Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Nov. 16 — Residents of Detroit, Mich., can’t get the bankruptcy court to order the Detroit Water and Sewerage Department (DWSD) to restore water to customers and prohibit any further shutoffs because it violates the Bankruptcy Code, the Sixth Circuit held Nov. 14 ( Lyda v. City of Detroit (In re City of Detroit) , 2016 BL 378016, 2016 BL 378016, 6th Cir., No. 15-2236, 11/14/16 ).
Judge Richard Allen Griffin of the U.S. Court of Appeals for the Sixth Circuit concluded that the plain language of Bankruptcy Code Section 904 explicitly prohibits the injunctive relief sought by the plaintiffs.
Under Section 904, the “court may not, by any stay, order, or decree, in the case or otherwise, 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.”
“Section 904’s mandate is clear,” the Sixth Circuit said, concluding that the statute’s plain meaning must be enforced.
Ten plaintiffs/residents of the city of Detroit filed an adversary proceeding in the city of Detroit’s Chapter 9 bankruptcy case alleging a series of claims arising from DWSD’s termination of water service to thousands of residential customers. The residents argued that the city violated state law and their constitutional rights in turning off water for nonpayment. All of the plaintiffs stated that the cost of DWSD’s water service is unaffordable.
Chapter 9 protection is a form of bankruptcy available only to municipalities. The city of Detroit filed for Chapter 9 protection July 18, 2013, and emerged from bankruptcy protection Dec. 10, 2014.
The city of Detroit argued that Section 904 explicitly prevented the bankruptcy court from granting the relief sought by the plaintiffs regardless of the theory under which the plaintiff’s asserted their claims.
The bankruptcy court granted the city’s motion to dismiss, concluding that the court lacked the authority to grant the injunctive relief requested. The district court affirmed.
The Sixth Circuit looked at the underlying policy considerations underlying Chapter 9, which are the same as that of a Chapter 11 reorganization: “to give the debtor a breathing spell from debt collection efforts and establish a repayment plan with creditors.”
Section 904, the court said, is a “keystone in the constitutional arch between federal bankruptcy power and state sovereignty.” According to the court, Congress “drafted chapter 9 ‘to give courts only enough jurisdiction to provide meaningful assistance to municipalities that require it, not to address the policy matters that such municipalities control.’”
Because Section 904 prohibits the bankruptcy court from awarding the relief sought, the plaintiffs failed to state a claim upon which relief could be granted and the case must be dismissed.
Expressing its concern and “empathy” for the residents of Detroit, the Sixth Circuit concluded that the bankruptcy court was correct to dismiss the case even for affordable water service. The plaintiffs may have been better off “moving for relief from the automatic stay to pursue their claims outside of bankruptcy court,” the court noted in footnote six of the opinion. They would have to prove that they are a “party in interest” entitled to relief from the automatic stay under Section 362(d)(1), the court said.
Judges Jeffrey S. Sutton and Bernice B. Donald joined the opinion.
Mark P. Fancher, ACLU Fund of Michigan, Detroit, represented appellants.
Marc N. Swanson, Miller, Canfield, Paddock and Stone, P.L.C., Detroit, represented appellees.
To contact the reporter on this story: Diane Davis in Washington, D.C. 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.
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