A brief overview of Merrill, Michigan's 1987 bankruptcy filing

When Detroit filed for bankruptcy in July 2013, the city's fiscal woes generated headlines across the world. To some, Detroit's municipal bankruptcy was viewed as potentially devastating for other communities across the state of Michigan. But the Motor City wasn't Michigan's first municipality to pursue court protection. 

Back in 1987, the small village of Merrill, up north in Saginaw County, was faced with a sudden financial emergency: Officials had to figure out how to address a $225,000 jury award that dwarfed its annual operating budget. A police officer by the name of Harold "Bud" Sprowl filed a wrongful termination lawsuit against the village and won, according to The Associated Press. So, in June of that year, faced with a bill it couldn't foot, Merrill filed a bankruptcy petition to restructure its debt — "making it the first town in the state to ever take the step," the AP reported at the time.

Except there was one problem: The U.S. bankruptcy judge assigned the case had nothing to work off. The Michigan legislature repealed a law in 1982 that allowed any municipality to file for bankruptcy, AP noted. And, as many know, it's just highly unusual for a town to go bust. 

Speaking to AP, Judge Arthur Spector said he would have to depend on a small number of published rulings to determine if his court had the authority to oversee Merrill's case.

"We will have to use the laws in the book and interpret them the best we can," Spector told AP then. Even today, judges have novel rulings to make in municipal bankruptcy cases — for instance, the judge overseeing Detroit's case has to decide if the so-called "grand bargain" is legal under federal bankruptcy code.

Meanwhile, Merrill's move into the courtroom had state officials on edge. If the town of roughly 800 succeeded, then who knows what could follow?

Similar to those aforementioned concerns raised about Detroit's bankruptcy, according to AP, then-state Treasurer Robert Bowman wrote in a court filing that, "The impact of of any one community successfully filing for bankruptcy in federal court is felt not only by the community but throughout the state."

Michigan's Attorney General Frank Kelley chimed in, saying, if a community were to file for bankruptcy, the state would need to authorize the petition.

(A few years back, the state denied the City of Hamtramck's request to file bankruptcy. Under Michigan law today, the only way a community can file for bankruptcy is if the state appoints an emergency manager who then determines bankruptcy is needed.)

Besides the state, Sprowl's attorney challenged Merrill's authority to file for bankruptcy. Sprowl, AP reported, said he was "sorry village taxpayers are burdened with the huge debt but [he] has no plans of backing down."

Eventually, the bitter dispute ended on a rather quiet note.

As the Hartford Courant reported, Merrill withdrew its petition; if the village couldn't pay Sprowl $225,000, it most certainly couldn't afford a lengthy court battle with the state. And, the predicament actually brought a change of heart to Sprowl: In light of Merrill's troubles and uncertainty, the filing brought the police officer back to the table to renegotiate, the Courant reported. 

Tom Mayan, village President, told the Courant: "It helped to bring the whole matter to a close."