A Michigan bankruptcy judge ruled yesterday that Detroit is eligible for protection under Chapter 9 of the U.S. Bankruptcy Code, overruling numerous objections filed by labor unions, pension funds and other interested parties. Almost immediately following the ruling, a notice of appeal was filed by Counsel 25 of the American Federation of State, County & Municipal Employees (“AFSCME”).
With $18 billion in estimated liabilities, in July 2013 Detroit became the largest American city ever to file a municipal bankruptcy. Various parties contested the city’s eligibility for Chapter 9 protection, arguing, among other things, that Detroit had failed to negotiate in good faith with creditors prior to entering bankruptcy. In November 2013, the court held a nine-day trial to determine eligibility – a common gatekeeping event in municipal bankruptcies. In a bench ruling summarizing his forthcoming 140-page opinion, Judge Steven Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan found that the city is eligible, having demonstrated its insolvency and that good faith negotiations with creditors were impossible under the circumstances.
Judge Rhodes also denied requests that his opinion be appealable directly to the Sixth Circuit, ruling that motions to appeal must first be filed in the bankruptcy court. Following the bench ruling, AFSCME quickly filed both a notice of appeal to the District Court for the Eastern District of Michigan and a motion for leave to appeal, which was the course of action recommended by the Ninth Circuit in Silver Sage Partners, Ltd. V. City of Desert Hot Springs, 339 F.3d 782, 787 (9th Cir. 2003). AFSCME’s motion for leave to appeal is based primarily on grounds that a Chapter 9 eligibility order is appealable as of right either (i) as a final order issued under section 921(c) of the Bankruptcy Code or (ii) as a collateral order under the collateral order doctrine. Alternatively, AFSCME argues that the appeal should be granted because the contested issues meet the (admittedly inapplicable, but helpful) certification standards employed by district courts and found under 28 U.S.C. § 1292(b) (involves a controlling issue of law, substantial ground for difference of opinion).
Detroit’s eligibility for bankruptcy protection may not immediately be heard by the Court of Appeals. But because the appealability of a municipal bankruptcy eligibility order represents an issue of first impression in the circuit, this case is likely to wind up in front of the Sixth Circuit very soon.