Municipal bankruptcies, at least until recently, were a rare phenomenon. Even more rare is a bankruptcy filing of this magnitude. Detroit has $18.5 billion in debt and liabilities that it cannot afford to pay, including $3.5 billion in unfunded pension liabilities.
In a 150-page order earlier this month, Judge Steven W. Rhodes held that Motown was eligible to file for Chapter 9 bankruptcy and more importantly, could restructure or avoid some of its massive pension obligations, despite the Michigan Constitution's protections for pensioners from cuts, as federal bankruptcy law trumps state law.
Both holdings may now head to the Sixth Circuit Court of Appeals, after Judge Rhodes certified his rulings for appeal directly to the appeals court, bypassing the intermediate district court, though as USA Today notes, it'll be up to the Sixth Circuit to decide whether it wants to accept the immediate appeal.
The city sought to delay any appeals on the eligibility issue until after a reorganization plan was in place, arguing that the eligibility determination was not a "final judgment, order, or decree." Though the Sixth Circuit has yet to rule on whether Chapter 9 eligibility is a final order, both the Ninth and Fifth circuits have, finding that eligibility is not immediately appealable.
City retirees argued that the matter was a matter of public importance worthy of an expedited trip to the Sixth Circuit, stating that "Certification of a direct appeal would serve the most basic interests of justice by ensuring that monumentally important legal issues of first impression affecting the interests of hundreds of thousands of Detroit residents, millions of Michigan residents, and indeed the people of the entire Sixth Circuit and United States, are decided by the Sixth Circuit before the time realistically available for judicial review potentially runs out."
Judge Rhodes apparently agreed, as he certified the appeals earlier this week. Interestingly enough, a parallel case is developing in California, with a municipal bankruptcy appeal certified for a trip to the Ninth Circuit late last week, reports The Sun.
Pragmatically, the ruling makes sense, as waiting to appeal the novel issue until after a reorganization plan is in place could do major damage to the city's already broken budget, and could lead to even more ridiculous legal fees. So far, the city has spent nearly $28 million on lawyers, accountants, art appraisers, and more, highlighted by $14.2 million in fees for BigLaw firm Jones Day, reports The Wall Street Journal.
- Detroit bankruptcy judge allows appeal of eligibility, pension rulings (Detroit News)
- Detroit Bankruptcy is Largest Ch. 9 Filing in US History (FindLaw's Courtside)
- Detroit's Bankrupt. So What's Next? (FindLaw's Law & Daily Life)