Detroit's Historic Bankruptcy: Four Questions That Still Beg For An Answer

Crowds outside the bankruptcy trial in Detroit on Wednesday October 23, 2013. People are demanding that the proceedings be halted., a photo by Pan-African News Wire File Photos on Flickr.

Detroit's historic bankruptcy: 4 questions that still beg for an answer

9:42 PM, October 31, 2013
By Nathan Bomey
Detroit Free Press Business Writer

ATLANTA — With the Detroit bankruptcy trial on a break until Monday, the industry’s most influential bankruptcy attorneys and judges gathered Thursday for the National Conference of Bankruptcy Judges, where Chapter 9 was a hot topic because of Detroit’s historic case.

The conference attracted several key players from the city’s bankruptcy case, including Judge Steven Rhodes, who declined an interview request after speaking on a panel about Ponzi schemes, saying he needs to avoid speaking to the news media during the case.

In attendance were Jones Day attorney Corinne Ball, who is helping to represent the city, Detroit pension funds attorney Robert Gordon and American Federation of State, County and Municipal Employees attorney Sharon Levine, both of whom are battling the city’s bankruptcy case. Gordon and Levine attended a panel on Chapter 9.

With 700,000 residents longing for better services, 23,500 retirees worried about their pensions and more than 100,000 creditors awaiting possible cuts, emotions are intense and the dispute is personal for many people.

Lingering in everyone’s mind are the unanswered questions. They’re unanswered mostly because municipal bankruptcy is so rare that few judges have even handled a case.

Here are four key questions judges and lawyers weighed in on Thursday:

Are public pensions considered a property right or a contractual right?

Whether public pensions are protected by the Michigan Constitution from cuts in U.S. Bankruptcy Court is a hotly disputed issue. The key question may be whether the U.S. Constitution’s protection of citizens’ property rights extends to Detroit retiree pensions.

“There are more constitutional rights for property than for a contract,” said Kenneth Klee, a bankruptcy attorney for Jefferson County, Ala., which is in bankruptcy. He was also involved in the Chapter 9 case of Mammoth Lakes, Calif. “It depends on whether the right is a property right or a contract right.”

Michael Gearin, who represented the California Public Employees’ Retirement System in the San Bernardino bankruptcy case, was unequivocal.

“It’s not just a contract,” he said.

Will the pension fight end up at the U.S. Supreme Court?

U.S. Bankruptcy Judge Christopher Klein, who is overseeing the Stockton, Calif., bankruptcy case, said he thinks the pension battle is “all a very ambiguous, unresolved area in the context of Chapter 9.”

“Ultimately there’s going to have to be a Supreme Court decision that resolves it,” Klein said. “I don’t have a clue how that’s going to come out.”

In an interview, Levine, the AFSCME attorney, wouldn’t rule out a fight to the Supreme Court on pensions.

“All the options are on the table,” she said. “If we can figure something out that works for our members, that’s fine. But if not, all those options are on the table.”

Will mediation work?

Rhodes has assigned U.S. District Judge Gerald Rosen to manage mediation between Detroit and its creditors. Rosen has been conducting a series of closed-door talks with creditors and has appointed his own team of mediators to help.

Klee questioned whether it will be productive for the City of Detroit because it has nearly 50 unions.

“Mediation in Detroit?” Klee said. “I cannot imagine how mediation is going to be anything other than a waste of resources.”

But Judge Frank J. Bailey, who oversaw the Chapter 9 bankruptcy of Central Falls, R.I., said mediation “has a role” in resolving municipal bankruptcy disputes.

What exactly does “good faith” negotiations mean?

This question is so difficult that Rhodes recently surprised attorneys involved in Detroit’s bankruptcy by giving them until mid-November to deliver official opinions on the definition of “good faith” negotiations.

Chapter 9 bankruptcy code requires the city to prove it negotiated in good faith with its creditors to be eligible for bankruptcy, although the city could bypass that standard by proving it is “impracticable” to continue negotiating.

Klein said that in Stockton’s bankruptcy, it was very difficult to assess whether collective labor contract talks had been in good faith.

“I knew how many bargaining sessions there were, I knew who attended them, I knew how long they were,” Klein said. “There just was not evidence of who said what to who.”

He added: “There’s a problem with the phrase ‘good faith.’ It shows up in five different places in the Chapter 9 process. And as near as I can tell, it has five different meanings.”

Bruce Bennett, Detroit’s lead bankruptcy attorney, said in opening arguments during the eligibility trial that “the city did act in good faith in all the negotiations it conducted.”

But Levine said in an interview that the city rushed into a bankruptcy filing after delivering four lectures, instead of fruitful negotiation sessions.

“They haven’t told us even how much they’re looking for from us,” Levine said.

Contact Nathan Bomey: 313-223-4743 or nbomey@freepress.com. Follow him on Twitter @NathanBomey.