Detroit’s bankruptcy is, as Idiot-in-Chief Joe Biden would say, “a big f*cking deal.” It’s a big deal not only for the people of Detroit, who most certainly have the most to gain (or lose) from restructuring the failed liberal city’s debts, but more so for unions and more particularly public sector unions.
Regular readers know ‘Puter hates him some unions, particularly the public sector unions which are not constrained by market forces. Worse than public sector unions are public sector union pension funds, perennially underfunded, corrupt as all get-out and known to all sentient beings as political payback to liberal politicians’ masters. But as much as ‘Puter hates public sector unions, ‘Puter’s position isn’t based solely on emotion and misguided notions of “fairness.” Rather, ‘Puter bases his position on law and precedent.
The single largest issue in Detroit’s bankruptcy is this: May a municipality use federal bankruptcy laws to alter pension obligations, both past and future, where such pension obligations are guaranteed by a provision of the relevant state’s constitution?
‘Puter answers in the affirmative. That is, municipalities are not constrained by provisions of state law where such state law is inimical to the primary of bankruptcy: effective reorganization of debtor entities.
‘Puter adds in dicta that having public unions’ unsustainable pension obligations reformed by unelected federal judges who are impervious to union threats and bribes is totally awesome, and it couldn’t have happened to a more deserving set of asshats.
This is a long post, even by ‘Puter’s standards. But trust ‘Puter, it’s worth spending the time to read. It’s a thorough examination of the topic with more than enough facts to shut down even the most obstinate liberal true-believer. ‘Puter hopes you find it a valuable resource.
Without further ado, behold, the genius of ‘Puter!
I. Federal Law Is the Supreme Law of the Land: The Supremacy Clause
To begin, the bankruptcy court must determine whether state or federal law will apply to treatment of Detroit’s public pension obligations. A good starting point is the United States Constitution’s Supremacy Clause, found at Article VI, Clause 2:
This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.
Got it? If Congress enacts a law pursuant to its enumerated powers in the Constitution, then such law preempts all inconsistent state laws, whether such laws are legislative in origin or found in the state’s constitution. The existence of a federal bankruptcy code is beyond dispute.
II. Congress’ Power to Legislate: The Bankruptcy Clause
The question remains, though, whether Congress had the power to enact a bankruptcy code in the first instance. The Constitution’s Bankruptcy Clause, Article I, Section 8, Clause 4, provides the answer:
The Congress shall have Power To…establish…uniform Laws on the subject of Bankruptcies throughout the United States….
So, we now can conclude that Congress enacted bankruptcy laws, that Congress had the Constitutional authority to enact such laws, and that therefore Congress’ bankruptcy laws trump any inconsistent state enactments.
III. Supremacy Clause Analysis: Congressional Authority and Intent
The United States Supreme Court determined that inconsistent federal laws must yield where either or both of the following are true: (1) “where compliance with both federal and state regulations is a physical impossibility”; or (2) “state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Edgar v. MITE Corp., 457 U.S. 624, (1982).
So what was Congress’ legislative intent when it enacted Chapter 9 of the bankruptcy code, the Chapter specifically dealing with municipal bankruptcies like Detroit’s? Well, here’s what the U.S. Bankruptcy Court for the Southern District of California has to say on the topic:
The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.
Congress expressly intended municipalities like Detroit to restructure their debts – all debts, not just the politically convenient debts – so municipalities can afford them. The bankruptcy code does not contain some double-secret exemption for public sector union pension obligations, despite liberals’ fervent protestation otherwise.
IV. Express Provisions of Congressional Enactments: The Bankruptcy Code
Do federal bankruptcy laws offer any direct guidance on treatment of public sector union pensions? Let’s take a gander.
As noted above, Detroit filed for bankruptcy protection under Chapter 9, located at 11 U.S.C. §§ 901 et seq., which relates exclusively to municipal debtors. There are multiple other chapters providing bankruptcy proceedings for other debtor types, such as Chapter 7 (liquidation of individual and corporate debtors), Chapter 11 (reorganization of corporate debtors), Chapter 12 (wage earner plans for family farmer debtors) and Chapter 13 (wage earner plans for individual debtors).
Within Chapter 9, Section 901 incorporates a lengthy list of provisions from other chapters of the bankruptcy code, predominantly from Chapter 1 (General Provisions), Chapter 3 (Case Administration), Chapter 5 (Creditors, Debtors and the Estate) and Chapter 11 (Reorganization). Congress took great care in crafting a debt relief structure uniquely related to special features of municipalities. In essence, Congress chose to treat bankrupt municipalities much the same as it treats insolvent publicly traded corporate debtors, amending the law to accommodate municipalities’ differences.
Before we get in the weeds, remember this. There are two primary types of creditors in bankruptcy: secured and unsecured. Secured creditors hold debts secured by collateral, while unsecured creditors hold debts without collateral. Bankruptcy ensures secured creditors receive at a minimum the full market value of their security, though in certain cases the debt can be restructured to be paid over time rather than all at once.
Bankruptcy treats unsecured creditors (including any portion of a secured creditor’s debt over the collateral value of such debt’s security) differently. Unsecured creditors split whatever funds remain available after paying the secured creditors, whether through liquidation of collateral or available cash flow going forward, frequently on a pro rata basis. It is rare that unsecured creditors receive nothing, except in a Chapter 7 liquidation. Bankruptcy courts usually require (and the bankruptcy code strongly prefers) unsecured creditors to get something when at all possible for the debtor to so provide.
Public pension claims against Detroit’s bankruptcy estate (a term of art meaning all real and personal property the debtor had when entering bankruptcy protection) are unsecured claims, meaning pensioners will be scrapping with bondholders and other unsecured creditors over whatever crumbs are left after Detroit’s secured creditors are paid.
How will bankruptcy court decide who gets paid, and how much each creditor gets paid? Good question. A bankrupt debtor reorganizing under Chapter 9 submits a plan of reorganization detailing how the debtor proposes to treat each creditor (if unique) or class of creditors (e.g., general unsecured creditors). A debtor’s plan may propose to treat different creditors differently; however, it cannot treat similarly situated creditors differently.
When a plan is submitted, all Hell breaks loose. Each creditor screams bloody murder, clutches his pearls and cries to high Heaven about the rank injustice of it all. There is a period where the creditors go back and forth with the debtor, each trying to gain the upper hand. But, as we know from experience, sooner or later even good things must come to an end, even loathsome creditors attempting to emasculate one another.
Eventually, the bankruptcy court will hold a final hearing on confirmation of Detroit’s plan of reorganization, and once approved, Detroit’s plan is binding on the city and its creditors going forward. To the extent all or a portion of a creditor’s pre-petition debt is disallowed pursuant to the plan, that debt is canceled and uncollectable from the city. To the extent debt is allowed under the plan, such debt becomes a forward-going obligation of Detroit.
Couldn’t have happened to a nicer bunch of guys, the average person thinks. Most Americans believe Wall Street richly deserves to take it in the shorts after screwing us all in 2008. So, too, do many Americans believe that greedy, corrupt public sector unions richly deserve to nut-punched for insisting on pension and other benefits no reasonable person believed Detroit could afford, much less make good on.
But that’s not the end of the story here. Read on.
V. Michigan’s Constitution and the Bankruptcy Code
The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.
Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities.
Of course, Michigan’s public sector unions only ever gave a darn about this section’s first paragraph, content to look the other way on the second paragraph while Detroit failed to fund future pension obligations, so long as Detroit used those funds to increase union members’ salaries instead.
‘Puter mocks Judge Aquilina because the correct answer is patent, included in the plain text of the federal bankruptcy code. Section 1123(a)(4) provides:
Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall … provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest. (emphasis added)
No sane person can think that Michigan’s constitution is anything other than “any otherwise applicable nonbankruptcy law,” meaning Detroit’s pensioners and pension funds are just the same as any other unsecured creditor, no better and no worse. Detroit is prohibited by law from preferring public sector union pension funds and pensioners over other general unsecured creditors, no matter what a totally not in the tank for her union benefactors judicial savant like Judge Aquilina declaims.
Detroit properly ignored Judge Aquilina’s decision, stating the bankruptcy court determines its own jurisdiction, the bankruptcy code’s automatic stay prevents Judge Aquilina from hearing the matter in the first instance and that in any event, the state’s constitution is preempted by federal bankruptcy law. Detroit took its case before a higher authority, a federal judge.
VI. Conclusion: ‘Puter’s Always Right
So where does this lengthy discussion bring us? Why, right back to ‘Puter’s initial question.
May a municipality use federal bankruptcy laws to alter pension obligations, both past and future, where such pension obligations are guaranteed by a provision of the relevant state’s constitution?
‘Puter told you that yes, municipalities may alter pension obligations in bankruptcy. ‘Puter then proceeded at length to detail why municipalities may do so. ‘Puter will now proceed to offer a brief synopsis of his argument, lest you forget.**
· Federal law, whether the United States Constitution or Congress’ enactments based on enumerated powers, is the supreme law of the United States.
· State law, even state constitutions, must yield to federal law when there is a direct conflict between the two.
· Congress passed a bankruptcy code, which the Constitution expressly authorizes Congress to do.
· Congress expressly intended – and Congress plainly stated as much in Section 1123(a)(4) – that “[n]otwithstanding any otherwise applicable nonbankruptcy law,” insolvent municipalities be protected from creditors and afforded opportunity to restructure their debts including through discharging all or a portion of some debts on equitable terms.
· Michigan’s state constitution provision affording special treatment to creditors claiming pension related obligations is an “otherwise applicable nonbankruptcy law that would require Detroit to treat a “claim or interest of a particular class” differently from creditors in the same class (i.e., general unsecured creditors).
· If the bankruptcy court were required to apply Michigan’s state constitution, it would be impossible for Detroit to comply with both state and federal provisions. Further, treating pensions as a protected class of general unsecured creditor would ignore Congress’ plain intent, not to mention the statutory language itself.
· Therefore, pursuant to the United States Constitution’s Supremacy Clause, Michigan’s state constitution provision cannot be given effect, and Detroit will be able to cram down its pension obligations, much to the dismay of public sector unions everywhere.
Now that you’ve gotten a thorough education on Detroit’s bankruptcy and the law applicable thereto, there are two additional things to remember.
First, no way, no how are public sector unions going down without a fight. If the public sector unions lose on this issue, they’re done and they know it. After all, why the Hell would anyone pay money to a union that can’t even protect its promised pension benefits? Expect the unions to dump so much money, time and effort into fighting Detroit in bankruptcy court that the unions themselves might just end up in bankruptcy. ‘Puter fully expects Michigan’s public sector unions (and all the bodies national and regional unions can bus in to help them) to attempt to take through threats and intimidation what they’re not entitled to under law, consequences be damned.
Second and most importantly, remember that ‘Puter’s always right.
*New York (Article V, Section 7) has a similar state constitutional provision which the parasitic public sector unions have waved about as an ironclad taxpayer guarantee of public pensions since 1940.
**As one of ‘Puter’s Jesuit high school writing teachers insisted, “Tell them what you’re going to tell them. Tell them. Tell them what you told them.” It’s served ‘Puter well for years.
Always right, unless he isn’t, the infallible Ghettoputer F. X. Gormogons claims to be an in-law of the Volgi, although no one really believes this.
’Puter carefully follows economic and financial trends, legal affairs, and serves as the Gormogons’ financial and legal advisor. He successfully defended us against a lawsuit from a liquor distributor worth hundreds of thousands of dollars in unpaid deliveries of bootleg shandies.
The Geep has an IQ so high it is untestable and attempts to measure it have resulted in dangerously unstable results as well as injuries to researchers. Coincidentally, he publishes intelligence tests as a side gig.
His sarcasm is so highly developed it borders on the psychic, and he is often able to insult a person even before meeting them. ’Puter enjoys hunting small game with 000 slugs and punt guns, correcting homilies in real time at Mass, and undermining unions. ’Puter likes to wear a hockey mask and carry an axe into public campgrounds, where he bursts into people’s tents and screams. As you might expect, he has been shot several times but remains completely undeterred.
He assures us that his obsessive fawning over news stories involving women teachers sleeping with young students is not Freudian in any way, although he admits something similar once happened to him. Uniquely, ’Puter is unable to speak, read, or write Russian, but he is able to sing it fluently.
Geep joined the order in the mid-1980s. He arrived at the Castle door with dozens of steamer trunks and an inarticulate hissing creature of astonishingly low intelligence he calls “Sleestak.” Ghettoputer appears to make his wishes known to Sleestak, although no one is sure whether this is the result of complex sign language, expert body posture reading, or simply beating Sleestak with a rubber mallet.
‘Puter suggests the Czar suck it.