Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
Sept. 23 — Detroit residents who believe the city violated their rights when it shut off their water struck out again in federal court Sept. 16.
Judge Bernard A. Friedman agreed with the bankruptcy court that the remedies the plaintiffs were seeking from the city weren't permitted by the Bankruptcy Code.
Detroit began more aggressively trying to collect on past-due water bills in the wake of its highly-publicized bankruptcy. Detroit filed the biggest U.S. municipal bankruptcy in history in July 2013.
The city began shutting off water to customers who were in arrears, leading to public demonstrations and a lawsuit in the bankruptcy court. The customers alleged, among other things, that they hadn't received proper notice that their water would be shut off. They also claimed the city had violated their due process and equal protections rights.
The bankruptcy court rejected their claims, finding that it didn't have the power to use restraining orders and injunctions to force the city to keep providing the plaintiffs with water. The plaintiffs appealed.
Municipal bankruptcies, like the Detroit bankruptcy, are governed by Chapter 9 of the Bankruptcy Code and differ substantially from commercial bankruptcies filed under Chapter 11. While it is still relatively uncommon for a city or county to file for bankruptcy, Detroit was one of several cities to file for Chapter 9 in the years following the 2008 financial crisis. In California alone, three cities filed for bankruptcy within three months of each other in 2012.
Bankruptcy Code Section 904 makes clear that, unless the city consents, a court may not “interfere with (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property.”
“As the Detroit Water and Sewerage Department is an arm of the [c]ity of Detroit, and the [c]ity did not consent to the requested relief or agree to it in the plan, the [b]ankruptcy [c]ourt could not have awarded any of the relief plaintiffs seek without violating [Section] 904,” the court in this case said.
The plaintiffs also argued that the bankruptcy court could have exerted its powers in this case because their relationship with the city regarding their water is an “executory contract.” Executory contracts are contracts that have yet to be fully performed. But the court said there was no contract at all in this case.
“The [b]ankruptcy [c]ourt correctly concluded that the [c]ity does not provide water service pursuant to a contract with its residents, but rather that it does so pursuant to state law and city ordinance,” the court said. “Nor, even assuming such a contract could be said to exist, did the [b]ankruptcy [c]ourt err in noting that it still could not impose a ‘water affordability plan' on the [c]ity without running afoul of [Section] 904.”
The court also agreed with the lower court that the allegations of ineffective notice were “conclusory in nature and [did] not suffice to allege a due process claim.” The court said the city had introduced evidence that the customers did in fact have notice their water would be shut off. Water bills contained warnings that water could be shut off if payments weren't made, a 24-hour emergency number customers could use to prevent shut-offs, and a notice informing delinquent customers that they could enter into a reasonable payment plan agreement. The court said that these and similar notices were “all that [was] constitutionally required.”
Finally, the court also found that the equal protection claim was properly dismissed. Customers alleged their equal protection rights were being violated because delinquent commercial customers were being given preferable treatment and not facing water shut-offs.
“Plaintiffs have not cited any authority for the proposition, and the [c]ourt is aware of none, that an equal protection claim by individuals may be based on an allegation that they are treated less favorably than certain business entities or, conversely, that business entities may base such a claim on an allegation that they are treated less favorably than certain individuals,” the court said. “The mere fact that individuals and businesses both purchase water does not make them ‘similarly situated' for equal protection purposes any more than the fact that both pay taxes or that both may own property. For the claim to succeed, plaintiffs would have to show that defendant treated them differently as compared to similarly situated individuals.”
Alice B. Jennings of Edwards & Jennings, Detroit, Kurt Thornbladh of Thornbladh Law Group PLLC, Dearborn, Mich., Jerome D. Goldberg of Jerome D. Goldberg PLLC, Detroit, and Julie H. Hurwitz of Goodman and Hurwitz, P.C., Detroit, represented the appellants.
Marc N. Swanson, Timothy A. Fusco, and Ronald A. Spinner of Miller Canfield, Detroit, represented the city of Detroit.
Shanna M. Kaminski of Kilpatrick & Associates, P.C., Auburn Hills, Mich., represented the Detroit Water and Sewerage Department.
To contact the reporter on this story: Stephanie Cumings in Washington at email@example.com
To contact the editor responsible for this story: Jay Horowitz at firstname.lastname@example.org
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)