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CHAPTER NINE AND DETROIT – UNCERTAIN TERRITORY (PART I)

July 21, 2013

CHAPTER NINE AND DETROIT – UNCERTAIN TERRITORY (PART I)

While in the law practice I had occasion to handle some bankruptcy petitions, mostly under Chapter 7 with a few under Chapter 13. I never was involved in representing either bankrupt or creditor under a Chapter 9 filing. This is no surprise since Chapter 9 filings are relatively rare, with fewer than 700 having been filed since this chapter was added to the bankruptcy code in 1937 amidst the turmoil of the Great Depression. Indeed it is so rare that case law defining and applying the terms of the chapter have not yet been settled. The recent Detroit filing is therefore going to be brought to conclusion under a cloud of uncertainty as the issues are litigated with perhaps new and novel holdings by the court, some of which may be appealed as first instance trial holdings in need of appellate clarification.

Ordinarily bankruptcy petitions are filed on behalf of individuals or businesses, though creditors have a right to file involuntary petitions for bankrupts as well. All bankruptcy provisions are statutory and were unknown at common law or early English law, which utilized debtor’s prisons as a collection tool instead. Indeed in history the father of Charles Dickens did a year in debtor’s prison (which resulted in the youngster’s removal from school and working as a bootblack in full and humiliating view in London). Such an experience may have been an impetus for his great novels David Copperfield and his unforgettable Oliver!, dealing with indentured servitude and child labor horrors.

Chapter 9 has a narrow application; it applies not to individuals or corporate businesses but rather only to counties, municipalities and other public entities such as school districts and utilities. What a bankruptcy court may or may not do has some (but not much) history. For instance, there is case law which authorizes municipalities to rewrite union contracts, one certain to be sturdily opposed by public workers in Detroit under union contracts. (One could argue that a contract written under court order is not a contract at all, since “contract” is generally defined as an agreement fairly bargained for between two contracting parties. Under a court order, only one party – the bankrupt city of Detroit – would write the new “contract.”) Case law (following the holding in the bankruptcy of Central Falls, Rhode Island) now permits municipalities to escape their pension obligations to their workers as well. It appears that a body of case law is evolving which favors bondholders and secured creditors’ priorities over that of the bankrupt municipality’s obligations under union contracts and payment of pensions to their employees.

I am personally opposed to that order of priority and here suggest that Chapter 9 be amended to set forth a statutory priority favoring employee’ wage and pension claims over that of bondholders and secured creditors. While both creditors and employees are blameless for such a bankrupt’s financial woes, it seems to me that bondholders and secured creditors knew and took the risks of investment and/or extension of credit and can write it off and deduct it from their taxes but that a 65-year old employee set to retire cannot recall his working days to recover the funds he or she thought they were going to be enjoying upon retirement. The court’s order under current law could relegate such innocent  unfortunates to a remaining life spent in poverty. I think that a grossly unfair result and (left to my own devices) would amend the law to avoid such an inequity in the court’s division of the spoils.

I will be writing more on this Detroit bankruptcy filing shortly which will speculate on Detroit’s future as a viable municipality and the future of democratic control of its fiscal destiny. Stay tuned.  GERALD  E

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