CalPERS Wants Finding for Detroit Bankruptcy Reversed

May 2, 2014 ( – The California Public Employees’ Retirement System (CalPERS) filed an amicus (friend of the court) brief supporting appeals by the Committee of Retirees of the City of Detroit and others over the decision that Detroit is eligible for bankruptcy.

In its filing with the 6th U.S. Circuit Court of Appeals, CalPERS takes issue with the bankruptcy court improperly creating a presumption in favor of eligibility for bankruptcy which is not appropriate in the context of a Chapter 9 bankruptcy. The bankruptcy court determined that the “good faith” requirement must be construed to advance the “broad remedial purposes” of the Bankruptcy Code and that if the Section 109(c) factors are satisfied, then a “strong presumption in favor of” relief arises.

CalPERs says not only does this “strong presumption” lack textual support, it improperly flips the burden of proof of eligibility onto the objectors. “This legal error should be corrected,” CalPERs says, adding that reliance upon the so-called “broad remedial purposes” of the Code was doubly wrong because it created an extra-statutory presumption in favor of eligibility that can be met whenever a petitioner shows it is financially distressed.

“Congress sought ‘to limit accessibly to the bankruptcy court’ by municipalities,” the brief says. “A municipal debtor must show it both needs and is deserving of such protection.”

CalPERS also argues that the decision of the bankruptcy court saying once a state authorizes its subdivisions to file bankruptcy, the state’s laws and constitution no longer control the actions of the municipal debtor, is incorrect.

CalPERS asks the appellate court to vacate that portion of the bankruptcy court’s opinion determining that pensions could be impaired in a manner consistent with the Tenth Amendment. It pointed out that both the United States and the city of Detroit urged that this claim was not ripe, yet the court rendered an advisory opinion on the matter. “Whether viewed through the lens of avoidance of constitutional questions or ripeness, the result is the same: the court improperly issued an advisory opinion on a constitutional question of the highest order,” CalPERS says in its filing.

In the case, the court rendered a dispositive judgment—Detroit was eligible for relief. CalPERS says this should have ended the matter because it was unnecessary to rule on the Tenth Amendment challenge. CalPERS notes the court ruled on the Tenth Amendment challenge because in its view, "if the Tenth Amendment [as-applied] challenge to Chapter 9 is resolved now, the parties and the Court can focus on whether the City’s plan” can be confirmed.

“In essence, the bankruptcy court decided a constitutional question, not because it was unavoidable, but because it believed that putting the issue behind it would facilitate negotiations and the administration of the case. This was not appropriate,” CalPERS says. “A desire to move the case along cannot overcome the prohibition against Federal courts issuing advisory opinions and requiring them to avoid constitutional questions.

In the brief CalPERS distinguishes state administered systems, like itself, from city administered systems such as Detroit's and asks the court of appeals to confine its decision to the latter. “Vacation of this aspect of the eligibility decision is important to amicus because such a precedent can be, and has been, misconstrued for the broad proposition that all pensions are subject to impairment in Chapter 9,” it says.

CalPERS notes that while the Detroit pension systems are created and run by the Detroit City Charter, the CalPERS system is created by state law and is run by an arm of the state of California. States and their arms enjoy sovereign status, while municipalities do not. So CalPERS asks the court, even if the court decides it was proper for the bankruptcy court to rule on the Tenth Amendment issue and affirms the bankruptcy court ruling, to apply that holding narrowly, taking into account the differences between state-run and municipal-run pension plans.

CalPERS says the fact that a state may have authorized its subdivision to file for Chapter 9 does not mean the state relinquishes all control over its subdivision and issues it a license to violate state laws that may inconvenience the reorganization process. It notes that California has expressly chosen to control its municipalities in Chapter 9 by preventing them from rejecting their relationship with CalPERS, and likewise, Michigan has chosen to control its political subdivisions by making it unconstitutional to diminish or impair accrued pension benefits and by requiring that those benefits be annually funded.

“Congress did not intend to provide municipal debtors with a license to ignore State laws governing their conduct simply because those laws may make it harder for them to adjust their debts,” CalPERS says in the filing.

When describing its interest in the case, CalPERS points out it has been involved in at least five Chapter 9 bankruptcies in California and is currently involved in the second and third largest municipal bankruptcies in U.S. history—the cities of Stockton (see “CalPERS Comments on Stockton Bankruptcy”) and San Bernardino (see “CalPERS to Appeal San Bernardino Bankruptcy”). Detroit’s bankruptcy is the largest municipal bankruptcy in U.S. history (see “Detroit as Bellwether? Maybe Not”).