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Detroit Automatic Stay Ruling

posted by Adam Levitin

Continuing our coverage of the Detroit bankruptcy, it's being reported that Bankruptcy Judge Rhodes has ruled that the automatic stay extends to cover the progress of the suit regarding the constitutionality of the Detroit bankruptcy filing. I haven't seen a written decision (and there isn't one on the docket yet), so with the caveat that I'm writing based on journalistic reports, here goes: 

(1) The big point from the ruling is that it does not answer the ultimate question of Detroit's eligibility to file for bankruptcy.  What it does do is stop the progress of litigation against the city and key personnel. 

(2) The bankruptcy automatic stay operates as a pause button.  That means it is still possible to press play and let suits go forward.  Suits don't go away because of the stay.  They are just frozen. Also critically here, the stay does not operate as a rewind button. The stay does not unwind previous judgments. That means that it does not unwind the Michigan Circuit Court for Ingham County ruling (Webster v. Michigan) that the bankruptcy filing is not authorized.  (Check out the handwritten notation by Judge Aquilina ordering that the ruling be served on President Obama. What's he got to do with anything?) While the Michigan Court of Appeals stayed the Ingham County Circuit Court's injunction pending appeal, it did not reverse the ruling. That ruling is still out there, which raises some potential complications discussed under #5, below. 

(3) There are potentially a bunch of really interesting federal courts questions lurking both around this ruling and any potential eligibility ruling.  First, the bankruptcy court's order extending the automatic stay beyond the debtor appears to be under section 105(a) of the Bankruptcy Code, rather than under section 362. Section 362 is the automatic stay provision, while section 105(a) is the bankruptcy version of the All Writs Act, authorizing the bankruptcy court to issue whatever orders are necessary for implementing other Bankruptcy Code provisions.  

Bankruptcy courts sometimes turn to section 105(a) as a free-standing font of equitable powers, but that's a questionable and controversial reading of the provision, as I've railed previously given that bankruptcy courts are not courts of equity. They are federal statutory courts that can engage in common law law-making, but that's not the same as a roving writ to do equity. 

There is certainly precedent for bankrutpcy courts to enjoin suits against non-debtors, most famously A.H. Robbins v. Piccinin (4th Cir. 1986). (Note that the 4th Circuit is really cagey about the basis for its ruling, listing for possible grounds, and hoping that the synergy among them does the trick). The A.H. Robbins case and other similar decisions have been based on common fund concerns, where suits against the debtor's insurers might reduce the assets available for claimants in the bankruptcy.  In these cases, the courts were essentially seeing insurers' assets as property of the estate that was therefore protected under 362. Other cases deal with concerns about litigation against the debtor's officers and directors distracting them from the business of reorganizing the debtor.  

The typical extensions of the stay to protect non-debtors are in very different situations than Detroit's, where the non-bankruptcy litigation at issue is not trying to collect assets, but instead to obtain an injunction declaring that Detroit's bankruptcy filing is unconstitutional.  That's not at all what section 362 was meant to protect against, much less section 105(a).  The authority for applying the automatic stay to Webster v. Michigan seems really thin. 

(4) To this authority problem let's add in another problem:  the federal Anti-Injunction Act (AIA). The AIA provides that 

A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.

While some federal circuit courts have held that the AIA does not apply to bankruptcy courts because they are not "courts of the United States" (wtf!), others, including the 6th Circuit, in which Michigan is located, have held that the AIA does apply to bankruptcy courts. (Parker v. Goodman, 499 F.3d 616 (6th Cir. 2007).  

That said, there are three exceptions in the AIA. While section 362 might be an express authorization, this ruling isn't under 362 per se.  At best it is under 105(a), bootstrapping in 362. The third exception, for protecting and effectuating judgments, clearly does not apply. Perhaps the second, "where necessary in aid of its jurisdiction" applies, but it isn't clear that the bankruptcy court has jurisdiction over Detroit--that's the whole point of the eligibility hearing. So it's quite possible that the bankruptcy court has violated the AIA. 

(5) The bankruptcy court might also have a Rooker-Feldman problem.  The Rooker-Feldman doctrine is a relatively obscure and narrow federalism doctrine known as theRooker-Feldman doctrine regarding when federal courts should abstain from hearing a suit. The oversimplified version of the doctrine is that lower federal courts (that is federal courts other than the Supreme Court) should not be acting as courts of appeals for state court judgments. A state court judgment cannot generally be appealed to a federal court (there are ways of attacking such a judgment collaterally, but that's another issue). 

Both the automatic stay ruling and the eligibility hearing raise R-F issues.  The effect of the stay is to preclude enforcement of the state court's order. Functionally, that is very similar to the order being vacated.  And it seems impossible for any eligibility determination not to run smack into the state court judgment:  an eligibility hearing will necessarily involve a lower federal court having to rule on Detroit's authority to file for bankruptcy when there is already a judgment on the issue from the state court.  That raises potential Rooker-Feldman problems if the bankruptcy judge rules that Detroit is in fact eligible to file.  (No problem if Detroit is ineligible.)  

I say "potential" because the Rooker-Feldman doctrine is quite narrow, and I just don't know all of the facts necessary to determine if it would apply.  Among the complications is that the bankruptcy case was filed before the state court judgment, but the eligibility hearing will be after the state court judgment. One solution, as BDG notes in the comments to an earlier post, is that the bankruptcy court could certify the question to the Michigan Supreme Court (which could always decline to rule or take its sweet time). In any event, even if the bankruptcy court has to accept the Ingham County Circuit Court ruling and therefore (presumably) find Detroit ineligible to file, all that it does is toss the case back into the Michigan court system, which might well find that Detroit is authorized to file for chapter 9. 

(6) All this doctrinal talk aside, I would be quite surprised if the judge lets this case go. I think it would be hard for any judge to dismiss this case:  it would be like declining to play in the Superbowl. And retaining it isn't necessarily the wrong decision. But ultimately it may not be Judge Rhodes' decision. I would expect appeals from both the automatic stay and eligiblity rulings. It's not clear to me if they are final or interlocutory rulings, but I would think that eligibility would have to be a final ruling. And that means that there's a good chance that the last word will be the 6th Circuit.  

Comments

Having listened to Judge Rhodes ruling from the bench (Doc. 155 in the pleading tab at www.mieb.uscourts.gov) I am not sure there will a written decision. I don't recall the judge promising one. He did ask for an editable copy of Detroit's proposed order for tweaking.

Thanks for the commentary.

Make that Doc. 156. 155 is the argument. Sorry.

The issue here is that under 6th circuit law (see Smith v. First American Bank, N.A., 876 F.2d 524 (6th Cir. 1989)) any action taken in violation of the stay, which would include Judge Aquilina's ruling which occured after the bankruptcy filing, is void ab initio, so there is no Rooker-Feldman or AIA problem, Detroit made it through the Bankruptcy Court doors in time for the stay to stop the state court ruling.
As for the Judge's note that the ruling was being sent to President Obama, I would have liked to believe that a state court judge would understand the separation of powers concept that most of us learned in high school civics, but maybe that is expecting too much.

bmh--that logic would be compelling if Judge Aquilina's ruling violated the automatic stay. It didn't and can't as it was an injunction against the State, the Governor, and the State Treasurer. Detroit wasn't even a party to the suit. The Webster ruling wasn't a stay violation because it was not automatically stayed. It had to be subsequently stayed "by hand" as it were under section 105(a). So I don't think the Webster ruling is void ab initio.

How is the judge not violating the stay when she is telling people to withdraw the petition? A - there is no right to withdraw a Chapter 9 bankruptcy filing, unlike the right to dismiss a Chapter 13 filing. B - State court is not the proper place to be determining whether a case should be filed. If state court judges are allowed to say people must withdraw bankruptcy petitions, how does this not violate the Supremacy clause of the Constitution? If there is a constitutional issue as to whether Detroit can diminish pensions, is the Bankruptcy court not the best venue for this? Also, given the language of that provision in the Michigan Constitution, calling it a contract, probably made it harder to protect in bankruptcy.

Lesley--Interesting thoughts. I've put up a new post on the Supremacy Clause issues. But regarding the stay, let's start with this: the policy behind the stay is to preserve the assets of the estate. I don't see that policy as in any way implicated by the Webster suit.

You're right that there is not explicit right to withdraw a Chapter 9 petition. But I can't find caselaw on this, and I would suspect that a petition could be withdrawn upon motion.

State courts shouldn't be ruling on eligibility per se. That's a bankruptcy court's job under 921, but the authorization of the filing is a question of state law. The stay decision isn't an eligibility decision, and the fact that a state court has ruled that the governor lack authority to authorize the filing would seem important for the bankruptcy court's ultimate eligibility ruling, as it will have to interpret state law, and to the extent it disagrees with the state court, that will raise Rooker-Feldman issues.

But if you assume that the automatic stay does not apply to this issue in this case, why would it apply in even a consumer case with similar facts?

As long as the creditor asks the state court judge to find the consumer debtor unauthorized to file, rather than doing something contrary to "preserv(ing) assets of the estate" then your logic would dictate that there is no violation of the stay.

So if State law forbids bankruptcy and/or has a Constitutional amendment forbidding discharge of certain Bankruptcy dischargeable debts, are you saying Congress needs to do something else to prevent the State from forcing an individual to withdraw their petition?

[perhaps I am missing something, I have only briefly thought on what your statements could mean]

Ken, if there is a state court proceeding in process to determine an individual's competency, and then that individual purported files a bankruptcy petition, the stay would prevent the state court from determining the individual's competency, because the proceeding was a "proceeding against the debtor".

Here, as I understand it, there was no proceeding against the debtor, the City, in state court--it was a proceeding against an individual or individuals to challenge their ability to authorize the City to file. Maybe we're splitting hairs, but it seems like a difference.

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