Detroit files for bankruptcy--largest filing in US history

Paleocon wrote:
It could instantly become Ron Paul's Libertarian Wunderland.

You mean Sears?

Chairman_Mao wrote:
Paleocon wrote:
ringsnort wrote:
Chairman_Mao wrote:
Oh I would buy tickets to this...

From the safety of pay-per-view.

ensconced in your sky fortress.

I say we divide Detroit into West and East, I'll set up a communist utopia in one while RP does his thing in the other, and we make a reality show of the whole thing.

Oh, great. Morlocks verses Eloi happening in my lifetime. I'm not even going to try and guess who'll be who.

A lot of people stand to lose a lot of money when Detroit goes under. I'm not surprised to see that possibly one of these very powerful groups has a sympathetic judge. It will be interesting to watch this play out.

The very powerful group in this case are retired government employees who stand to see their pensions demolished.

ClockworkHouse wrote:
The very powerful group in this case are retired government employees who stand to see their pensions demolished.

They aren't the only horse in the race.

See, I get that argument but the thing is, do those people somehow think they'll get paid more if Detroit's denied bankruptcy? They are out of money. If they can't go bankrupt and reorganise, those people could go from getting $0.10 on the dollar for their pensions to getting nothing and maybe having their paycheques bounce too.

Well, it cannot happen. Any state provision is preempted by federal law as congress has sole power over bankruptcy. But Michigan has not been a beacon of knowledge lately.

KingGorilla wrote:
Well, it cannot happen. Any state provision is preempted by federal law as congress has sole power over bankruptcy. But Michigan has not been a beacon of knowledge lately.

It's a more complicated question than that. Generally a state can impose any conditions it wants on local governments. The question here will be whether Michigan state law actually does bar Detroit from filing for bankruptcy, and if it does, whether the bankruptcy laws preempt that control.

ClockworkHouse wrote:
The very powerful group in this case are retired government employees who stand to see their pensions demolished.

That's not true.

CheezePavilion wrote:
KingGorilla wrote:
Well, it cannot happen. Any state provision is preempted by federal law as congress has sole power over bankruptcy. But Michigan has not been a beacon of knowledge lately.

It's a more complicated question than that. Generally a state can impose any conditions it wants on local governments. The question here will be whether Michigan state law actually does bar Detroit from filing for bankruptcy, and if it does, whether the bankruptcy laws preempt that control.

It is a rare instance of being clear cut. Like admiralty law, the federal congress has exclusivity over bankruptcies from the constitution. Not that it has stopped states from seeking to enforce their own maritime laws, or indeed laws governing bankruptcies in the past, or to tax the federal government. But not successfully. But as I said, the state has not have a good reputation of understanding even the most fundamental of constitutional matters as of late.

And it should remain a chilling cautionary tale on what can go truly wrong when a state allows a city to run itself into the ground. Because it is only available to those municipalities that have authority to contract, to take loans, etc.

KingGorilla wrote:
CheezePavilion wrote:
KingGorilla wrote:
Well, it cannot happen. Any state provision is preempted by federal law as congress has sole power over bankruptcy. But Michigan has not been a beacon of knowledge lately.

It's a more complicated question than that. Generally a state can impose any conditions it wants on local governments. The question here will be whether Michigan state law actually does bar Detroit from filing for bankruptcy, and if it does, whether the bankruptcy laws preempt that control.

It is a rare instance of being clear cut. Like admiralty law, the federal congress has exclusivity over bankruptcies from the constitution. Not that it has stopped states from seeking to enforce their own maritime laws, or indeed laws governing bankruptcies in the past, or to tax the federal government. But not successfully.

But this isn't a Michigan bankruptcy law, this is a Michigan law regarding the devolution of power to municipalities. The law does not govern bankruptcy, it governs what the the city can and cannot do. Since the question is whether the city can declare bankruptcy if the state has barred it from doing so, that's why this is complicated. If you've got a case where this actually happened, then sure, but this looks like an unprecedented situation.

Judge Aquilina opined that the state constitution bars any measure to affect the pensions and she issued an order that the petition be withdrawn. She misstates the issue and her court's place in the scope of the federal system. She ordered the petition be withdrawn on the grounds that state law forbids breaking the pension contract. That is in no way directly related to whether the city or governor can file a Chapter 9 Petition, and is an issue better reserved for the bankruptcy judge.

Furthermore, the pensioners are seeking to elevate their status in the suit above other creditors with superior claims; arguing that Michigan Law supersedes the bankruptcy code. Part of the bankruptcy code includes a bit of wiggle room to cope with state laws governing property, contract law, etc. And it sets a very scary prospect that creditors can challenge bankruptcy filings in state court, rather than in bankruptcy court. Even as a mere delay tactic, which this is, it is a very frightening prospect for anyone holding a debt to think their petition is up for this scrutiny anywhere. Company X has to now fight a state court action because of laws governing the unions before it can file Chapter 11 or 7. That is scary.

If her ruling stands, which is highly unlikely, it paves the way for any state to thus inhibit others from filing for bankruptcy by making their own edicts, and rewriting the code to benefit classes of creditors that are more politically savory.

In the long run this will likely do far much more harm to pension funds as it shows from day 1 that they are not acting in the best of faith and seek to draw out the process. If Michigan Law does, indeed fully state that these pensions cannot be discharged and cannot be restructured-not unlike the laws governing Student Loans, then that argument should go before a bankruptcy judge.

KingGorilla wrote:
Judge Aquilina opined that the state constitution bars any measure to affect the pensions and she issued an order that the petition be withdrawn. She misstates the issue and her court's place in the scope of the federal system. She ordered the petition be withdrawn on the grounds that state law forbids breaking the pension contract. That is in no way directly related to whether the city or governor can file a Chapter 9 Petition, and is an issue better reserved for the bankruptcy judge.

This is the only issue I am talking about, and it is related in this way: bankruptcy could affect those pensions, and according to Michigan law--the law that empowers the city in the first place--the city was never granted the power to take any action that could diminish those pension. Also, even if this is an issue better reserved for the bankruptcy judge, that doesn't mean the bankruptcy judge can't rule that the city of Detroit cannot declare bankruptcy without the permission of the state government.

Kehama wrote:
Maybe a large corporation will buy Detroit, take on its debt and establish itself as a sovereign nation. It'd be like a Vatican City inside the US. I mean, last year Walmart had revenue of about $469 billion so they could take the hit to establish their own country. That'd be much better than allowing Detroit to go bankrupt, right? So yeah, if they can't go bankrupt... then what? They just default on everything, have no credit, their bonds are worthless, all city services either dissolve or go private... yeah, that would be bad. Ancient Rome did the whole private fire departments thing and that didn't work out too well.

This company is named OCP.

The thing is Cheeze, all of these possible roadblocks to Chapter 9 are in the bankruptcy code-approval of a plan by creditors, recognition of certain state idiosyncrasies on property and contract law, etc. The judge assigned will be both a member of the Michigan and Federal bar, with knowledge of state and bankruptcy law. No, her order is about Michigan supremacy over the federal constitution and is at best a populist tactic to get her re-elected.

Given another example. Taxes to the state are often listed on a disclosure and plan in Chapter 11. Many states have on their books that sales tax is held as a public trust-which means they are not debts that can be discharged or restructured, and in fact can be pursued as debts even during a bankruptcy process.

The bankruptcy code envisions just the issue that Judge Aquilina wrongly determined to estop the city from filing, and the state from approving. Contracts, property, real estate are all matters of state law that bankruptcy courts must deal with in different ways depending on the state.

What Judge Aquilina is stating is that Michigan court orders supersedes the federal constitution. And what her order sets forth is that the bankruptcy code, a direct extension of congressional constitutional authority is subservient to the state. That is outlandish and further blackens the eye of a state, in a federal circuit where both have severely bruised reputations regarding basic understanding of the constitution. And I take particular exception to the furtherance of the idea that Michigan has a supremely deficient understanding of the most basic legal principles. It is a top (supreme court) down (local court) issue in the state, that now gets national attention. The scathing indictments of the Michigan Supreme Court and the 6th Circuit by federal appeals courts and the Supreme Court are embarrassments.

This is the very worst forum to challenge a bankruptcy filing, and it's very existence where a state court judge would delay a bankruptcy filing in this way should be chilling. What is to stop creditors from seeking this same delay tactic against private citizens? Small businesses? Corporations? When you are broke and seeking Chapter 7, do you think you would have the sheer strength of will let along the money to contest such an action?

KingGorilla wrote:
The thing is Cheeze, all of these possible roadblocks to Chapter 9 are in the bankruptcy code-approval of a plan by creditors, recognition of certain state idiosyncrasies on property and contract law, etc.

I agree with you that all those things are in there, but what about issues of devolution of state power to local authorities law? If it's in there, can you give us some kind of source? Because examples about sales taxes are not analogous--you're talking about how the bankruptcy proceeding unfolds after bankruptcy has been declared in the first place.

You're wrong when you say that Judge Aquilina is stating is that Michigan court orders supersede the Federal constitution. What the judge is saying is that Michigan law prevents a creature that is entirely a creation of state law from seeking bankruptcy under these conditions.

If I've misunderstood the judge, point that out to me. If there's some precedent for this situation in bankruptcy law, show me that. I even agree with you that if the judge were putting state law above the Federal bankruptcy power, this case is dead in the water. What I'm trying to communicate to you is that the complexity stems from whether Federal bankruptcy is available to Detroit in the first place.

This is the very worst forum to challenge a bankruptcy filing, and it's very existence where a state court judge would delay a bankruptcy filing in this way should be chilling. What is to stop creditors from seeking this same delay tactic against private citizens? Small businesses? Corporations? When you are broke and seeking Chapter 7, do you think you would have the sheer strength of will let along the money to contest such an action?

The first two are natural persons. Corporations are artificial persons. Local governments, on the other had, are subject to WAY more state control than even corporations:

The Supreme Court of the United States cited Municipal Corporations and fully adopted Dillon's emphasis on state power over municipalities in Merrill v. Monticello, 138 U.S. 673 (1891), reaff'd. Hunter v. Pittsburgh, 207 U.S. 161 (1907), which upheld the power of Pennsylvania to consolidate the city of Allegheny into the city of Pittsburgh, despite the wishes of the majority of Allegheny residents. The Court's ruling that states could alter or abolish at will the charters of municipal corporations without infringing upon contract rights heavily relied upon Dillon's separation of public, municipal corporations from private ones.
http://en.wikipedia.org/wiki/John_Fo...

I'm not arguing whether this is a good thing or a bad thing: just that it's a legal thing. Or at least, not the kind of legal case you're talking about.

edit: KG, I feel like the goalposts are moving around here, and the "can Michigan stop Detroit" question is getting conflated with the "can a Michigan state court prevent you from getting into Federal Bankruptcy court" in which case I agree with you. But I think you're arguing two different legal questions here.

The City of Detroit, and indeed all municipal entities have been afforded autonomy since the 19th Century. Our own Judge Cooley made it ingrained in Michigan that local autonomy, local control is not just a Michigan constitutional right, not just a Federal Constitutional right, but a fundamental human right-I do not like Judge Cooley. Michigan rejected Dillon's Rule, formally adopting Home Rule in the 30's.

The mere fact that the city, as well as every other municipality or group of municipalities, can create charters that are equal to the State Constitution. Detroit's or Grand Rapids' town charter is equal to the state constitution, under the Home Rule provision in the state constitution. That us enough under the Bankruptcy Code for a city to declare Chapter 9-the autonomy to contract and hire employees.

So we reach a crossroads.

Here is the Michigan Constitutional Provision and the Judge's Order.

§ 24 Public pension plans and retirement systems, obligation.
Sec. 24.

The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities.

It was unfortunately passed in 1963 long before our present Bankruptcy Code.

And so, we have a state judge making an opinion on a matter that is exclusively under federal control. This judge, with no experience in bankruptcy as I can find has issued an opinion in a state court as to what the Bankruptcy Code states. It is 100% the wrong forum for this. And the order states that the Michigan Constitution with no express terms, is superior to the Bankruptcy Code's direct constitutional power. This judge with no bankruptcy qualifications in 3 pages stated that the pensions are non dischargeable non restructurable debts. And due to this, the petition must be withdrawn. She makes no basis on how she, a state court judge, has the power to hear this petition, or her authority to make determinations on matters of bankruptcy-a purely federal matter.

And it sets up, a case of first impression that creditors can in very bad faith make secondary attacks on debtors in state court. What arcane provisions are there in the Michigan or other state constitutions that might give rise to preventing the private citizen from seeking Chapter 7 relief? Or Chapter 13? What of those poor individuals who cannot pay for an attorney even for the bankruptcy filing, let alone to fight a concurrent state action? Bankruptcy is viscous enough without opening up this whole new avenue to harass the bankrupt.

This needs to be stopped in it's tracks. And I would go so far as to hope the bankruptcy judge assigned strips the pension funds of any secured interest for acting in bad faith the day after bankruptcy was filed. This is as foreign to me as if this judge sought to meddle with affairs of patents.

And as far as the edit, this is a quintessential forum and supremacy issue. I can think of absolutely no basis on which Judge Aquilina can rely upon to order the withdrawal of a petition that solely is in the purview of federal control. A judge in Kentucky might as well rule on a civil suit in Ohio; a state court may as well issue a court martial for a war crime. Where does she draw her authority to hear a petition regarding a bankruptcy? This is something covered in the first week at Law Schools.

And these are my concerns-Michigan judges completely ignoring basic constitutional and federal principles, as well as opening a floodgate for bad faith creditors to scour state laws to challenge a bankruptcy proceeding. Under her order, that is a threat to every citizen that a state law might jeopardize their bankruptcy.

KingGorilla wrote:
The City of Detroit, and indeed all municipal entities have been afforded autonomy since the 19th Century. Our own Judge Cooley made it ingrained in Michigan that local autonomy, local control is not just a Michigan constitutional right, not just a Federal Constitutional right, but a fundamental human right-I do not like Judge Cooley. Michigan rejected Dillon's Rule.

The mere fact that the city, as well as every other municipality or group of municipalities, can create charters that are equal to the State Constitution. Detroit's or Grand Rapids' town charter is equal to the state constitution, under the Home Rule provision in the state constitution. That us enough under the Bankruptcy Code for a city to declare Chapter 9-the autonomy to contract and hire employees.

So we reach a crossroads.

We don't. If Detroit can file for bankruptcy because Michigan law has rejected Dillon's rule, Detroit can file for bankruptcy because of Michigan law, not in spite of it for U.S. Constitutional reasons. But this case it turns out is actually different from that:

Here is the Michigan Constitutional Provision and the Judge's Order.

That order is for the Governor and the Emergency Manager. This is even more a matter of Michigan state law than it originally looked like.

And so, we have a state judge making an opinion on a matter that is exclusively under federal control. This judge, with no experience in bankruptcy as I can find has issued an opinion in a state court as to what the Bankruptcy Code states. It is 100% the wrong forum for this. And the order states that the Michigan Constitution with no express terms, is superior to the Bankruptcy Code's direct constitutional power. This judge with no bankruptcy qualifications in 3 pages stated that the pensions are non dischargeable non restructurable debts. And due to this, the petition must be withdrawn.

Okay, this might be the crux of where we disagree. I don't think she is stating that the pensions are non-d/non-r debts. I think she is saying that precisely because they are dischargeable and restructurable in bankruptcy, that means the Emergency Manager cannot have Detroit declare bankruptcy. If you read that Order you linked to, notice that it states that the Michigan law upon which the Emergency Manager is resting his power to take this action? That Michigan law is unconstitutional according to the Michigan Constitution.

Now the judge's reasoning is that in bankruptcy, these debts will become dischargeable or restructurable--not her opinion making bankruptcy law, just her understanding of bankruptcy law as made by the Federal government and the Bankruptcy courts. The Emergency Manager and Governor are empowered in this matter to declare bankruptcy by PA 436. But if bankruptcy will make these debts dischargeable or restructurable, and the EM&G have no power to take any action that will make these debts dischargeable or restructurable, then the EM&G have no power to declare bankruptcy. That's the reasoning here.

She makes no basis on how she, a state court judge, has the power to hear this petition, or her authority to make determinations on matters of bankruptcy-a purely federal matter.

To sum up, I think it's clear why she's not hearing a petition nor making determinations on matters of bankruptcy. She's just saying that the the Governor and Emergency Manager never had the legal right to have Detroit declare bankruptcy in the first place, because their power to have Detroit petition for bankruptcy comes from PA 436, and PA 436 is unconstitutional in that regard according to the Michigan Constitution.

And it sets up, a case of first impression that creditors can in very bad faith make secondary attacks on debtors in state court. What arcane provisions are there in the Michigan or other state constitutions that might give rise to preventing the private citizen from seeking Chapter 7 relief? Or Chapter 13? What of those poor individuals who cannot pay for an attorney even for the bankruptcy filing, let alone to fight a concurrent state action? Bankruptcy is viscous enough without opening up this whole new avenue to harass the bankrupt.

This needs to be stopped in it's tracks. And I would go so far as to hope the bankruptcy judge assigned strips the pension funds of any secured interest for acting in bad faith the day after bankruptcy was filed. This is as foreign to me as if this judge sought to meddle with affairs of patents.

And as far as the edit, this is a quintessential forum and supremacy issue. I can think of absolutely no basis on which Judge Aquilina can rely upon to order the withdrawal of a petition that solely is in the purview of federal control. A judge in Kentucky might as well rule on a civil suit in Ohio. Where does she draw her authority to hear a petition regarding a bankruptcy? This is something covered in the first week at Law Schools.

You of all people should know: sometimes what is legally right...sucks.

I just can't wait for the combo Mad Max/Robocop scenario to happen in my backyard any day now. This should be fun

EDIT: Well, we're halfway there, at least.

Krugman gives his take.

Paul Krugman wrote:

So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time — because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do.

And Cato responds.

Dunno how I feel about either of these takes; I think there's bits of truth in both.

Seth wrote:
Krugman gives his take.

Paul Krugman wrote:

So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time — because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do.

And Cato responds.

Dunno how I feel about either of these takes; I think there's bits of truth in both.

It reads to me like they can both be right, just the Cato piece wants to you think they're talking about the same thing, edit: when it reads to me more like the deck was already stacked against Detroit, and bad governance made it a bad situation worse. Cato wants you to think Detroit could just be Pittsburgh if not for those greedy unions and such. Here's another piece about how Detroit never really had a shot to become Pittsburgh:

http://www.slate.com/blogs/moneybox/...

Rosenthal: Detroit sounds warning for Chicago

No matter how much horsepower you produce, you can't outrun math.

Like automakers General Motors and Chrysler a few years earlier, Detroit late last week finally acknowledged its numbers never would add up and filed for bankruptcy protection. This is the destination after decades of struggling to reconcile growing legacy costs and obligations with a shrinking economy.

Sound familiar anyone? Anyone?

Chicago is not Detroit. Not lately anyway. The two cities share a heritage as great industrial cities on the Great Lakes. Chicago's economy has been more diverse and proved more resilient, enabling it to better hold on to its population and tax base over the past half-century while autocentric Detroit veered off course.

"By any kind of functional accounting of the last 10 years or more, it's been apparent the city is bankrupt," said Matthew Cullen, a former GM executive who helps manage investments and businesses for Quicken Loans founder and Chairman Dan Gilbert. "It was a situation we were aware of and many of us feel like the only thing that's different as of (Thursday's filing) is we've turned to confront this issue as opposed to thinking we could hide from it."

Here in Illinois we have our own problems. Chicago's bond rating got a significant dressing down from Moody's Investors Service, which cut the Windy City's rating three notches on the same day of Detroit's Chapter 9 filing. Yes, we can spend all day highlighting the differences between the two cities, but we're also spending more than we should. To blithely ignore the warning signs of what happened in the Motor City is as dangerous as thinking you can blow past the flashing lights at a railroad crossing.

Plus Chicago has Dresden.

That money comes from the state, not the city. I'm not a fan of using government funds to pay for sports stadiums for any reason, but it's not "Detroit" that's able to come up with the funds.

If you want to bash Detroit, this list is much more frightening.

edit -- about a half hour of research gives me pause to believe that source. Secrets of the Fed seems to be a Truther/chemtrail web site, with a hint of anti semitism, which more or less invalidates anything else it claims.

To be fair, though--there is plenty of truthful things to bash Detroit over aside from the Red Wings stadium.

CptDomano wrote:
To be fair, though--there is plenty of truthful things to bash Detroit over aside from the Red Wings stadium. :D

Yeah, Joe Louis Arena is a dump!

And hockey isn't played in a stadium. It's in a rink or arena. Sometimes a place or a collesium. Occasionally a tank or an igloo. Used to happen in a gardens and there might be a few centres (center) around. But never a stadium.

Vector wrote:
CptDomano wrote:
To be fair, though--there is plenty of truthful things to bash Detroit over aside from the Red Wings stadium. :D

Yeah, Joe Louis Arena is a dump!

And hockey isn't played in a stadium. It's in a rink or arena. Sometimes a place or a collesium. Occasionally a tank or an igloo. Used to happen in a gardens and there might be a few centres (center) around. But never a stadium.

Unless it's the Winter Classic. :p

Vector wrote:
CptDomano wrote:
To be fair, though--there is plenty of truthful things to bash Detroit over aside from the Red Wings stadium. :D

Yeah, Joe Louis Arena is a dump!

Yes, a dump. A stale-smelling, congested, stupid dangerous concrete stairway, bathrooms-with-troughs dump. But, it's a beautiful dump. A rafters-full-of-banners dump.

Here's a good rundown of how the new arena will be funded. http://kuklaskorner.com/tmr/comments...

And, as an employee of a Detroit utility company, I would really really not like a large corporation to take over the city. Not only will we get Enforcement droids that sound like pigs when they fall down stairs, but my job will probably be given to the first dudes who aren't afraid to go into a hole in the ground and be surrounded by electricity for $7/hr.

I keep some of that wistfulness. Tiger Stadium was built in 1912, and was on the site of a ball park built in the 1800's; and was demolished. The Joe is one of the oldest hockey arenas, built in 1979. Some of me still likes to think of sports stadiums and ball parks as American Cathedrals, but that is not how most teams nor owners see it.