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Corporate Restructuring & Bankruptcy | MONDAY, MARCH 3, 2014 | S3

upheld on appeal,2 could have signiicant tection under the Michigan Constitution:
ramiications for municipalities seeking to • The wording of Article IX, §24, providing
restructure their debt. This article explores that the pension beneits are a “contractual
Rhodes’ opinion and the effect it could have obligation”;
on municipalities eligible to ile for Chapter • The lack of difference between the use
9 protection in New York.
of “impair” in Article I, §10 and “impair or
diminish” in Article IX, §24;
• The Michigan Supreme Court’s use of
Make informed strategic decisions. The Tenth Amendment
“contract language to describe the status of
Among other things, those objecting to pensions”; and
Win larger verdicts. Detroit’s iling of a bankruptcy petition argued • The fact that the “only remedy for impair-
that Chapter 9, as applied, violates the Tenth ment of pensions is a claim for breach of
Negotiate from strength.
Amendment of the U.S. Constitution. Specii- contract.”4
cally, the pension plans (the Plans) asserted Noting that the Michigan Constitution
that Chapter 9 is unconstitutional because could have protected pension beneits, but
(i) the Michigan Constitution protects both did not (discussed infra), the court held the
contract and pension obligations such that pension beneits to be contractual obliga-
any impairment of the obligations violates the tions not entitled to special protection in
U.S. Constitution; and (ii) pension obligations, the Chapter 9 case.
which are afforded extraordinary protection
in the Michigan Constitution as compared
to general contractual obligations, are not The Michigan Authorization Statute

suficiently protected in Chapter 9.
Similarly, the Plans alleged that, because
In support of these arguments, the Plans the statute authorizing municipal bankruptcy
relied on the following provisions of the ilings in Michigan, Public Law 436, Michigan
Michigan Constitution: “No . law impairing Compiled Laws §141.1558 (the Authorizing
the obligation of contract shall be enacted.” Statute), did not speciically protect pension
Mich. Const., art. I, §10. “The accrued inancial obligations, the statute itself was a violation of
beneits of each pension plan and retirement the Michigan Constitution. Opinion, p. 92. The
system of the state and its political subdivi- Authorizing Statute provides, in relevant part:
sions shall be a contractual obligation thereof If, in the judgment of the emergency
which shall not be diminished or impaired manager, no reasonable alternative to
thereby.” Mich. Const., art. IX, §24.
rectifying the inancial emergency of the
It necessarily followed, according to the local government which is in receivership
objectors, that the Tenth Amendment of the
United States Constitution protects the rights exists, then the emergency manager may
recommend to the governor and the state
afforded to the pension obligations by the treasurer that the local government be
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Michigan Constitution by providing that “[t] authorized to proceed under Chapter 9.
he powers not delegated to the United States If the governor approves of the recom-
by the Constitution, nor prohibited by it to the mendation, the governor shall inform
Quick access
states, are reserved to the states respectively, the state treasurer and the emergency
or to the people.” U.S. Const., amend. X.
manager in writing of the decision, with
The Bankruptcy Court disagreed on both a copy to the superintendent of public
accounts, inding the state’s consent to the instruction if the local government is a
filing of a Chapter 9 petition sufficient to school district. The governor may place
3 Full Case Views
defeat a Tenth Amendment challenge, cit- contingencies on a local government in
ing United States v. Bekins, 304 U.S. 27, 58 S. order to proceed under Chapter 9. Upon
Ct. 811 (1938). In doing so, the court deter- receipt of the written approval, the emer-
mined that, while contract rights may not be
impaired under the Michigan Constitution, gency manager is authorized to proceed
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under Chapter 9. This section empow-
contracts clearly are subject to impairment ers the local government for which an
in a bankruptcy proceeding. Indeed, as the emergency manager has been appointed
court explained, bankruptcy presupposes the to become a debtor under title 11 of the
impairment of contracts:
United States Code, 11 USC 101 to 1532,
The state constitutional provisions pro- as required by section 109 of title 11 of
Access a database of more than 180,000 verdicts hibiting the impairment of contracts and the United States Code, 11 USC 109, and
and settlements from the nation’s leading provider pensions impose no constraint on the empowers the emergency manager to act
of verdict and settlement research.
bankruptcy process. The Bankruptcy exclusively on the local government’s
Clause of the United States Constitu- behalf in any such case under Chapter 9.5
tion, and the bankruptcy code enacted
Take VerdictSearch.com for a test-drive and see for pursuant thereto, explicitly empower the Rejecting the argument that pension ben-
yourself how powerful, fast and easy to use it is.
eits are afforded greater protection than gen-
bankruptcy court to impair contracts and eral contracts for the reasons previously set
to impair contractual rights relating to forth, the Bankruptcy Court held that, “[i]f
accrued vested pension beneits. Impair-
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ing contracts is what the bankruptcy the state consents to a municipal bankruptcy,
process does.3
it consents to the application of Chapter 9 of
the bankruptcy code.”6
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The next issue propounded by the Plans
and addressed by the court was whether the Protection of Pensions in New York
pension obligations protected by the Michi-
gan Constitution were contractual obligations Similar to Michigan, the New York Constitu-
subject to impairment or something entitled tion includes a provision intended to protect
VerdictSearch | 120 Broadway 5th Floor | New York, NY 10271 | 877-807-8076
to heightened protection.
pension beneits:
The Bankruptcy Court provided various After July irst, nineteen hundred forty,
reasons for its holding that pension obliga- membership in any pension or retirement
tions are not afforded extraordinary pro-
system of the state or of a civil »
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