Page 10 - Corporate Restructuring & Bankruptcy

S10 | MONDAY, MARCH 3, 2014 | Corporate Restructuring & Bankruptcy
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Detroit
Opinion and Order permitting the voluntary In other words, the Bankruptcy Court 1. The case is currently pending in the U.S. Bank-
Chapter 9 petition of the New York City Off- suggested that plans under Chapter 9, as ruptcy Court for the Eastern District of Michigan, No.
Track Betting Corporation (NYC OTB) to pro- would be the case under other Chapters of 13-53846.
2. Various parties have appealed the court’s oral rul-
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ceed as a municipality12 based on an Executive the Bankruptcy Code, would recognize state ing regarding eligibility, the Memorandum Opinion and
division thereof shall be a contractual Order issued by then-Gov. David Patterson.13 law property rights even though they might Order and the entry of the Order for Relief, and have
relationship, the beneits of which shall Explaining that Bankruptcy Code §109(c)(2) modify contractual obligations.
requested direct appeal to the U.S. Court of Appeals for
not be diminished or impaired.7
permits governmental oficers empowered As discussed, the Bankruptcy Court also the Sixth Circuit.
3. In re City of Detroit, Mich., No. 13-53846, 2013 WL
And, like Michigan, the provision provides by the state to authorize a Chapter 9 iling,14 considered whether the authorization to ile 6331931, at *40 (Bankr. E.D. Mich. Dec. 5, 2013). As dis-
cussed in the opinion, the Bankruptcy Court’s indings
that such beneits are contractual relation- the Bankruptcy Court found the governor the Chapter 9 petition could have included on this point are consistent with prior case law. See e.g.,
ships “which shall not be diminished or to have “suficient power under New York contingencies limiting the effect that the id. (discussing Association of Retired Employees v. City of Stockton, California, 478 B.R. 8, 15 (Bankr. E.D. Cal.
impaired.”8
state law to authorize NYC OTB to ile for bankruptcy could have on pension obliga- 2012)).
New York provides statutory authoriza- bankruptcy[.]”15
tions. In this respect, the Bankruptcy Court 4. Id. at *43-44.
tion for municipalities to ile petitions under referred to the Authorization Statute which 5. Mich. Comp. Laws §141.1558(1).
Chapter 9 of the Bankruptcy Code:
Possible Efect of Detroit Opinion
“permits the governor to ‘place contingencies 6. City of Detroit, 2013 WL 6331931 at *52.
7. N.Y. Const., art. V, §7.
A municipality or its emergency inan- on a local government in order to proceed 8. Id.
cial control board in addition to, or in As a result of the broad statutory authori- under Chapter 9.’”17 In the authorization for 9. As of Oct. 31, 2012, the most recent date for which
lieu of, iling a petition under this title, zation in New York and the powers afforded Detroit to ile a Chapter 9 petition, the gov- inancial data is available, 14 New York counties, one
or the city of New York or the New York to the governor to authorize a Chapter 9 il- ernor of Michigan chose not to impose any city and one town had local ARRA Bonds purchased by the State of New York Municipal Bond Bank Agency
state inancial control board, may ile ing, municipal bankruptcies within the state contingencies. Nevertheless, the Bankruptcy outstanding. See http://emma.msrb.org/; http://www.
any petition with any United States dis- remain a distinct possibility. In the event of Court effectively concluded that any such abo.ny.gov/annualreports/PARISAuditReports/FYE2012/
such a iling, pension obligations presumably contingency would have been ineffective to State/StateOfNewYorkMunicipalBondBankAgen-
trict court or court of bankruptcy under will be a seminal issue. Accordingly, all eyes limit the Bankruptcy Court’s authority to cy2011-12.pdf (for the inancial statements of the State of New York Municipal Bond Bank Agency for the iscal
any provision of the laws of the United year ending Oct. 31, 2012).
States, now or hereafter in effect, for the will be on Detroit and the pending appeals administer the case under the Bankruptcy 10. N.Y. Local Fin. Law §85.80 (entitled “[a]uthority for
composition or adjustment of municipal to determine the pervasiveness of the Bank- Code when, later in the Opinion, it explained municipality or emergency inancial control board to ile
indebtedness. Nothing contained in this ruptcy Court’s holding.
that “state law cannot reorder the distribu- petition under federal statute.”).
11. N.Y. Local Fin. Law §2.00(1).
title shall be construed to limit the autho- In the meantime, based on the similarities tional properties of the [B]ankruptcy [C] 12. Indeed, the Bankruptcy Court found the NYC OTB,
rization granted by this section. However, between the constitutional provision on pen- ode.”18 Thus, it determined, consent to a as a public beneit corporation, to be a “municipality”
no municipality shall ile any petition sion obligations in Michigan and New York, it bankruptcy iling is full consent, and “no state under section 101(40) of the Bankruptcy Code, which is
authorized by this section for so long is worth considering the Bankruptcy Court’s law can protect contractual pension rights deined as a “political subdivision or public agency or instrumentality of a State.” See 11 U.S.C. §101(40).
as its local ARRA bonds,9 as deined in dicta in regards to what it believes Michigan from impairment in bankruptcy, just as no law 13. See In re New York City Off-Track Betting, 427 B.R.
section twenty-four hundred thirty-two could have done to protect pension beneits could protect any other types of contractual 256, 267 (Bankr. S.D.N.Y. 2010) (“Executive Order No. 27
of the public authorities law, purchased in a Chapter 9 case. Discussing protections rights.”19
authorizes NYC OTB to ‘ile any petition with any United
by the state of New York municipal bond that the Michigan Constitution could have Leaving aside the issue of contingencies, States district court or court of bankruptcy under any provision of the laws of the United States, now or here-
bank agency and secured by its pledge of provided to pensions, the Bankruptcy Court query whether the Bankruptcy Court’s other after in effect, for the composition or adjustment of mu-
opined as follows:
suggestions for the protection of pension nicipal indebtedness.’”).
tax revenues pursuant to the authority of It could have simply prohibited Michigan obligations are plausible in New York. The 14. Speciically, §109(c)(2) provides that “[a]n entity
section twenty-four hundred thirty-six- may be a debtor under Chapter 9 of this title if and only if such entity . is speciically authorized, in its capacity
b of the public authorities law remain municipalities from iling bankruptcy. It irst—prohibiting municipal bankruptcies— as a municipality or by name, to be a debtor under such
outstanding.10
could have somehow created a prop- or the inal suggestion—a state guaranty of Chapter by State law, or by a governmental oficer or
erty interest that bankruptcy would municipal pensions—seems less likely to be organization empowered by State law to authorize such
The Local Finance Law deines “municipal- be required to respect under Butner v. adopted than legislation to create a proper- entity to be a debtor under such Chapter . .” 11 U.S.C. §109(c)(2).
ity” to mean “a county, city, town or village.”11 United States, 440 U.S. 48, 99 S. Ct. 914 ty or security interest in municipal assets, 15. Id. at 268. Moreover, the Bankruptcy Court noted
Aside from the statutory authorization of (1979) . . Or, it could have established such as designated tax revenues, to secure that control over the NYC OTB had been transferred
§85.80 of the New York Local Finance Law, some sort of a secured interest in the pension benefits. Whether any combina- from New York City to New York state and that the is-
it appears that the governor may issue an municipality’s property. It could even tion of these alternatives is more palatable suance of the Executive Order was consistent with the governor’s powers. Id. at 269, 271.
executive order authorizing a Chapter 9 peti- have explicitly required the State to than other inancial solutions to the prob- 16. City of Detroit, 2013 WL 6331931 at *44.
tion. In In re New York City Off-Track Betting guaranty pension benefits. But it did lem of unfunded pension liabilities remains 17. Id. at *20.
Corporation, the Bankruptcy Court issued an
none of those.16
to be seen.
18. Id. at *52.
19. Id.

Powers
Undoubtedly, the Supreme Court will Article III protection. However, the court could issue proposed indings of fact and
address Schor in its forthcoming opinion. noted that “to the extent . [a] structural conclusions of law in certain “core” pro-
Schor provides the initial framework for principle is implicated in a given case, the ceedings where it did not have constitu-
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analyzing the issue of litigant consent. parties cannot by consent cure the constitu- tional power to inally adjudicate.
At least two cases recognize that par- In Schor, the court explained that Article tional dificulty.”38 This lays the groundwork Title 28 §157 authorizes the bankruptcy
ties may impliedly consent to adjudica- III, §1: (i) serves the institutional interest for the Supreme Court’s forthcoming deci- court to make rulings in adversary proceed-
tion by a non-Article III tribunal. In CFTC of separation of powers by creating the sion in Arkison. If it is determined that EBIA ings and contested matters. More specii-
v. Schor, the court stated that “when there judicial branch of government; and (ii) consented to bankruptcy jurisdiction, the cally, bankruptcy judges may “hear and
[is] no evidence of an express waiver [the preserves the individual right of litigants court must determine whether that consent determine” core proceedings, subject to
litigant’s conduct] . constituted an effec- to appear before judges who are insulated implicates a structural principal, and if so, ordinary appellate review.40 Bankruptcy
tive waiver.”33 In Schor, the court reasoned from other branches of government.36
there can be no litigant consent.
courts also have limited authority to hear
that by agreeing to seek relief before the Schor establishes the balancing test Four circuit courts of appeals have “noncore” proceedings and submit pro-
Commodity Futures Trading Commission for determining Article III challenges. The addressed the issue of litigant consent to posed indings of fact and conclusions of
(CFTC) rather than in district court, a liti- test requires a court to weigh the values of a bankruptcy judge entering inal judgment law to the district court for the entry of a

gant “effectively agree[s] to an adjudication Article III against several different factors, on a private right since the Supreme Court’s inal judgment.41 Federal law categorizes
by the CFTC of the entire controversy.”34 including “the extent to which the ‘essential decision in Stern. The Ninth Circuit stands a fraudulent conveyance proceeding as
This includes consent to adjudication of a attributes of judicial power’ are reserved to alone in its decision that litigants may con- “core.”42 However, the statute does not
common law counterclaim asserted against Article III courts, and, conversely the extent sent. Three other courts of appeals have explicitly state that judges may submit pro-
a litigant. Additionally, in Roell v. Withrow, to which the non-Article III forum exercises held that party consent did not preclude posed indings of fact and conclusions of
the court held that based upon the parties’ the range of jurisdiction and powers nor- an Article III objection to bankruptcy court law in such a “core” proceeding. The Ninth
litigation conduct, each of the parties agreed mally vested only in Article III courts, the adjudication.39
Circuit ultimately held that 28 U.S.C. §157(b)
to adjudication by a magistrate judge even origins and importance of the right to be The second issue to be decided by the (1) gives the bankruptcy court the authority
after being notiied of their right to refuse adjudicated, and the concerns that drove Supreme Court in Arkison is the “statu- to hear fraudulent conveyance actions and
and after being told that the magistrate Congress to depart from the requirements tory gap” created by Stern. Following the submit reports and recommendations to
judge intended to exercise the power of of Article III.”37 The court’s holding in Schor Supreme Court’s decision in Stern, the the district court. Since a fraudulent con-
adjudication.35
recognized a litigant’s ability to waive
question arose whether a bankruptcy court
veyance claim is a “core” proceeding, the