This article was originally published in the Spring-Summer 2015 issue of Carolina Law.
When Detroit said in 2013 that it was broke, it was the largest municipal bankruptcy ever. The Motor City owed more than 100,000 creditors about $18 billion. Things were so bad that at one point about 40 percent of the city’s streetlights were out, firefighters were relying on improvised alarm systems and police officers took as long as an hour to get to top priority calls.
Debt wasn’t owed just to big corporations. About half of it was for pensions and health care benefits for former city workers. It was a big case with big stakes. The creativity of the judge in managing the case, as well as the opportunity to better understand the range of issues facing a financially distressed city, got Melissa Jacoby, Graham Kenan Professor of Law, interested.
“There are decades of racial tensions, of flight out of the city, of labor issues, as well as financial misdoings, mayors who went to jail,” Jacoby says. “Bankruptcy can never cut through all those problems. It doesn’t have all the answers.”
She dug into the case and started writing about it on Credit Slips, an academic blog. In 2013 she took part in in a forum convened by the ranking member of the U.S. House Judiciary Committee to discuss the case in Detroit. In 2014 Jacoby talked about her research on the case at law schools nationwide, including at a Fordham University symposium also featuring Richard Ravitch, who had a historic hand in the fiscal recovery of New York City and is now involved in Detroit’s recovery.
Jacoby followed the Detroit case by listening to the digital recordings of the court hearings and status conferences through the life of the bankruptcy. In addition to blogging, she was active on Twitter (@melissabjacoby), engaging in a dialogue with residents, the municipal finance community, journalists, lawyers and others. As a result of her immersion in the Detroit case, Jacoby has been quoted widely about the issue in the media, including by the Associated Press and National Public Radio. Her research has translated into a number of different working papers on various aspects of the case.
Jacoby says the 2013 forum, with an audience of hundreds of angry Detroiters, gave her a first-hand look at the promise, and pain, that municipal bankruptcy brings.
“That was hugely eye-opening for me,” she says. “Being in that environment made me even more appreciative of what the stakes were and also how the rest of the real world doesn’t assume that bankruptcy can be a helpful tool.”
Into that financial, political and legal maelstrom stepped federal bankruptcy judge Steven Rhodes. By Congressional and possibly constitutional design, bankruptcy judges’ main job is to preside over trials on a city’s eligibility for bankruptcy and whether its restructuring plan is lawful. They often stay out of the messy middle, where debtors and creditors negotiate to resolve their claims. Not so in the Detroit case, where the court took an unusually active role in the proceedings.
Rhodes actively shepherded the city, its creditors and its residents through the process. He acted as a case manager, Jacoby says, putting the case on a schedule from beginning to end. He also appointed the chief U.S. District Court Judge for the District as the lead mediator. That judge, Gerald Rosen, is not only a powerful legal figure, but politically well connected.
“It shows, again, that this is not just a legal case, it’s not just a financial case, but a political case,” Jacoby says.
The court acted as a team builder. A whole group of mediators and consultants were assembled: alternative dispute resolution specialists, an attorney (with a team of accountants) to review professional fees, a feasibility expert to assess Detroit’s plan to rebuild itself financially, and others.
And the mediator acted more like a dealmaker.
“There were stories also of fairly strong pressure to settle,” Jacoby says. Those mediation talks even involved organizations — such as the Ford Foundation — that weren’t parties to the bankruptcy case.
Finally, recognizing the stake that Detroit citizens had in the proceedings, Rhodes held court hearings where residents could air their views.
Rhodes approved Detroit’s plan to exit bankruptcy in December.
It’s unclear whether the case could lead to changes in other municipal bankruptcies. Jacoby points out that circumstances differ widely from one community to the next. But that doesn’t mean that we won’t see echoes of Detroit.
“The process is going to depend on a lot of other factors, largely political, but others as well,” Jacoby says. Jacoby says her research has shown that federal judges can influence the restructuring of a bankrupt city through informal channels.
“The law is premised on judges acting almost exclusively as umpires of trials, but this has not been an accurate portrayal of what federal judges have done for many decades.”
-April 28, 2015