A judge for the US Bankruptcy Court for the Eastern District of Michigan [official website] ruled Tuesday that the city of Detroit is eligible to file for bankruptcy under Chapter 9 of the US Bankruptcy Code [US Courts backgrounder], marking the largest municipal bankruptcy in the nation's history. In an oral ruling, Judge Steven Rhodes authorized the bankruptcy filing, declaring the city insolvent [WP report] because it owes approximately $18 billion to more than 100,000 creditors, which is harming the city's residents and making it essentially impossible for the city to negotiate with creditors. Pursuant to Chapter 9, a municipality remains in control of its government affairs during bankruptcy and the debtor must file a plan of debt adjustment. Detroit Emergency Manager Kevyn Orr [official profile] is assigned the task of creating a debt restructuring plan for the city, which he says will take at least a month. The most highly contested portions of Detroit's debt are the city's underfunded health care obligations, which total $5.7 billion, and pension funds, totaling $3.5 billion. Rhodes also held that federal bankruptcy law supersedes Michigan state law regarding safeguards for state employee pensions and therefore the pension funds could not be treated any differently than other unsecured debt. This marks the first time a US bankruptcy court has held that federal law supersedes state constitutional protection of public pension holders. The American Federation of State, County and Municipal Employees and the American Federation of Labor-Congress of Industrial Organizations [union websites] have announced their intention to appeal [text, PDF] the decision.
In July Rhodes allowed [JURIST report] Detroit's bankruptcy filing to continue, declaring that his federal bankruptcy court had exclusive jurisdiction over the matter. This action placed a stay on a Michigan circuit court ruling that had been announced three days earlier, which declared the filing unconstitutional [JURIST report] because it threatened public pension benefits and those benefits are protected by the Michigan Constitution [text, PDF]. Earlier this fall JURIST guest columnists Patrick Brady and Igor Shleypak discussed how Detroit's pension plan holders have been fighting for their rights in this case and explored the broader consequences [JURIST op-eds] that Detroit's actions may have on other cities that consider filing for protection under Chapter 9.