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Detroit's Managerial Milestones

posted by Melissa Jacoby

PathA city in bankruptcy operates with considerably more freedom from judicial oversight than its private chapter 11 counterparts. People often say judges have just two principal points of involvement in a chapter 9: presiding over trials on eligibility and confirmation of the plan of adjustment. My earlier posts about Detroit have told a story that puts judges in a more active ongoing role, emblematic of the evolution of the federal judiciary over the second half of the Twentieth Century. Serious managerial judging (plus a team) empowers them to shape the speed and direction of municipal restructuring notwithstanding doctrinal and constitutional limits on their formal legal authority. Yesterday's evidentiary hearing in Detroit's bankruptcy is illustrative.

The October 8th evidentiary hearing probed the impact on the City's lawyers of the continuation of a section 1983 action in U.S. district court to liquidate the plaintiff's claim, stemming from a tragic murder-suicide of two Detroit police officers. At the hearing's outset, the court asked everyone to dispense with opening arguments and move directly to testimony. The only witness called by the City, or by any party, was Detroit's deputy corporation counsel. The court called its own witness, however: another in-house City lawyer with primary responsibility for the 1983 suit. The court wanted to know exactly how this lawyer was spending his time now that Detroit was in bankruptcy.  

The court ruled from the bench later in the day and followed up with a written order. In essence, the stay of the 1983 action is going to be lifted to allow liquidation of the claim unless Detroit makes meaningful progress toward a detailed plan for dealing with all of its tort claims (700 or so) in the next 35 days. In response to this ruling, the plaintiff's lawyer expressed frustration in the Detroit Free Press that the lawsuit, based on his client's daughter's death, is being used as leverage to expedite Detroit's bankruptcy and the treatment of other claimants. Hard to refute. But here's where the limited formal legal powers in a chapter 9 may lead judges to reach for tools with teeth, and to use them in ways that facilitate controlling the broader case.

Recall that the court floated the idea of a tort claimant committee early, at the August 2, 2013 hearing - efforts to consider tort claimants that the press presented favorably (or at least did here). The City's lawyer suggested that the City had a different idea. Last week, at oral arguments on the lift-stay motion, the court invoked his earlier query and asked again: "what's your plan?" One of the City's lawyers noted the intent to use mediation and sketched out some timing of a claims bar date for later this fall. Yesterday's evidentiary hearing filled in some pieces of the puzzle for the court, including that the in-house lawyers, with tort litigation expertise, are not currently spending time on developing a process for liquidating tort claims, but also are not consumed with working on other aspects of the bankruptcy. In his verbal ruling, the court again asked the City to consider a tort claimant committee but noted this was one of many possible avenues.

Will the technique achieve the court's objective? One suspects Detroit's in-house lawyers arrived at work a little earlier today.

For more in-person discussion of this, and other dimensions of municipal financial distress, head to Fordham Law's conference on Friday.

Path photo courtesy of Shutterstock.


Judge Rhodes Judge Rhodes cited the District Court's opinion in my bankruptcy appeal for the position that all sorts of things fall under the "public rights" exception - even state court successor liability litigation between a creditor and buyer at a non-plan 363 sale.

I'll cite Judge Rhodes' reliance on my case in my writ to the supreme court as a reason the High Court needs to further clarify the public rights exception after Stern v Marshall.

Opinion and Order Denying Motion to Stay Proceedings Pending Determination of Motion to Withdraw the Reference

fn 9
Other cases also conclude that various matters arising within a bankruptcy case are within the public rights doctrine. See ...
White v. Kubotek Corp., 2012 WL 4753310 (D. Mass. Oct. 2, 2012) (creditor’s successor liability claim against purchaser of assets from bankruptcy estate);

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