The American Interest
Analysis by Walter Russell Mead & Staff
High Stakes in Looming Detroit Legal Battle

Detroit

In Detroit, bankruptcy lawyer turned city manager Kevyn Orr is playing hardball while preparing the city for a likely Chapter 9 bankruptcy. He’d like the various stakeholders to negotiate a “pre-packaged” bankruptcy in order to avoid a drawn-out and extremely costly legal battle, but reaching agreement could be incredibly tough, as Reuters points out:

[G]etting everyone on board for a pre-packaged plan is easier said than done, said Douglas Bernstein, a bankruptcy attorney at Plunkett Cooney in the Detroit area.

“When it comes to a pre-packaged plan, the big question is whether he (Orr) would have enough acceptance going into court,” he said. “He would need sufficient votes from all the creditor classes and that will not be easy.”

One problem is that Detroit’s creditors or stakeholders have different priorities. The main areas of uncertainty surround its unions and pension funds, which may not have much bargaining room and may feel their best chance lies in bankruptcy proceedings rather than a negotiated pre-packaged deal.

By holding out, the city’s unions and pension funds would be setting up a legal battle that could lead all the way to the Supreme Court. At issue is a conflict between federal and state law: Michigan’s state constitution specifically protects pensions and retirement benefits, but that clause is in tension with federal bankruptcy law. The unions would likely argue that the 10th Amendment “trumps the notion that federal law is supreme.”

If the Supreme Court rejected that argument, it would deal a major blow to public sector unions across the country. According to bankruptcy lawyer Michael Sweet, “The last thing (union pension funds) may want is for a judge to rule on that….Because if the judge ruled against them, it would open the floodgates.” Every public sector union in the country would then be on notice that underfunded pension programs will ultimately be welshed on by cities and states.

If the unions prevailed, though, federal bankruptcy law could be called into question elsewhere. Either way, it’s a major blow to blue model government: either states’ rights get a big boost or public sector unions take it on the chin.

[Detroit image courtesy of Shutterstock]

Published on June 17, 2013 1:40 pm
  • kkseattle

    “Every public sector union in the country would then be on notice that underfunded pension programs will ultimately be welshed on by cities and states.”

    Not really. Just because a pension program is underfunded doesn’t mean the city or state can file for bankruptcy. Under the current Bankruptcy Code, states are not permitted to file for bankruptcy at all. A city may file only if its state permits it to do so. Only the city may file; its creditors may not file to put a city into bankruptcy. And in order to be eligible to file, the city must be insolvent (unable to pay its obligations) and must demonstrate that it has made good faith efforts to negotiate with creditors before filing.