Judge picks Supremacy Clause in Detroit’s bankruptcy battle

National Constitution Center

Federal bankruptcy Judge Steven Rhodes said on Tuesday that Detroit can possibly cut pensions for city workers as part of its bankruptcy proceedings, despite a Michigan constitutional provision that prevents such actions.

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“Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” Rhodes said in a 140-page ruling.

“Pension rights are contract rights under the Michigan constitution,” Rhodes said as he declared Detroit insolvent and eligible for bankruptcy. “It has long been understood that bankruptcy law entails the impairment of contracts.”

Detroit’s bankruptcy case is the latest in a series of high-profile power conflicts between the federal government and states with constitutional roots.

This time, the attorneys for the government workers facing the possible cuts say Rhodes’ decision has national implications.

Bruce Babiarz, a spokesman for the Police and Fire Pension System, said in the New York Times on Tuesday that the Michigan Constitution protected the workers’ pensions, which should be considered separately from other contracts.

“This is one of the strongest protected pension obligations in the country here in Michigan,” Babiarz said. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”

And there were indications last month that Detroit’s employee pension systems were prepared to appeal the case as far as the U.S. Supreme Court.

The Detroit News said the pension systems retained lawyers with federal bankruptcy and Supreme Court experience, in case an appeal was needed. And within hours of Tuesday’s decision, an appeal was made to U.S. district court on behalf of the city’s unions.

Detroit had filed for Chapter 9 bankruptcy protection in July, claiming more than $18 billion in debts (including more than $8 billion in pension and retiree health-care liabilities).

The state’s governor and a city manager approved the move, but a state court then said the bankruptcy filing violated the Michigan state constitution.

The Detroit case set up a courtroom battle between different parts of the Constitution.

The Supremacy Clause in Article VI of the Constitution states that “This Constitution, and the Laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding.”

However, the 10th Amendment says, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

The attorneys for pension funds, unions and other creditors wanted state courts in Michigan take up the legality of the bankruptcy filing. Instead, the fight will happen in the federal court system.

In an opinion piece for Thomson Reuters in July, Alison Frankel laid out the basic long-term constitutional issue.

“As I’ve written any number of times … no federal bankruptcy court has ruled whether municipalities may cut pension benefits through a Chapter 9 plan. The issue pits the Supremacy Clause and the Bankruptcy Code against the Contract Clause and the 10th Amendment, which reserves to states the right to manage their own affairs,” she said.

For now, Rhodes wants to see the city’s final reorganization plan before he rules that the entire plan is fair and equitable. So there is no guarantee that pension cuts will be in the final deal.

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