## Facts

- The City of Detroit filed a voluntary petition under Chapter 9 on July 18, 2013 after Michigan’s governor authorized the filing under state emergency-management law.
- Detroit faced severe fiscal distress, with roughly $18 billion in liabilities and an inability to meet obligations as they came due.
- The City asserted both cash-flow insolvency and failure to provide adequate basic services, citing deteriorating infrastructure and reduced public safety and other core services.
- Significant obligations included accrued public pension benefits for employees and retirees.
- The Michigan Constitution treats accrued public pension benefits as contractual obligations and states they “shall not be diminished or impaired.”
- Unions, retiree groups, pension systems, and individual retirees objected to Chapter 9 eligibility and argued that state constitutional pension protections and federal constitutional limits barred any bankruptcy-based pension impairment.
- Some objectors relied on state-court proceedings seeking to block the authorization and filing; the bankruptcy court addressed those challenges within the Chapter 9 case.

## Issues

1. Whether Detroit satisfied Chapter 9 eligibility requirements under 11 U.S.C. § 109(c), including specific state authorization, insolvency, desire to effect a plan, and negotiation/impracticability and good-faith filing.
2. Whether Michigan’s constitutional protection of accrued pension benefits prohibits impairment of those benefits in a Chapter 9 case once the state authorizes the filing.
3. Whether allowing potential pension impairment through Chapter 9 violates the U.S. Constitution, including the Tenth Amendment and Contracts Clause, or otherwise exceeds federal bankruptcy power.

## Decision

- The court overruled the eligibility objections and held Detroit eligible to be a Chapter 9 debtor under 11 U.S.C. § 109(c).
- The court found Detroit insolvent, including inability to pay debts as they became due, and accepted evidence of severe service-delivery deterioration relevant to the insolvency showing.
- The court found Detroit desired to effect a plan to adjust its debts.
- The court held prepetition negotiations were impracticable given the number and dispersion of creditor groups and the lack of a workable structure for comprehensive retiree negotiations, and it found the petition was filed in good faith.
- The court held accrued pension benefits, though protected as contractual obligations under the Michigan Constitution, may be impaired in Chapter 9 once the state authorizes the municipality to file.
- The court rejected constitutional challenges to the filing and to potential pension impairment, concluding federal bankruptcy law governs debt adjustment after valid state authorization.

## Legal Principles

- A municipality is eligible for Chapter 9 only if it meets each element of 11 U.S.C. § 109(c), including insolvency, desire to effect a plan, specific state authorization, and satisfaction of negotiation/impracticability and good-faith requirements.
- “Insolvency” in Chapter 9 may be shown by inability to pay debts as they become due; evidence concerning inability to sustain essential services may support the court’s assessment of the municipality’s financial condition.
- When a state specifically authorizes a municipal Chapter 9 filing, federal bankruptcy law governs adjustment of the municipality’s debts, and conflicting state-law limits on impairment do not bar application of bankruptcy remedies.
- State constitutional protections for public pensions that characterize benefits as contractual obligations do not immunize those obligations from impairment in Chapter 9 after state authorization to file.
- Chapter 9’s state-authorization requirement addresses federalism concerns; once the state consents to filing, the bankruptcy court may administer the case within Chapter 9’s statutory limits on interference with governmental powers.

## Conclusion

The bankruptcy court held Detroit eligible for Chapter 9 and ruled that, because Michigan authorized the filing, federal bankruptcy law permits adjustment of the City’s obligations, including potential impairment of accrued pension benefits notwithstanding the Michigan Constitution’s pension clause.


In re City of Detroit, Michigan, 504 B.R. 97 (Bankr. E.D. Mich. 2013)