In the wake of the Great Recession,[1] many municipalities faced a widening gap between increased retiree benefit costs and decreased projected revenues.[2] Those cities also confronted “dwindling population[s] ... decaying infrastructure, excessive borrowing, mounting crime rates, spreading blight, and a deteriorating quality of life.”[3] Correspondingly, between 2011 and 2013, there was a surge in the number of municipal bankruptcy filings.[4]
According to Rep. John Conyers, Jr. (D-Mich.), “when a municipality files for bankruptcy, its employees and retirees ... risk having their hard-earned wages, pensions and health benefits cut or even eliminated.”[5] So, on July 17, 2014, Conyers introduced the Protecting Employees and Retirees in Municipal Bankruptcies Act of 2014 (H.R. 5133)[6] to bolster “protections for employees and retirees under chapter 9 municipality bankruptcy cases.”[7] Conyers claims that the bill will raise the bar on the chapter 9 eligibility requirements, accelerate appellate review of challenges to those requirements, and impose “heightened standards that a municipality must meet before it may modify any collective bargaining agreement or retiree benefit.”[8]
Raising the Bar on Chapter 9 Eligibility Requirements
Before filing, a municipality must prove, in part, that it tried to negotiate with its creditors pursuant to § 109(c)(5).[9] To meet this requirement, it must show that it either reached an agreement with its creditors, negotiated in good faith with its creditors, negotiation was impracticable, or that a creditor may attempt to obtain a preferential transfer.[10] H.R. 5133 would change § 109 in three ways. First, it would adopt the definition of “good faith negotiation” found in the National Labor Relations Act,[11] requiring municipalities to (1) serve written notice upon labor creditors of proposed changes to a collective bargaining agreement at least 60 days prior to the effective date of any such change; (2) offer to negotiate; (3) notify federal mediation authorities within 30 days of such notice of the existence of a dispute; and (4) continue in full force and effect, without resorting to lock-out, all terms and conditions of the existing contract for a period of 60 days after such notice is given.[12] Second, the bill would change the standard for futility of negotiation from “impracticable” to “impossible.”[13] Third, it would elevate the standard of proof a municipality must meet under § 109(c) from a “preponderance of the evidence” to “clear and convincing.”[14]
These proposed changes seem severe, although — with the exception of the new “clear and convincing” standard of proof — bankruptcy courts already interpret § 109(c) to safeguard the contractual interests of pension creditors. In evaluating H.R. 5133, legislators should therefore analyze the impact that this proposed section will have, if any, on pre-petition negotiations. For example, while the plain language of § 109(c)(5), as currently enacted, does not explicitly require municipal debtors to provide written notice to creditors of proposed changes to a collective bargaining agreement, courts have held that some version of a comprehensive reorganization plan must be produced to creditors and negotiated prior to filing.[15] Further, under the existing law, showing negotiation was impracticable is no small task. “Impracticable” has been defined as “incapable of being performed or accomplished by the means employed or at command; infeasible.”[16] A change in term to “impossible” is arguably no more onerous than the already stringent “impracticable” or “infeasible” standard. However, the slightly less-rigid term “impracticable” may allow courts discretion to more evenly balance creditor and debtor rights. For instance, in In re City of Vallejo, the bankruptcy court ruled that even if the city could identify all unknown creditors, the city had an obligation to “preserve its ability to continue providing the community uninterrupted services, and ... a delay in filing to locate and negotiate with unknown creditors would have put those functions at risk.”[17] Hence, the court found that the city had met the chapter 9 eligibility requirements given that the negotiations between the municipality and its creditors regarding a possible debt-adjustment plan were “impracticable.”[18] In short, the “impossible” H.R. 5133 standard could have disqualified the City of Vallejo if the court had found that it was possible to locate and negotiate with unknown creditors.
Accelerated and Automatic Appeals
Chapter 9 prohibits a bankruptcy court from staying any proceeding in the case in which the appeal is being taken.[19] This is the only chapter in the U.S. Bankruptcy Code in which a stay is overtly barred, as Congress “recognize[d] the unique and urgent necessity to continue the process of resolution [in a municipal bankruptcy] even during an appeal of an eligibility determination.”[20] H.R. 5133 would strike this provision.[21]
To expedite the appellate process, the bill would allow an appeal of a bankruptcy court order granting a municipality’s petition for eligibility under chapter 9 to be filed directly with the court of appeals.[22] It would then require the court of appeals to hear such appeal de novo, on an expedited basis, and would specify that the doctrine of equitable mootness[23] does not apply.[24]
These proposed appellate provisions could create incongruous, perhaps unintended, outcomes. For instance, a creditor objecting to a municipality’s eligibility under chapter 9 could file an appeal on an issue of well-settled law. Under the Code, the bankruptcy would proceed irrespective of the pending appeal. However, under H.R. 5133, such a case would be stayed and the court of appeals would be required to hear the (possibly meritless) appeal. By way of example, in In re City of Detroit, Mich., Bankruptcy Judge Steven W. Rhodes overruled objections made by parties in interest to the city’s chapter 9 eligibility.[25] Specifically, the court found that chapter 9 does not violate the Tenth Amendment.[26] The objectors then sought certification for direct appeal to the U.S. Court of Appeals for the Sixth Circuit (the “Sixth Circuit”) on this issue. The bankruptcy court recommended that the Sixth Circuit decline to authorize a direct appeal because the bankruptcy court’s Opinion Regarding Eligibility does not involve “question[s] of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States.”[27] In fact, “the Supreme Court has already sustained the federal municipal bankruptcy law against a Tenth Amendment challenge.”[28] The Detroit bankruptcy has thus moved forward notwithstanding the appeal. If H.R. 5133 had been enacted, the bankruptcy would have been stayed pending appellate resolution of this well-settled application of the Tenth Amendment.
Protections for Employees and Retirees in the Negotiation Process
Chapter 9 debtors must obtain bankruptcy court approval of a plan that adjusts the municipality’s debts.[29] H.R. 5133 amends chapter 9 by requiring consent from employees and retirees to any proposed plan that impairs a collective bargaining agreement or retiree benefit.[30] The bill would further require that persons receiving retirement benefits under a collective bargaining agreement be represented by their respective labor organization.[31]
This provision does not apply, however, if the labor organization chooses not to serve as the authorized representative or the court determines that different representation is appropriate. If the labor organization or retired employees are not protected by an authorized representative or by a collective bargaining agreement, the court shall order the U.S. Trustee to appoint a committee of retired employees if the debtor seeks to modify or not pay retiree benefits or if the court otherwise determines it is appropriate to appoint such a committee.[32] Should the court grant a motion for the appointment of a retiree committee, the U.S. Trustee would be required to choose individuals to serve on the committee on a proportional basis per capita based on organizational membership. In a case where the municipality proposes to impair any right to a retiree benefit, the committee may only support such impairment if at least two-thirds of its members vote in favor of doing so.[33] The Code currently has no such requirement.
Conclusion
In chapter 9 cases, as in any bankruptcy, courts are tasked with resolving the tension between the interests of failed debtors and unfortunate creditors. The current economic and political climate widens the chasm between those competing interests. Judge Rhodes, in his opinion regarding Detroit’s eligibility, acknowledged the human component involved in restructuring pensions:
The Court emphasizes that it will not lightly or casually exercise the power under federal bankruptcy law to impair pensions. Before the Court confirms any plan that the City submits, the Court must find that the plan fully meets the requirements of 11 U.S.C. § 943(b) and the other applicable provisions of the Bankruptcy Code. Together, these provisions of law demand this Court's judicious legal and equitable consideration of the interests of the City and all of its creditors, as well as the laws of the State of Michigan.[34]
On the other hand, cities argue that chapter 9 already empowers pension creditors — with great emphasis placed on balancing the city’s budget in a way that minimizes pension cuts, rather than honing in on the underlying operational pitfalls that triggered the insolvency.[35] H.R. 5133 would add more creditor protections, although it ignores the many concerns that cities have regarding the bankruptcy process. Upon introduction in the House, the bill was referred to the House Committee on the Judiciary. No further action has been reported.
[1] See, e.g., Marilyn Geewax, “Did the Great Recession Bring Back the 1930s?,” NPR (Sept. 10, 2012), available at www.npr.org/2012/07/11/155991507/did-the-great-recession-bring-back-the… (“The long economic downturn that began in late 2007 came to be known at the Great Recession — the worst period since the Great Depression of the 1930s.”).
[2] A Widening Gap in Cities — Shortfalls in Funding for Pensions and Retiree Health Care, Pew Charitable Trusts Report, Jan. 2013, at 2, available at www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/Pewcityp… (a study of the most populous city in each state plus all others with more than 500,000 people revealed those cities have enough savings to pay a mere 74 percent of pension obligations and “had promised at least $118 billion more than they had in hand to cover health care benefits for current and future retirees”).
[3] In re City of Detroit, Mich., 504 B.R. 97, 112 (Bankr. E.D. Mich. 2013).
[4] For a comprehensive review of recent municipal bankruptcy filings, see Juliet M. Moringiello, Goals and Governance in Municipal Bankruptcy, 71 Wash. & Lee L. Rev. 403, 405-407 (2014) (noting the recent chapter 9 filings of Central Falls, R.I.; Harrisburg, Pa.; Jefferson County, Ala.; Stockton and San Bernardino, Calif.; and Detroit); see also Christine Sgarlata Chung, Zombieland / the Detroit Bankruptcy: Why Debts Associated with Pensions, Benefits, and Municipal Securities Never Die ... and How They Are Killing Cities Like Detroit, 41 Fordham Urb. L.J. 771 (2014); Jeannette Neumann, “Global Finance: Warning from S&P on Munis,” Wall Street Journal, Jan. 24, 2011, at C3 (reporting “growing fears that some state and local governments will default on their debt”).
[5] 113 Cong. Rec. E1187 (2014) [hereinafter “Conyers Remarks”].
[6] Protecting Employees and Retirees in Municipal Bankruptcies Act of 2014, H.R. 5133, 113th Cong. (2014) [hereinafter “H.R. 5133”].
[7] Conyers Remarks, supra n.5, at E1187.
[8] Id.
[9] 11 U.S.C. § 109(c)(5).
[10] Id.
[11] See H.R. 5133 § 2(a) (adopting the definition of “good faith negotiation” found in the National Labor Relations Act).
[12] 29 U.S.C. § 158(d).
[13] Compare 11 U.S.C. § 109(c)(5)(C) with H.R. 5133 § 2(a).
[14] H.R. 5133 § 2(a).
[15] See, e.g., In re Sullivan Cnty. Reg’l Refuse Disposal Dist., 165 B.R. 60, 78 (Bankr. D.N.H. 1994) (“While the statutory requirement does not require a formal plan as such, some sort of comprehensive plan is required as one of the ‘screening factors’ to avoid a too early and rapid resort to the bankruptcy courts by municipalities.”); In re Cottonwood Water & Sanitation Dist., Douglas Cnty., Colo., 138 B.R. 973, 979 (Bankr. D. Colo. 1992) (finding, after an extensive analysis of the legislative history of 11 U.S.C. § 109(c), that “in order for this Debtor to be entitled to the entry of an order for relief, it must be prepared to show that it engaged in good faith negotiations with its creditors concerning the possible terms of a plan to be effected pursuant to section 941 of the Bankruptcy Code.”).
[16] In re Valley Health Sys., 383 B.R. 156, 163 (Bankr. C.D. Cal. 2008) (citing Webster’s New International Dictionary 1136 (3d ed. 2002)).
[17] 408 B.R. 280, 298 (B.A.P. 9th Cir. 2009).
[18] Id.
[19] 11 U.S.C. § 921(e).
[20] In re City of Detroit, Mich., 504 B.R. at 200.
[21] H.R. 5133 § 2(b).
[22] Id. at § 2(c).
[23] Equitable mootness applies in a reorganization where the bankruptcy court confirms a plan, the plan has been substantially consummated, and then a party seeks appellate review of an issue that, if overruled, would disrupt the plan. See, e.g., In re Williams, 256 B.R. 885, 896 (B.A.P. 8th Cir. 2001); In re Long Shot Drilling, Inc., 224 B.R. 473, 477 (B.A.P. 10th Cir. 1998).
[24] H.R. 5133 § 2(c).
[25] In re City of Detroit, Mich., 504 B.R. at 232.
[26] Id.
[27] Id. 196-97 (citing 28 U.S.C. § 158(d)(2)(A)(i)).
[28] Id. (citing United States v. Bekins, 304 U.S. 27, 58 S. Ct. 811, 82 L.Ed. 1137 (1938)).
[29] 11 U.S.C. § 943.
[30] H.R. 5133 § 3.
[31] Id.
[32] Id.
[33] Id.
[34] In re City of Detroit, Mich., 504 B.R. at 154; see also editorial, “For Detroit's Retirees, Michigan’s Pension Promise Must Be Kept,” Detroit Free Press, Aug. 1, 2013, available at www.freep.com/article/20130801/OPINION01/308010019/michigan-constitutio… (“Among the city’s claimants, retirees are the most vulnerable. Their payouts are meager — an average of $30,000 a year for police and fire, $19,000 for other city employees — but absolutely crucial to their survival. And even though the pension systems’ elected leadership mismanaged funds, made poor investments and overstated the funds’ health, to visit the consequences of those missteps on recipients is a Dickensian nightmare.”).
[35] See, e.g., Karen Pierog, Detroit can survive after bankruptcy but large risks loom, REUTERS, Oct. 22, 2014, available at http://mobile.reuters.com/article/idUSL2N0SH1XY20141022?irpc=932.