Detroit: My Complication Had A Little Complication

Until a few days ago, it looked like Detroit's chapter 9 plan confirmation would come and go untouched by appellate process. In February 2014, the U.S. Court of Appeals for the Sixth Circuit granted seven petitions for direct appeal of the bankruptcy court's eligibility decision, which included the finding that public pension claims could be impaired in chapter 9 bankruptcy. But the Sixth Circuit did not act on the request for expedited consideration. Somewhat remarkably, it agreed to do what the bankruptcy court had requested in its certification memo: consult with the bankruptcy court's lead mediator to consider the impact of the appeal's timing on negotiations. According to the bankruptcy court, "the interests of the City, its residents and its creditors are better served by adjusting the pace of the legal process, including the appeals, to meet the needs of the mediation process." (p. 14) Don't know for sure, but it seems plausible that the lead mediator preferred deferral of the appeal until after plan confirmation; doing otherwise might throw a wrench in implementation of plan settlements he oversaw - especially the Grand Bargain, for which he has pressed for many months. Because the eligibility decision included the finding that public pensions could be impaired in bankruptcy, the Sixth Circuit docket has swelled in the meantime to include many amici appearances and briefs, including from CalPERS, the Illinois Public Pension Fund Association, the American Federation of Teachers, and AARP.

A host of appeals from other bankruptcy court orders in Detroit's bankruptcy also are pending in the U.S. District Court for the Eastern District of Michigan. In at least several - and possibly all, as I haven't yet checked each and every one - the district judge sua sponte stayed the matter until the Sixth Circuit decided the eligibility appeal.

This week, the Sixth Circuit shattered the blockade on appeals from Detroit's bankruptcy.

First, acting on a writ of mandamus, the Sixth Circuit ordered a district judge to adjudicate an appeal, on a short deadline, of a bankruptcy court order regarding the City's casino revenues from late August 2013. Given that the district judge had stayed other appeals on the same grounds, it is possible that those will have to get moving as well.

Then, the Sixth Circuit scheduled oral argument for July 30 for appeals from the bankruptcy court's eligibility/pension impairment decision. Here's the notice; the time has since been changed to 1:30.

The Sixth Circuit's acts are important reminders that rights to appeal on major legal questions are not inherently second fiddle to expedience in restructuring. Yet, is this ever a fraught time for the oral argument announcement! The Sixth Circuit notice strongly discourages motions for deferrals. The identified standard is "exceptional circumstances." Detroit's counsel filed a motion anyway, asking for a time-out at least until the votes on the plan are counted. The voting deadline is July 11. The official tally is due to the bankruptcy court by July 21.

The eligibility appeals are intricately tied with key settlements on Detroit's plan of adjustment. The State of Michigan contribution to Detroit's plan is contingent on eligibility-challenging appellants giving up that fight. Most of those appellants - retiree and employee groups, unions, and the Detroit Retirement Systems - are part of the settlement and now advise a "yes" vote on class 10 and 11 claims, even though doing so is a vote to abandon the challenge to eligibility/pension impairment. Remember what Shirley Lightsey said: You Can't Eat Principles.

Claimants might have absorbed that message more readily when a Sixth Circuit oral argument was an abstract concept rather than the more tantalizing scheduled reality. Those who vote on Detroit's plan after the Sixth Circuit announcement may calculate the odds differently than those who voted before. Meanwhile, the settling organizations cannot say today that they are dropping the appeal because the votes are not yet in and tabulated.

Other twists: How many issues should the Sixth Circuit consider, depending on the votes and settlements? The bankruptcy court's certification memo listed eighteen questions, although the pension impairment question largely drove the challenges and appeals. Financial creditors sat out the eligibility fights. Although appeals of the eligibility decision were administratively consolidated in April, the Sixth Circuit instructed appellants to file individual briefs. Appellants have never raised fully identical issues or arguments. And is it conceivable that the Sixth Circuit could find a way to go forward with the appeal even if the last three employee/retiree associations settle with the City and the requisite majorities - but not 100% - of classes 10 and 11 vote in favor of a plan that impairs their pensions?

Complications indeed.

Gazelle photo courtesy of Shutterstock.com. Title and selection of photo inspired by a certain Terry Gilliam film.