Challenges to EM Law in Limbo

Federal bankruptcy judge stays all city lawsuits.

With all the attention being paid to Detroit’s mayoral primary results and bankruptcy filing, it’s easy to see how an important story, roiling just beneath the surface, is failing to generate much scrutiny.

Fortunately, the Hits is here to explore what might otherwise be overlooked.

What we’re talking about are the two federal cases challenging the constitutionality of Michigan’s current emergency manager law, PA 436 — and the potential effect a bankruptcy filing could have on them.

You may recall some fairly big splashes were made when these cases were filed, separately, earlier this year. One is a largely union-backed effort, the other has been brought by the Detroit branch of the NAACP.

Given the typically slow grind of federal court actions, it’s understandable there hasn’t been much media attention paid to either case since that initial burst of coverage.

Except that … both challenges appear to have been put on hold, at least temporarily.

The reason: Detroit’s bankruptcy filing — and a ruling made by U.S.

Bankruptcy Court Judge Stephen Rhodes staying all relevant legal proceedings against not only the city, but also against Gov. Rick Snyder, state Treasurer Andy Dillon and state appointed officials.

The pseudo-legal heads here at News Hits find this to be a rather peculiar turn of events. Here’s why:

In Michigan, all roads to municipal bankruptcy currently run through PA 436; if an emergency manager has been installed, he’s the one who must recommend that the governor authorize the filing for Chapter 9 bankruptcy protections.

Which is exactly what happened in Detroit.

Here’s what we find odd about this: The law that EM Kevyn Orr is operating under may be unconstitutional. If it is (and that, admittedly, is a big if), then Orr is acting without any legal authority. However, the court challenges that would determine if Orr has been installed legally are at risk of being put on hold as a result of actions being taken by Orr.

That seems crazily circuitous to us.

Our first question when we first caught wind of this was: Does Judge Rhodes actually have the authority to freeze the two cases already being heard by another federal judge?

The answer is: maybe.

The most thorough analysis we’ve seen comes from a confidential report provided to the Detroit City Council by the lawyers in its Research & Analysis Division.

As we reported previously, when the city filed for bankruptcy, all cases pending against it were automatically stayed. (We’re particularly interested in that because a Freedom of Information Act lawsuit we filed, one related to the whole EM issue, was put on hold.)

On July 24, as lawyers representing the city were successfully attempting to keep federal bankruptcy proceedings from being derailed by challenges in state court, Rhodes was asked to broaden the automatic stay to include Snyder and his crew. Rhodes did just that.

As a result, advised the RAD attorneys, the order issued by Rhodes now “freezes” ongoing challenges to the emergency manager law “in both federal and state courts.”

That’s also the opinion held by John Pottow, a bankruptcy expert at the University of Michigan Law School.

According to Pottow (who has become one of the go-to legal experts for journalists attempting to understand the ins-and-outs of municipal bankruptcy), Chapter 9 law gives broad authority to bankruptcy court judges. It is Pottow’s opinion that, in a situation like this, “the bankruptcy judge gets priority.”

Pottow goes so far as to say Rhodes has the authority to assume control of the two cases now in front of U.S. Judge George C. Steeh.

On the other hand, there’s Robert Sedler, a constitutional law authority at Wayne State University Law School, who, in an email exchange, pointed out to us that not all federal judges are the same.

U.S. bankruptcy judges, he noted, are what’s known as “Article I” judges, and are appointed to 14-year terms. Federal judges such as Steeh are “Article III” judges who, after being confirmed by the Senate, receive lifetime appointments.

“I would seriously doubt that a federal bankruptcy judge would purport to interfere with a proceeding before an Article III judge,” Sedler opined. “I would also seriously doubt if the federal bankruptcy law gives the bankruptcy judge that authority.”

Attorney Melvin “Butch” Hollowell, who represents the Detroit branch of the NAACP in its lawsuit challenging PA 436, informed us that his side is prepared to make the argument that their case should be allowed to move forward in front of Judge Steeh.

“Unlike creditors and debtors, the NAACP’s claim is not about money; it’s about voting,” Hollowell explained in an email.

Attorney Julie Hurwitz, one of the lawyers at the helm of the other federal case challenging the constitutionality of the EM law, said they too “are planning to challenge the applicability of the stay to our case.”

As if all that weren’t enough, here’s another factor worth contemplating: Don’t isn’t the only city in Michigan with an emergency manager in place. Why should Detroit’s bankruptcy interfere with lawsuits that aren’t focused only on the city, but rather the whole state?

The bottom line is, the legal thicket surrounding PA 436 — and the Detroit bankruptcy case it led to — keeps getting thornier.

The law itself is being questioned because it is more extensive than any similar statute currently in place anywhere in America. Adding to the complexity is the Michigan Constitution, which explicitly protects the pensions of municipal retirees. If the bankruptcy proceeds, will those pension protections be upheld in federal court?

Nobody really knows. As the lawyers for RAD noted in their report to City Council:

“The impact of bankruptcy proceedings on Detroit assets and services is unknown at this time and virtually impossible to predict given the disputes surrounding the level of debt that needs restructuring and the legal framework within which it will need to be accomplished. With the pension challenges already raised, and less than one month into bankruptcy, Detroit is already in uncharted territory.”

That much is beyond dispute.

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

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