Chapter 9 Bankruptcy in Detroit and the

Pension Problem

MARISSA A. WIESEN*

INTRODUCTION

hen Detroit filed for Chapter 9 bankruptcy on July 18, 2013,1 it

became the largest U.S. city by population to do so.2 Once known
as the Paris of the West and the home of Americas lucrative
automotive industry, Detroit filed after fighting decline for over fifty
years.3 While Detroit grew at a constant rate for the first half of the
twentieth century, it has been shrinking at a stunning rate since. 4 In 1950,
the population was over 1.8 million; now Detroit is home to only 700,000
residents.5 There are tens of thousands of abandoned buildings and vacant
properties.6 This has left Detroit with a shrunken tax base and a huge, 139square-mile city to maintain. In the past fifty years, the city has also been
plagued with increased borrowing and financial mismanagement, vastly
underfunded pension funds, and widespread dysfunctionall factoring
into Detroits decision to file for municipal bankruptcy.7
Upon approving Detroits petition for municipal bankruptcy, U.S.
Bankruptcy Judge Steven Rhodes gave the city approval to adjust its
pension and retirement funds as part of the restructuring plan, despite a

* Marissa A. Wiesen currently serves as a law clerk to the Honorable Tony M. Davis of the
United States Bankruptcy Court for the Western District of Texas. She is a 2014 graduate of the
University of Toledo College of Law, where she graduated magna cum laude and Order of the
Coif. Marissa earned her bachelors degree in political science from the University of Michigan
in 2008.
1

Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles Into Insolvency,
N.Y. TIMES, July 19, 2013, at A1, available at 2013 WLNR 17602180.
2 Michael A. Fletcher & Reid Wilson, Detroit Eligible for Bankruptcy Filing, WASH. POST, Dec.
4, 2013, at A01, available at 2013 WLNR 30383140.
3
4
5
6
7

Id.
Davey & Walsh, supra note 1.
Id.
Id.
Id.

25

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Michigan constitutional provision that explicitly protects pensions. 8 Judge

Rhodes ruled that pensions are to be treated as contracts and can be
compromised in federal bankruptcy court.9 Many unions and retiree
organizations are appealing the decision, citing that pensions are
constitutionally protected.10
Shortly before publication of this Article and after a remarkably quick
two-month trial, Judge Rhodes confirmed Detroits bankruptcy plan on
November 7, 2014. Judge Rhodes concluded that the plan borders on
miraculous.11 Nicknamed the Grand Bargain, the cornerstone of the
approved plan creatively preserved most of the city workers pensions by
negotiating with twelve private organizations. The organizations agreed to
fund the citys pension funds on the condition that Detroits art collection
would not be sold as an asset of the city in the bankruptcy process. 12 The
Grand Bargain was a unique settlement agreement reached through
closed-door mediation sessions and provides for preservation of Detroits
art collection by helping pay retirees pensions.13 In the end, municipal
retirees accepted a 4.5% cut in their pensions and agreed to halt cost of
living increases, higher health care costs, and return of previous improper
payments.14 Retired Detroit firefighters and police officers also accepted a
cut in their pension payments as a result of the Grand Bargain.15
As the largest city to ever file bankruptcy, Detroit provides a high
profile example of the deep disconnect between the Tenth Amendment and
the Supremacy Clause.16 The Grand Bargain presents a truly unusual
settlement in which private foundations funded Detroits pensions.
However, most cities facing bankruptcy will not have this option, and the
unanswered question remains whether a municipal debtor can pay its

Khalil AlHajal, Unions, Retirees Prepare for Appeal After Detroit Ruled Eligible for Bankruptcy,
MLIVE (Dec. 3, 2013, 6:25 PM), http://www.mlive.com/news/detroit/index.ssf/2013/12/
unions_retirees_prepare_for_ap.html.
9 In re City of Detroit, Mich. (In re Detroit I), 504 B.R. 97, 11617 (Bankr. E.D. Mich. 2013)
(holding that the city did not show good faith, but meaningful negotiations were
impracticable because of the number of creditors involved and the lack of time with the city
running out of cash before the July deadline).
10

AlHajal, supra note 8.

Monica Davey & Mary Williams Walsh, Plan to Exit Bankruptcy is Approved for Detroit,
N.Y. TIMES, Nov. 8, 2014, at A11, available at 2014 WLNR 31368836.
11

12

Elizabeth Blair, Grand Bargain Will Help Save Detroit And Its Art, NATL PUB. RADIO
(Nov. 7, 2014, 4:19 P.M.), http://www.npr.org/2014/11/07/362351942/grand-bargain-will-helpsave-detroit-and-its-art.
13

Id.; Davey & Walsh, supra note 11.

14

Davey & Walsh, supra note 11.

15

Id.

16

See infra Part III.

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Chapter 9 Bankruptcy in Detroit

27

pension debt in less than full when applicable state constitutional

provisions provide that such obligations cannot be impaired.17 Despite the
attention given to the increasing number of Chapter 9 bankruptcy filings,
case law remains scarce and many significant issues remain unresolved.
This Article outlines the constitutionality of reducing pension debt in
bankruptcy and offers a resolution to the issue that can be employed across
the country, including how other courts should analyze similar issues. Part
I briefly details the decline of Detroit and analyzes Detroits petition for
Chapter 9 bankruptcy. Part II summarizes the Michigan constitutional
provision that conflicts with federal law and the Bankruptcy Code. Part II
additionally establishes that state law, including the Michigan
Constitution, cannot override the Federal Bankruptcy Code. Lastly, Part III
proposes that the Supreme Court grant review of this issue to establish a
bright-line rule.
I.

Background
A. Detroits Downfall

Detroit is insolvent now, but that was not always the case. 18 The
Motor City is the birthplace of the American automotive industry, and at
the height of its prosperity Detroit had over 1.8 million residents and built
half of the worlds automobiles.19 However, after its peak in the 1950s
Detroit experienced a substantial decrease in population. From 1950 to
2012, the population fell by over 63%.20 Consequently, tax revenues
plummeted.21 Income tax revenues have decreased by $91 million since
2002 and $44 million since 2008.22 Property tax revenues are decreasing at a
rate of 10% per year. 23 As of 2013, Detroit had operated at a deficit for
seven years and accumulated a debt of over $237 million.24 Without
restructuring, the city forecasts a negative cash flow of $190 million for
2014 and its deficit could grow to over $1.3 billion by 2017. 25

17 Mark S. Kaufman & B. Summer Chandler, The Looming Chapter 9 Battle over State
Protection of Vested Public Employee Pension Benefits, AM. BANKR. INST. J., Nov. 2013, at 14, 14.
18 Nathan Bomey & John Gallagher, How Detroit Went Broke: The Answers May Surprise
Youand Dont Blame Coleman Young, DETROIT FREE PRESS (Sept. 15, 2013, 1:10 AM),
http://www.freep.com/interactive/article/20130915/NEWS01/130801004/Detroit-Bankruptcyhistory-1950-debt-pension-revenue.
19
20
21
22
23
24
25

In re Detroit I, 504 B.R. at 112.

Id. at 119.
Id. at 112.
Id. at 118.
Id.
Id.
In re Detroit I, 504 B.R at 119.

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Of Detroits $18 to $20 billion debt, approximately $5.7 billion is owed

for other post-employment benefits (OPEB), which includes health and
life insurance and death benefit plans for retirees.26 An additional $3.5
billion is owed in unfunded pension obligations. 27 From 2007 to 2012,
pension payments exceeded contributions by approximately $1.7 billion for
the General Retirement System (GRS) and $1.6 billion for Detroits Police &
Fire Retirement System (PFRS), which caused the liquidation of the
pension fund trust principal.28 When Detroit filed for bankruptcy in July
2013, the city was not making pension contributions as they came due and
had deferred payment of approximately $104 million for pension
contributions and over $39 million for certificate of participation (COP)
payments.29
B. Chapter 9 Bankruptcy and Detroits Filing
Chapter 9 of the Bankruptcy Code applies when reorganizing a
municipalitys finances or adjusting its debts.30 Its purpose is to permit a
financially distressed city to seek protection from creditors as it negotiates
an adjustment plan.31 Generally, a bankruptcy courts power under
Chapter 9 is much more limited than in Chapter 11. 32 In a Chapter 9
bankruptcy, the court is less involved in the conduct and operation of the
bankrupt city than in a Chapter 11 reorganization, where the debtor-inpossession submits itself fully to the bankruptcy courts jurisdiction.33
Consequently, the courts functions in a Chapter 9 bankruptcy are limited
to approval of the petition and the formulation, confirmation, and
implementation of a debt adjustment plan. 34 If the case is not successful or
the plan cannot be confirmed, the court is limited to dismissing the case.35

26

Id. at 113.
Id.
28 Id. at 114.
29 Id. at 119.
30 See generally 11 U.S.C. 90146 (2012).
31 6 COLLIER ON BANKRUPTCY 900.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.
2010).
27

32 See Admin. Office of the U.S. Courts, Municipality Bankruptcy, U.S. COURTS,
http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter9.aspx (click
Courts Limited Power link) (last visited Nov. 3, 2014).
33 See generally FRANCIS J. LAWALL & GREGG MILLER, DEBT ADJUSTMENTS FOR
MUNICIPALITIES UNDER CHAPTER 9 OF THE BANKRUPTCY CODE: A COLLIER MONOGRAPH 7[1]
(2012).
34 See Leco Properties, Inc. v. R.E. Crummer & Co., 128 F.2d 110, 11213 (5th Cir. 1942); In
re Addison Cmty. Hosp. Auth., 175 B.R. 646, 649 (Bankr. E.D. Mich. 1994).
35

11 U.S.C. 930.

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Chapter 9 Bankruptcy in Detroit

29

In addition, states must provide approval to a city seeking relief under

Chapter 9. This requirement of approval, as well as the limited role of the
bankruptcy court, ensures that Chapter 9 bankruptcy continues to be
constitutional and that the federal court does not overreach. 36
The State of Michigan permits municipalities to file for bankruptcy but
imposes several conditions. A municipality may file a Chapter 9 petition if
the local government adopts a resolution by a majority vote of the
governing body declaring a financial emergency.37 Next, the governor must
approve the filing. The governor may also place restrictions on the local
governments filing under Chapter 9, such as protections for pension
benefits.38
In March 2013, Detroit declared a financial emergency, and Michigan
Governor Rick Snyder appointed Kevyn Orr as the citys emergency
manager.39 On July 16, 2013, Orr recommended to Governor Snyder that
Detroit file for Chapter 9 relief.40 Two days later, Governor Snyder
authorized the city to file for Chapter 9. Governor Snyder did not place any
contingencies on the City of Detroit and stated: [F]ederal law already
contains the most important contingencya requirement that the plan be
legally executable.41 At the time of filing on July 18, 2013, Detroit
estimated its debt to be $18 billion, with $11.9 billion in unsecured debt and
$6.4 billion in secured debt, and more than 100,000 creditors.42
On December 5, 2013, the bankruptcy court held that Detroit was
eligible under 109 to become a municipal debtor.43 The court held that the
city was insolvent, desired to effectuate a plan to adjust its debts,
demonstrated impracticability of engaging in pre-filing negotiations with
its creditors, and filed in good faith for Chapter 9 relief. 44

36

See Admin. Office of the U.S. Courts, supra note 32.

MICH. COMP. LAWS ANN. 141.1566(1) (effective 2014).
38 See id. 141.1566(2).
39 Monica Davey, Bankruptcy Lawyer Is Named to Manage an Ailing Detroit, N.Y. TIMES (Mar.
14, 2013), http://www.nytimes.com/2013/03/15/us/gov-rick-snyder-kevyn-orr-emergencymanager-detroit.html.
40 In re Detroit I, 504 B.R. 97, 154 (Bankr. E.D. Mich. 2013).
41 Id. at 154, 162. See generally 11 U.S.C. 943(b)(4) (2012).
42 In re Detroit I, 504 B.R at 113.
43 Id. at 190.
44 Id. at 110. The impracticability of pre-filing negotiations was a particularly contentious
issue and the court outlined several reasons for its decision. Id. at 178. First, the sheer number
of creditors made pre-bankruptcy negotiations impracticable, many with no formal
representatives. Id. at 179. Second, the groups arguing that their pensions should not be
impaired asserted that their benefits were fully protected by state law, and the court held that
it is impracticable to negotiate with a group that asserts that their position is immutable. Id.
at 17879. Third, the city of Detroit was running out of assets and had no time for prebankruptcy negotiations. In re Detroit I, 504 B.R. at 179.
37

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C. Debate Over Pension Benefits

In approving Detroits bankruptcy petition, the court ruled that the
bankruptcy authorization did not violate the Michigan Constitution,
holding that pension benefits are in fact a contractual obligation of the
municipality and should be treated like other contract claims. 45 Therefore,
pension obligations were able to be impaired in Detroits adjustment plan.
After the courts opinion was released, a flurry of appeals and
complaints followed. Detroits two largest unsecured creditors, the GRS
and PFRS, filed an appeal with the Court of Appeals for the Sixth Circuit,
attempting to bypass the appeals process to the U.S. District Court for the
Eastern District of Michigan. 46 These groups argued pension benefits are
entitled to greater protection than general contractual claims under the
Michigan Constitution and, therefore, pensions should be protected from
impairment.47 Ultimately, the Detroit Institute of Arts (DIA), numerous
private organizations, and the Detroit pension holders agreed to an
innovative deal to overcome the underfunded pensions. The private
organizations agreed to fund the citys pensions in exchange for
bankruptcy-proof ownership of Detroits art collection.48
However, not all cities facing bankruptcy will have private foundations
willing to fund public pensions or a valuable art collection at stake. The
tension remains between a states desire to protect its public retirees and
the risk of seriously rising costs of municipal finance if a reduction in
pension benefits is prohibited. Generally, municipalities that file for
bankruptcy face the same problem as any debtor in bankruptcy: the debtor
(the municipality in a Chapter 9 case) has taken on more debt than it can
afford to pay.49 When a municipality files for bankruptcy, however, it is
presented with an added complexity that has political and public
consequencesthe challenge of how to provide adequate protection for
pension holders in the face of an eroding tax income and decreasing
revenues.50 Ultimately, the end goal of a Chapter 9 filing is the courts
confirmation of the debtors adjustment plan, which provides a feasible
restructuring plan that will not only work in the near future but will
provide the municipality with a stable future as well.51

45

Id. at 161.
See Notice of Appeal at 1, In re Detroit, Mich. (In re Detroit II), 504 B.R. 191 (2013) (No. 1353846).
46

47

In re Detroit II, 504 B.R. at 19596.

48

Davey & Walsh, supra note 11.

49

Hannah Heck, Comment, Solving Insolvent Public Pensions: The Limitations of the Current
Bankruptcy Option, 28 EMORY BANKR. DEV. J. 89, 90 (2011).
50
51

Id. at 9495.
Kaufman & Chandler, supra note 17, at 14.

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31

However, many states have conflicting statutory or constitutional

limitations that prevent a city from reducing the payment of such
benefits.52 States often treat public sector pensions as sacred cows and
have consistently protected the obligations.53 The Michigan Constitution
provides that pension obligations constitute a contractual obligation that
shall not be diminished or impaired.54 This protection leads to the
unavoidable question: if a municipality meets all of the requirements for
eligibility under Chapter 9, can the Bankruptcy Code be used to permit a
municipality to pay its pension obligations in less than full,
notwithstanding the state constitutional provision that provides these
rights may not be diminished or impaired? Detroit provides a striking
example of a city that cannot pay its current debts and operating expenses
while facing mounting pension obligations to retirees. 55 This is a complex
constitutional issue with high stakes and broad impact. Appeals and
contention around this issue have already led to a great deal of litigation
with endless expenses to the bankruptcy estate and creditors. The
remainder of this Article will analyze whether a Chapter 9 debtor can pay
its pension debt in less than full when applicable state constitutional
provisions provide that such obligations cannot be impaired and why
Supreme Court review of this issue is warranted.
II. Federal Supremacy and the Bankruptcy Code
Constitutional and state law restrictions related to the modification of
pension plans are the biggest limitations that a municipality faces in
reducing or avoiding its pension obligations. 56 This Article demonstrates
that the Bankruptcy Code establishes a federal priority scheme that cannot
be overridden by state law in the Chapter 9 context. Constitutional or
statutory provisions providing that accrued pension benefits are vested
contractual rights and are not subject to impairment or reduction should
not be granted protection in Chapter 9 against an attempt by a municipal
debtor to pay those obligations less than in full.57 To the extent that such
provisions attempt to create a special class of protected unsecured creditors

52

See Heck, supra note 49, at 95.

Kaufman & Chandler, supra note 17, at 14; see Stephen D. Eide, Constitutional Public
Pension Guarantees: Unfair, Unaffordable, and Bad Policy, MANHATTAN INST. FOR POLY RES.
(Aug. 2013), http://www.manhattan-institute.org/html/ib_25.htm#.Uuvgov3wvwI; see also
ALASKA CONST. art. XII, 7; ARIZ. CONST. art. XXIX, 1, cl. C; CAL. CONST. art. XVI, 17;
HAW. CONST. art. XVI, 2; ILL. CONST. art. XIII, 5; LA. CONST. art. X, 29, cls. A & B; MICH.
CONST. art. IX, 24; N.Y. CONST. art. V, 7.
53

54
55
56
57

MICH. CONST. art. IX, 24.

See supra Part I.
Heck, supra note 49, at 110.
Kaufman & Chandler, supra note 17, at 80.

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that do not exist under the Bankruptcy Code, they should be rejected as an
improper encroachment on the federal priority scheme.
A. The United States Constitution Establishes that Pension Impairment
in Chapter 9 Must Be Governed by Federal Law
Under the Bankruptcy Code, states have the power to authorize a
municipality to petition for bankruptcy, or to prohibit it.58 Under Michigan
law, the state is vested with the power to control whether or not a
municipality can enter into Chapter 9 bankruptcy. 59 Thus, it is well within
the power of the state to prevent federal bankruptcy law from interfering
with a states municipalities, which would prevent federal bankruptcy law
from impairing Detroit pension obligations.60
Under the Bankruptcy Clause, Congress is given authority to enact
uniform laws on the subject of bankruptcies, and the Bankruptcy Code
permits the impairment of contracts. 61 The conflicting Michigan
constitutional provision provides that pension benefits shall not be
diminished or impaired thereby.62 By allowing a city to petition for
Chapter 9 relief, the State of Michigan has submitted itself to the U.S.
Constitutions Supremacy Clause.
The Supremacy Clause provides that when a state law conflicts with
federal law, federal law prevails.63 Thus, because federal bankruptcy law
authorizes the impairment of municipal debts and obligations, it takes
precedence over the conflicting Michigan constitutional provision. 64
Accordingly, the Michigan Constitution can prevent its state legislature
from passing a law that impairs Michigan pension obligations, but it
cannot prevent Congress from passing a law doing so. 65
Those who support state constitutional provisions restricting the
impairment of contracts in bankruptcy argue that allowing a municipality
to impair contracts in light of a contrary state constitutional provision
infringes on a states rights under the Tenth Amendment. 66 However, states
are still permitted to control whether or not a municipality is permitted or

58

11 U.S.C. 109(c) (2012).

Id.
60 Christian S. Herzeca, Detroit, Chapter 9 Pension Impairment and Special Revenues Pledged to
Secure General Obligation Bonds, MBIBAC LITIG. (Dec. 10, 2013, 4:47 PM),
http://mbibaclitigtion.blogspot.com/2013/12/detroit-chapter-9-pension-impairment.html.
59

61
62
63
64
65
66

U.S. CONST. art. I, 8, cl. 4; see, e.g., 11 U.S.C. 365 (2012).

MICH. CONST. art. IX, 24.
U.S. CONST. art. IV.
Herzeca, supra note 60.
Id.
Kaufman & Chandler, supra note 17, at 15.

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Chapter 9 Bankruptcy in Detroit

33

authorized to file bankruptcy.67 Federal law does not require a state to

authorize a municipal bankruptcy. It is left up to the states to decide. Also,
the Tenth Amendment refers to powers not delegated to the federal
government by the Constitution.68 However, bankruptcy powers were
delegated to Congress through the Bankruptcy Clause. 69 Thus, Congress
should have the ultimate authority in carrying out the Bankruptcy Code.
B. Federal Case Law Also Recognizes That a States Constitutional
Provisions Do Not Protect Pension Contracts in Bankruptcy
Because there are very few Chapter 9 filings, case law on the
impairment of pensions in bankruptcy in the face of a conflicting
constitutional provision is minimal. However, all federal courts that have
addressed the issue have found that such provisions do not protect
pensions upon filing for bankruptcy. 70 Generally, case law provides that
state constitutional provisions that merely assert that pension obligations
are contractual rights that cannot be impaired may not shield those
obligations from adjustment in bankruptcy.71 Several key principles have
developed from these cases. First, Congress, and not the states, is
authorized by the Bankruptcy Clause to enact bankruptcy laws and the
impairment of contracts is essential to that power.72
Second, the
Bankruptcy Code establishes a federal priority scheme that cannot be
overridden by state law once a municipality files for Chapter 9 relief. 73
Ultimately, states have control over whether or not a city is permitted to
seek Chapter 9 relief and, once authorized, states should not be permitted
to use their constitutional provisions to thwart the application of Chapter 9
bankruptcy with a conflicting state law.74
As far back as 1819, the Supreme Court held that the Bankruptcy
Clause authorizes Congress to make laws that impair contracts. 75 This
power has long been understood that Congress
is expressly vested with the power of passing bankrupt[cy] laws,
and is not prohibited from passing laws impairing the obligation
of contracts, and may, consequently, pass a bankrupt[cy] law

67

See supra Part I.B.

U.S. CONST. amend. X (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.).
68

69
70
71
72
73
74
75

U.S. CONST. art. I, 8, cl. 4.

See infra Part II.B.
Kaufman & Chandler, supra note 17, at 15.
Id.
Id.
Id.
Sturges v. Crowninshield, 17 U.S. 122, 191 (1819).

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which does impair it; whilst the states have not reserved the
power of bankrupt[cy] laws, and are expressly prohibited from
passing laws impairing the obligation of contracts. 76

Again in Ashton v. Cameron County Water Improvement Dist. No. 1, the

Supreme Court noted that the especial purpose of all bankruptcy
legislation is to interfere with the relations between the parties concerned
to change, modify, or impair the obligation of their contracts.77 In 1938, the
Court validated a municipal insolvency statute and explained that the
natural and reasonable remedy through composition is not available
under state law by reason of the restriction imposed by the Federal
Constitution upon the impairment of contracts by state legislation but the
bankruptcy power is competent to give relief.78 Thus, when a state
authorizes a municipality to file a case, it invites the intervention of the
bankruptcy power to save its agency which the State itself is powerless to
rescue.79
More recently, in In re City of Vallejo, a bankruptcy court considered the
issue of whether a municipal debtor could reject collective bargaining
agreements in contravention of state laws.80 The relevant California
constitutional provision provided that no law shall be passed that impairs
the obligation of contracts.81 In re Vallejo analyzed the intersection of state
and federal law and found that the United States Constitution authorizes
Congress to enact uniform bankruptcy laws and that by virtue of the
Supremacy Clause, federal laws are the supreme law of the land,
notwithstanding state laws to the contrary.82
The court acknowledged that the Supremacy Clause must be
harmonized with the Tenth Amendment, which states that powers not
delegated to the federal government are reserved to the states.83 The
court reasoned that Congress enacted 903 of the Bankruptcy Code to
balance these two competing interests.84 Section 903 addresses and
ensures the constitutionality of [C]hapter 9 but does not provide an
independent substantive limit on the application of [C]hapter 9
provisions.85 In conjunction with 11 U.S.C. 109(c)(2), 903 allows states

76
77
78
79
80
81
82
83
84
85

Id.
298 U.S. 513, 530 (1936).
United States v. Bekins, 304 U.S. 27, 54 (1938).
Id.
403 B.R. 72, 75 (Bankr. E.D. Cal. 2009).
CAL. CONST. art. I, 9.
In re City of Vallejo, 403 B.R. at 75.
U.S. CONST. amend. X.
In re City of Vallejo, 403 B.R. at 75.
Id.

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Chapter 9 Bankruptcy in Detroit

35

to act as gatekeepers to a municipalitys access to Chapter 9.86 When a state

permits a municipality within its jurisdiction to file a Chapter 9 petition, it
essentially declares that Chapter 9 relief is more important than state
control over municipalities.87 As a result, if a municipality is authorized
by [a] state to file a [C]hapter 9 petition, it is [thereby permitted] to take
advantage of 11 U.S.C. 365 to accept or reject executory contracts.88 The
California Constitution cannot be used to amend, modify or negate
substantive provisions of [C]hapter 9 [because this] would violate
Congress ability to enact uniform bankruptcy laws.89 In a valid exercise
of exclusive power, Congress enacted 11 U.S.C. 365 to provide debtors
the ability to reject executory contracts, and [t]his authority preempts state
law by virtue of the Supremacy Clause, the Bankruptcy Clause and the
Contracts Clause.90 Thus, the court rejected the claim that any state labor
law provides the applicable standard controlling rejection of a
municipalitys collective bargaining agreements, and the California
Constitution was preempted.91
In another California case, In re County of Orange, a state statute created
a special class of creditors for non-county governmental entities.92 This
statute directly conflicted with federal bankruptcy law because it dictated
the priority distribution to a special class of creditors over other creditor
classes.93 The court held that the California legislature cannot rewrite
bankruptcy priorities.94 Furthermore, the Bankruptcy Code explicitly
defined the order of creditor priority and declared the congressional intent
of federal supremacy over declared but conflicting state-law orders of
priority.95
In the most recent California case, the bankruptcy court dealt with an
issue strikingly similar to that on appeal in Detroit.96 In In re City of
Stockton, the City of Stockton filed its Chapter 9 case and the Stockton City

86

See 11 U.S.C. 903, 109(c)(2) (2012).

In re City of Vallejo, 403 B.R. at 76.
88 Id.; see 11 U.S.C. 901 (making 365 fully applicable in Chapter 9 cases).
89 In re City of Vallejo, 403 B.R. at 7677 (quoting 6 COLLIER ON BANKRUPTCY, supra note 31,
903.01).
87

90

In re City of Vallejo, 403 B.R. at 77; see also U.S. CONST. art. I, 8, cl. 4; U.S. CONST. art. IV,
cl. 2; U.S. CONST. art. VI, cl. 2.
91 In re City of Vallejo, 403 B.R. at 77.
92 In re County of Orange, 191 B.R. 1005, 1017 (Bankr. C.D. Cal. 1996); see also CAL. GOVT
CODE 27100.1 (West 2014).
93
94
95
96

In re County of Orange, 191 B.R. at 1016.

Id. at 1017.
Id. (citing First Fed. of Mich. v. Barrow, 878 F.2d 912, 915 (6th Cir. 1989)).
In re City of Stockton, Cal., 478 B.R. 8, 13 (Bankr. E.D. Cal. 2012).

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Council adopted a balanced budget as required by state law. 97 The budget

was balanced by cutting costs and unilaterally reducing retiree health
benefits.98 The Association of Retired Employees of the City of Stockton
brought a class action lawsuit against the city, seeking an injunction that
would prohibit it from reducing retiree health benefits. 99 The Association of
Retired Employees claim was based on the premise that it violated the U.S.
Constitutions Contracts Clause and the California Constitution, which
provides that a law impairing the obligation of contracts may not be
passed.100
The bankruptcy court concluded the retirees contracts could be
impaired in a Chapter 9 proceeding because the Bankruptcy Clause gives
Congress express power to legislate uniform laws of bankruptcy that
result in impairment of contract.101 Significantly, the Contracts Clause
bans a state from making a law impairing the obligation of contract; it does
not ban Congress from making a law impairing the obligation of contract.
This asymmetry is no accident.102 Thus, a bankruptcy court may impair
contracts in Chapter 9 without offending the Constitution.103 In addition,
the Supremacy Clause preempts the California State Constitutions
Contracts Clause.104 The court noted that even if these benefits were vested
property interests, the shield of the Contracts Clause crumbles in the
bankruptcy arena.105
In all three cases, objections were raised arguing that states and
municipalities could rely on the reservation of state power contained in
Chapter 9 of the Bankruptcy Code to condition or qualify the application of
Code provisions that apply in Chapter 9 cases. 106 However, the courts
repeatedly discredited this argument, finding that a state may control
prerequisites for consenting to authorize a municipality to file a Chapter 9
case, but the state cannot revise Chapter 9. 107 By authorizing the use of
[C]hapter 9 by its municipalities, California must accept [C]hapter 9 in its

97

Id. at 14.
Id.
99 Id.
100 U.S. CONST. art. I, 10, cl. 1 (No State shall . . . pass any . . . Law impairing the
obligation of Contracts.); CAL. CONST. art. I, 9; In re City of Stockton, Cal., 478 B.R. at 15.
101 U.S. CONST. art. 1, 8, cl. 4; In re City of Stockton, Cal., 478 B.R. at 15.
102 In re City of Stockton, Cal., 478 B.R. at 15.
103 Id. at 16. See generally U.S. CONST. art. 1, 8, cl. 4.
104 In re City of Stockton, Cal., 478 B.R. at 16. See generally CAL. CONST. art. 1, 9.
105 In re City of Stockton, Cal., 478 B.R. at 16.
106 Id.; see also In re City of Vallejo, 403 B.R. 72, 7576 (Bankr. E.D. Cal. 2009); In re County
of Orange, 191 B.R. 1017, 1021 (Bankr. C.D. Cal. 1996).
98

107

See In re City of Stockton, 478 B.R. at 17.

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totality; it cannot cherry pick what it likes while disregarding the rest.108
When a state authorizes its municipality to file a [C]hapter 9 petition it
declares that the benefits of [C]hapter 9 are more important than state
control over its municipalities.109
C. Fair Treatment Among Creditors and Detroit Taxpayers Would Also
Be Impacted if Pension Obligations Could Not Be impaired
There is a strong policy argument in favor of the impairment of
pension obligations. What if the courts were to rule in favor of protecting
pensions? This would mean other bondholders would be required to bear
much more of the needed concessions.110 This would lead to the increased
cost of municipal credit for restructuring the city and otherwise. 111 This
would not be good for the municipal bond market in the long run and
would likely cause credit spreads to widen.112 Such a payment plan
protecting retired workers pensions over other bondholders would also
create a mentality in the State of Michigan that pits citizens against those
who loaned to the city.113
Furthermore, what is equitable for the 9,000 current city employees
who could see their pension contributions completely lost in order to save
the pensions of those already retired? Should these current employees
suffer to insulate former colleagues?114 Often, when a locality falls into
distress, it raises taxes as high as necessary to make full payments on
bonds.115 If constitutional protections for pensions were valid in the face of
Chapter 9, it would elevate what is fair to retired workers over what is
affordable to taxpayers. In a city that is already suffering from a declining
population, decrepit infrastructure, and dismal health and safety services,
should taxpayers really see increased taxes to support retired workers?
Detroit is attempting to rebuild and strengthen its community and cannot
afford to further divide and alienate its citizens. While this may seem like a
harsh result for citizens who have served the city and now live on fixed
incomes, it is the right sacrifice for the city to move forward.

108

In re City of Vallejo, 403 B.R. at 75 (quoting In re County of Orange, 191 B.R. at 1021).
Id.
110 See Eide, supra note 53.
111 Kaufman & Chandler, supra note 17, at 80.
112 Chris Christoff & Brian Chappatta, Detroit Bankruptcy Exit Plan Threatens Munis as
Pensions Favored, BLOOMBERG PERS. FIN. (Feb. 1, 2014, 12:00 AM), http://www.bloomberg.com/
news/2014-01-31/detroit-bankruptcy-exit-plan-favors-pensioners-over-bondholders.html.
113 Id.
114 Chad Halcom, Pensions in Play in Detroit Bankruptcy: Whats Equitable?, CRAINS DETROIT
BUS. (Dec. 8, 2013, 8:00 AM), http://www.crainsdetroit.com/article/20131208/NEWS/312089960/
109

pensions-in-play-in-detroit-bankruptcy-whats-equitable.
115 Christoff & Chappatta, supra note 112.

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III. The Case for Supreme Court Review

The single largest issue facing municipalities today is the dramatic and
increasing shortfall in funding for public pensions. 116 The deficit in pension
funding is estimated to be over $3 trillion nationwide and over $9 billion in
Michigan alone.117 In many cases, like Detroit, public pension plans are
vastly under-funded: on average only at about 65%.118
One alternative for a citys pension liabilities is the dramatic step of
filing for Chapter 9 bankruptcy. While there is some consensus in case law
concerning whether a citys pensions liabilities can be impaired in
bankruptcy when a state constitutional provision mandates otherwise,
municipal cases are rare, and this matter is hardly well-settled. Moreover,
with even more municipal filings in the future, this is an important issue
that requires a clear resolution. Municipalities need to get out of
bankruptcy as cheaply and efficiently as possible and, in order to do so,
they need guidance on this important but unanswered issue.
I propose that the Supreme Court grant certiorari to resolve this issue.
Supreme Court Rule 10(c) provides certiorari may be granted if a state
court or a United States court of appeals has decided an important question
of federal law that has not been, but should be, settled by this Court, or has
decided an important federal question in a way that conflicts with relevant
decisions of this Court.119 While a conflict among the circuits or state
courts is a valuable asset in seeking certiorari, Supreme Court Rule 10(c)
makes it clear that an important federal issue can provide an independent
basis for review.120

116 Jeffrey B. Ellman & Daniel J. Merrett, Pensions and Chapter 9: Can Municipalities Use
Bankruptcy to Solve Their Pension Woes?, 27 EMORY BANKR. DEV. J. 365, 367 (2011).
117 See The Role of Public Employee Pensions in Contributing to State Insolvency and the
Possibility of a State Bankruptcy Chapter: Hearing Before the Subcomm. on Courts, Commercial and
Admin. Law of the H. Comm. on the Judiciary, 112th Cong. 47 (2011) (statement of Joshua Rauh,
Associate Professor of Finance, Kellogg School of Management, Northwestern University)
([U]sing valuation methods and accounting practices that are consistent with financial
economics, . . . the already-promised part of these unfunded liabilities actually amounts to
over $3 trillion . . . .).
118

See Gina Chon, Private Firm Pensions Face Costly DeadlineBusinesses and Charities Seek an
Extension on Funding Targets; Cutting Expenses at Easter Seals, WALL ST. J., Apr. 1, 2010, at C3
(reporting that the average funding level for public pension plans was 65% as of the end of
2009).
119

SUP. CT. R. 10(c).

See id.; see also Lyle Denniston, Another Landmark Ruling in the Offing, SCOTUSBLOG
(Dec. 12, 2011, 11:51 AM), http://www.scotusblog.com/2011/12/another-landmark-ruling-inthe-offing/ (describing the historical decision in Arizona v. United States and the Courts
willingness to hear historic and deeply consequential constitutional disputes).
120

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First, decisions that invalidate state statutes on constitutional grounds

are typically of sufficient importance to warrant review. 121 The pension
debate highlights the tension between the Supremacy Clause, the
Bankruptcy Clause, the Tenth Amendment, and the Michigan Constitution.
Article I of the U.S. Constitution gives Congress authority to regulate
bankruptcies and establishes that federal law applies in the event of
conflicting state law, but the Tenth Amendment reserves authority for
states to regulate areas not under the federal governments scope.122 Detroit
is the poster child for testing whether and in what circumstances
financially distressed cities . . . can restructure their debts under Chapter 9
and, most particularly, whether and how they can restructure their pension
obligations.123 The State of Michigan has some of the strongest state laws
for safeguarding pensions, hence the reason the Michigan Constitution
provides for such protection.124 If Detroits pensions can be modified in
bankruptcy, then virtually all pensions are subject to impairment. 125 In
addition, Louisiana and New York have specific constitutional provisions
that protect public employers pension rights, and also have authority to
permit municipalities to file for Chapter 9 bankruptcy protection
contingent on certain conditions and actions of state officials or other
entities.126
Second, the Supreme Court often grants certiorari to cases that
consume considerable judicial resources or financial liabilities.127 The
Detroit case is one of the most high profile and important bankruptcy cases
in decades.128 There is a significant financial impact when a major
municipality, such as Detroit, goes into bankruptcy. Fire, police, and
sanitation services are scaled back, city assets are auctioned off, taxes
increase, and political turmoil arises.129 In addition, millions of dollars are
spent appealing and litigating, which reduces the recovery of thousands of

121 Timothy S. Bishop et al., Tips on Petitioning for Certiorari in the U.S. Supreme Court, THE
CIRCUIT RIDER, June 2007, at 28, 30, available at http://www.mayerbrown.com/
files/Publication/34891e80-a15d-4b25-84a2-d3c8573d23da/Presentation/PublicationAttachment
/5f64270f-6be0-4cec-8cc8-10e6bed6988b/ART_CIRCUITRIDER_JUN07.PDF.
122 U.S. CONST. amend. X.
123 Charles Tabb, Detroits Chapter 9 Bankruptcy and the Grinch Who Stole Their Pensions,
JURIST (Dec. 23, 2013, 12:11 PM), http://jurist.org/forum/2013/12/charles-tabb-detroitbankruptcy.php.
124

See id.
Id.
126 See LA. CONST. art. X, 29, cl. AB; N.Y. CONST. art. V, 7.
127 Bishop et al., supra note 121.
128 See Tabb, supra note 123.
129 Marina Koren, What Bankruptcy Means for Detroit Residents, NATL J. (Dec. 3, 2013),
http://www.nationaljournal.com/budget/what-bankruptcy-means-for-detroit-residents20131203.
125

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people. All of that litigation decreases funds available to creditors

(including pension holders) and debtors who are being paid from the
bankruptcy estate, and this ultimately eats away at the citys available
funds.
Third, the Supreme Court regularly grants certiorari when issues occur
frequently.130 Unfortunately, Detroit is not alone; there are five more cities
like Detroit in Michigan alone, and many more municipalities across the
country face similar circumstances.131 The aftershocks of the largest
municipal bankruptcy in U.S. history will be staggering.132 This rising
trend in municipal bankruptcies nationwide means that the same issue
threatens to play out again and again in other circuits, with a similar cost to
the bankruptcy estate and the affected community. The knowledge of what
will happen to Detroits pension benefits in bankruptcy can also help
individuals who are current pension holders shore up their savings more
than they otherwise would if they are in a town facing financial concerns.
Thus, a decision on Detroits pension obligations will pave the way for
municipalities far into the future.
Not only is this case sufficiently important to merit Supreme Court
review because of the financial liabilities and nationwide impact, but the
Supreme Court has also granted certiorari in similar cases. While the only
Supreme Court precedent on the constitutionality of municipal
bankruptcies is three-quarters of a century old, the Court has granted
certiorari to several cases with similar issues.133 In United States v. Bekins,
New York v. United States, and Printz v. United States, the Supreme Court
repeatedly addressed the issue of state sovereignty under the Tenth
Amendment as an important federal question.134 In Printz, the Supreme
Court granted review of the Ninth Circuits holding that Congress may not
command the states to enact or administer a federal regulatory program.135
The petitioner was a chief law enforcement officer commanded by federal
statute to perform background checks and make judgments concerning
handgun purchases.136 The impacts of the federal statute were broad and
burdensome. Officers would have to perform these background checks on
thousands of individuals, which would involve substantial undertaking

130

Bishop et al., supra note 121.

Tabb, supra note 123.
132 Meredith Whitney, Detroit Aftershocks Will Be Staggering, FIN. TIMES (July 23, 2013),
http://www.ft.com/cms/s/0/34abcabc-f389-11e2-942f-00144feabdc0.html.
131

133

Ashton v. Cameron Cnty. Water Improvement Dist. No. One, 298 U.S. 513, 530 (1936).
Printz v. United States, 521 U.S. 898, 899 (1997); New York v. United States, 505 U.S.
144, 144 (1992); United States v. Bekins, 304 U.S. 27, 28 (1938).
135 Petition for Writ of Certiorari at 7, Printz v. United States, 521 U.S. 898 (1997) (Nos. 951478, 95-1503), 1996 WL 33413759.
134

136

Id. at 1.

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and the expenditure of significant resources.137 Petitioners effectively

argued that the decision shakes the structure of federalism to its
foundations, this case presents an important federal question that this
Court should decide, and the Supreme Court granted review.138
The importance of Detroits bankruptcy filing is strikingly similar to
Printz. Both cases involve the core issues of state sovereignty and
federalism. The conflict between the federal Bankruptcy Code and the
Michigan Constitution questions the basic foundation of federalism. Like
Printz, Detroits bankruptcy filing can potentially impact thousands of
people and millions of dollars in state and federal resources. In Printz, the
Supreme Court was willing to resolve the Tenth Amendment issue as a
justification for granting certiorari. It should do so now to determine
whether or not a citys pension obligations are subject to modification in
Chapter 9.
While the Supreme Court has consistently held for almost two
centuries that the Bankruptcy Clause authorizes Congress to make laws
that impair contracts,139 the Court has never unequivocally ruled on
whether pension obligations can be impaired.140 This gap left by the
Supreme Court in Sturges, Ashton, and Bekins does not establish a brightline rule on the particular issue at hand. 141 Accordingly, an opinion from
the highest court is necessary to give definitive guidance to lower courts
that are increasingly dealing with this complex issue. An ideal ruling from
the Supreme Court on this issue would follow the Tenth Amendment, U.S.
Constitution, and current case law to hold that when a city files for Chapter
9 the city cannot pay its pension debt in less than full, even though
applicable state constitutional provisions provide that such obligations
cannot be impaired. A Supreme Court ruling would clearly establish that
state law, including the Michigan Constitution, cannot override the federal
Bankruptcy Code.

CONCLUSION
Underfunded pension obligations constitute one of the most
significant problems facing municipalities across the country.142 For
municipalities like the City of Detroit that are crippled with overwhelming
pension obligations, Chapter 9 offers relief. However, the ability to

137
138
139
140
141
142

See id. at 7.
Id.
See Sturges v. Crowninshield, 17 U.S. 122, 191 (1819).
See supra Part II.
See supra Part II.
Ellman & Merrett, supra note 116.

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restructure these pensions presents a unique challenge in which state and

federal law are in conflict. This Article presents a model interpretation of
how the Bankruptcy Clause, Supremacy Clause, and Tenth Amendment
work in conjunction to establish federal supremacy of the Bankruptcy
Code. But without a Supreme Court ruling on this issue, whether or not
pension obligations are subject to impairment remains uncertain.