Challenge to Detroit Pension Cuts Thwarted by Sixth Circuit

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Diane Davis

Oct. 6 — The City of Detroit, Mich., won’t have its Chapter 9 bankruptcy plan unraveled by the Sixth Circuit despite a challenge by city employees, retirees, and beneficiaries over the city’s reduction in pension benefits ( Ochadleus v. City of Detroit (In re City of Detroit) , 2016 BL 328281, 6th Cir., No. 15-2379, 10/3/16 ).

Judge Alice M. Batchelder of the U.S. Court of Appeals for the Sixth Circuit Oct. 3 upheld the Detroit’s municipal bankruptcy plan that incorporated a “complex network of settlements and agreements with its thousands of creditors and stakeholders” and was approved by the bankruptcy court.

The doctrine of equitable mootness applies to Chapter 9 cases just as it applies to Chapter 11 cases, the court concluded. The doctrine of equitable mootness “protects the need for finality in bankruptcy proceedings and allows third parties to rely on that finality by preventing a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract,” the court said. Equitable mootness “was created and intended for exactly this type of scenario” the court said.

Ruling Not Surprising

“The outcome of this case is no surprise,” bankruptcy law professor Melissa B. Jacoby, University of North Carolina, Chapel Hill, N.C., told Bloomberg BNA Oct. 6.

“I expected the Sixth Circuit (and district court) to uphold the plan confirmation order resolving all of the issues in the Detroit bankruptcy -- whether on the merits, or on grounds like equitable mootness,” she told Bloomberg BNA.

Chapter 9 is a form of bankruptcy available to municipalities, while Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate under a plan that must be approved by the bankruptcy court.

Strong Dissent

Judge Karen Nelson Moore vigorously dissented, concluding that in its “zeal to avoid the merits of this case,” the majority “extends an already questionable prudential doctrine to a context in which it has no place.”

This case has “real-world” consequences for the retirees, Moore said. She also noted that by declining to review the bankruptcy court’s assessment of the case, the majority ensured that the appellants’ claims will never be heard by an Article III judge.

“The majority and dissents give us much more food for thought on the future of this [equitable mootness] doctrine for both corporate and municipal restructurings,” Jacoby told Bloomberg BNA. “On the one hand, the majority usefully critiques and distinguishes the district court decision in the Jefferson County case, and presents arguments that mootness may be even more important in a municipal case than a corporate one. On the other hand, the dissent is a forceful reminder that equitable mootness functionally eliminates appellate review from the most critical determinations made in a bankruptcy case, and that does not seem to be what Congress intended,” she said.

“Given that the Supreme Court has recently emphasized, in other contexts, federal courts’ obligation to decide cases within their jurisdiction, we should continue to see challenges to the propriety of equitable mootness across the board,” Jacoby said.

“The dissenting judge is clearly calling for en banc review of the propriety of equitable mootness. If that happens and prompts a more clear circuit split, it does seem like an issue the Supreme Court should review,” she said.

The bankruptcy court confirmed the City of Detroit’s Chapter 9 plan in November 2014, and the plan took effect in December 2014. Under the settlement, which was part of the plan, pensions were reduced by 4.5 percent.

Pensioners appealed to the district court, which dismissed the appeal in favor of the City of Detroit.

On appeal to the Sixth Circuit, the appellant/pensioners argued that equitable mootness isn’t a viable doctrine, and that it doesn’t apply in Chapter 9 bankruptcies. According to appellants, the differences between Chapter 11 and Chapter 9 show that equitable mootness should apply in Chapter 11 but not in Chapter 9.

The majority, however, rejected this argument and focused on the dual purpose of equitable mootness: finality in bankruptcy proceedings, and protection of the good faith reliance interests created by implementation of a bankruptcy plan. These purposes apply with as much force in Chapter 9 as in Chapter 11, the court said.

Judge David W. McKeague joined the majority opinion.

Jamie S. Fields, Detroit, Mich., argued for appellants in 15-2194; John P. Quinn, Detroit, Mich., argued for appellant in 15-2337; Dennis Taubitz, Irma Industrious, St. Thomas, Virgin Islands, argued for appellants in 15-2353; Marc N. Swanson, Miller Canfield Paddock & Stone PLC, Detroit, Mich., argued for appellees City of Detroit, Mich.; Heather Lennox, Jones Day, Cleveland, Ohio, Beth Heifetz, Anthony J. Dick, G. Ryan Snyder, Jones Day, Washington, D.C., represented appellees on brief; Lucinda J. Darrah, Detroit, Mich., pro se, in 15-2371; and William Davis, Detroit, Mich., pro se, in 15-2379.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.