November 21, 2013 Articles

Detroit's Pitch for a Pension Pinch

The City of Champions faces three key challenges in its bankruptcy case

by Devin Burke Hahn

Detroit's bankruptcy case has shaken up the bond market. The writing is on the wall: Detroit will probably succeed in reducing its pension obligations. In hopes of restructuring its debt, Detroit filed a bankruptcy case under Chapter 9 of the Bankruptcy Code. Chapter 9 follows the familiar path of Chapter 11 in many ways, but Detroit will face several unique challenges as it attempts to apply some of the Bankruptcy Code's hallmark provisions. See 11 U.S.C. § 901(a) (Chapter 9 borrows many provisions from Chapter 11). At each stage of its bankruptcy case, Detroit will meet serious objections based on the Michigan's constitution.

Detroit's pension pinch will face state constitutional challenges related to three major issues: eligibility, contract rejection, and the City's ability to "cram down" a Chapter 9 plan. Detroit's bankruptcy petition invoked the first of the Bankruptcy Code's most powerful debtor protections, the section 362(a) automatic stay. 11 U.S.C. § 362. To keep the stay in effect, Detroit will face its first challenge in the form of an eligibility contest. Once it wins the eligibility contest, Detroit will face a dispute over whether it can use another very powerful bankruptcy provision, section 365(a), to reject its pension obligations. 11 U.S.C. § 365. After it wins its second contest, Detroit will face its third and toughest challenge when it attempts use section 1129(b)(1) to "cram down," or confirm over creditor objections, a Chapter 9 plan that impairs the pensioners' claims for pre-petition arrearages and breach damages resulting from the contract rejection. 11 U.S.C. § 1129. Whether Detroit will win all three of these disputes is the $9.2 billion question. See Nancy Kaffer et al., "Detroit Files for Bankruptcy Protection," Detroit Free Press, July 18, 2013.

Premium Content For:
  • Litigation Section
Join - Now