorneys need to hear from Judge Rhodes if it’s his intent to wrap the cases challenging the EM law into the bankruptcy proceedings, or if he will allow them to move forward in the courtroom of Hon. George Steeh, the U.S. District Court judge who was originally assigned the cases.

One of those cases, brought by former Detroit Public Schools Superintendent (and current mayoral candidate) John Telford, had a hearing in front of Steeh last Thursday, a day after Rhodes put a stay on state court actions attempting to halt the federal bankruptcy proceedings. 

Telford contends that his contract with DPS was illegally terminated by school district EM Roy Roberts last March, after the new emergency manager law kicked in. (The school district, to no one’s surprise, contends the action was entirely legal.)

One of the things Judge Steeh has focused his questions on involves the convoluted history behind PA 436, the emergency manager law that’s currently in place.

Because we fear you’ll likely skip over the rest of this and jump straight to the sex ads at the back of the paper, we’ll make all this as simple as possible.

In short, Michigan Attorney General Bill Schuette successfully defended challenges to the way PA 436 was implemented in state court. Telford’s lawsuit attempts to have the federal courts rule on some of the same issues, but hoping for a different conclusion.

By the way, Schuette on Monday formally entered the federal bankruptcy case on behalf of city retirees who fear their pension and health benefits could be gutted in bankruptcy, no matter what the state constitution says.

Did you hear the booming cheers that erupted from union halls across the state when that happened? Neither did we.

Maybe that’s because Schuette, along with vigorously defending the EM law, just got done fighting to keep pensioners from using the state courts in their attempt to keep the federal bankruptcy proceedings from moving forward.

Now Schuette’s saying that he’s really on the side of the people he was just lined up against.

“The City of Detroit’s bankruptcy will cause even greater hardship for many people in Southeast Michigan who are already struggling. Detroit’s $20 billion indebtedness is simply staggering. Equally staggering is the financial uncertainty of pension benefits relied upon by Michigan seniors living on fixed incomes, and anticipating a safe and secure retirement after a lifetime of work,” said Schuette in a statement released by his office on Saturday.

“Retirees may face a potential financial crisis not of their own making, possibly a result of pension fund mismanagement,” Schuette’s statement continued. “Michigan’s constitution, Article 9, Section 24, is crystal clear in stating that pension obligations may not be ‘diminished or impaired.’ As Attorney General, I will defend the rights of Michigan citizens and defend the constitution of the state of Michigan.”

That puts Schuette in the odd role of arguing that the pensioners have state constitutional protections while at the same time defending the EM law against claims that it’s not legal.

As if all that isn’t enough to set your head spinning, there’s something else to keep in mind as you keep track of all this: Detroit, no matter how much red ink it’s drowning in, may not be allowed to move forward with its bankruptcy filing.

That’s according to retired U.S. Bankruptcy Court Judge Ray Reynolds Graves, who appeared on a panel discussing various aspects of federal Chapter 9 bankruptcy last week at Wayne County Community College.

As we’ve previously reported, Orr and the legal team at Jones Day have to convince Judge Rhodes that Detroit is truly insolvent, and that the only way to get out of the financial mess the city’s in is through bankruptcy.

Graves, however, pointed out another potential stumbling block.

Along with proving insolvency, Orr and his legal team also have to clearly demonstrate they bargained in good faith with creditors, and completely exhausted all efforts to reach some sort of settlement — before filing for bankruptcy.

“Did he do that?” Graves asked about Orr. From where he’s sitting, Graves isn’t certain, saying the bankruptcy filing could have been premature, possibly in an attempt to keep aforementioned state challenges from moving forward.

“I am still puzzled as to why this case was filed in a rush,” said Graves.

Graves, who pulled no punches when evaluating what’s going on, also said that he thinks the pensions of city retirees should absolutely be protected. He also said that, from what he’s observed so far, it could be that Orr “may be leaning toward protecting bondholders” and their interests.

He also didn’t appear to think too much of those who kept lending Detroit hundreds of millions of dollars, even after it became apparent that the city was being extended far past its limits.

“They really don’t care what’s happening in Detroit as long as they can break its heart and squeeze its last drop of blood,” said Graves.

All we can say is: It’s too bad he’s retired. 

News Hits is written by Curt Guyette. Contact the column at 313-202-8004 or [email protected]