Court Rejects Attempt to Restore Detroit Pension Benefits

Among other things, a federal appellate court found rolling back items implemented in Detroit’s bankruptcy plan would harm countless third-parties, including the city.

In a challenge to pension reductions in the city of Detroit’s bankruptcy plan, the 6th U.S. Circuit Court of Appeals has found equitable mootness applies and prohibits plaintiffs’ challenges to the bankruptcy court’s Confirmation Order.   

The court explained that equitable mootness is not technically “mootness”—constitutional or otherwise—but is instead “a prudential doctrine that protects the need for finality in bankruptcy proceedings and allows third parties to rely on that finality” by “prevent[ing] a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract.”

It further clarified that unlike conventional mootness, equitable mootness is not concerned with the court’s ability or inability to grant relief; it is concerned with protecting the good faith reliance interests created by implementation of the bankruptcy plan from being undone afterwards. “More akin to waiver or forfeiture (or perhaps estoppel) than to conventional mootness, equitable mootness is ‘grounded in the notion that, with the passage of time after a judgment in equity and implementation of that judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable,’” the court wrote in its opinion

The court analyzed equitable mootness under a three-part test: (1) whether a stay has been obtained; (2) whether the plan has been “substantially consummated”; and (3) whether the relief requested would significantly and irrevocably disrupt the implementation of the plan or disproportionately harm the reliance interests of other parties not before the court.

The 6th Circuit concluded that all three factors favor the application of equitable mootness: the appellants did not obtain a stay; the bankruptcy plan has been substantially consummated, “inasmuch as numerous significant—even colossal—actions have been undertaken or completed, many irreversible;” and the requested relief of omitting the bargained-for (and by majority vote agreed-upon) pension reduction would necessarily rescind the bargain, its $816 million in outside funding, and the series of other settlements and agreements contingent upon the Global Retiree Settlement, “thereby unravelling the entire plan and adversely affecting countless third parties, including, among others, the entire City population.”

NEXT: Implementation of the bankruptcy plan

According to the 6th Circuit’s opinion, the city orchestrated the “Grand Bargain,” in which it obtained “outside funding” to bolster the city’s General Retirement System (GRS) in exchange for a settlement of GRS claims at less than the full promised pension amount. The outside funding, which totaled $816 million, came from agreements by and among the city, the State of Michigan, and certain philanthropic foundations.

The “Global Retiree Settlement” between the City and the GRS Board of Trustees reduced all GRS pensions by 4.5% and eliminated cost-of-living increases; reduced retiree health care coverage and eliminated dental, vision, and life insurance; and set out a mechanism for the partial recoupment of excess GRS Annuity Savings Fund (ASF) distributions. The GRS pension claimants voted 73% in favor of accepting the plan, including the Grand Bargain and the Settlement.

The bankruptcy plan took effect on December 10, 2014, and the city began implementation immediately. A lower court’s opinion, which the 6th Circuit affirmed, noted that the city had by that date already issued $287.5 million in bonds and $720 million in new notes; irrevocably transferred all Detroit Institute of Art assets to a perpetual charitable trust; recouped money from all but five ASF account holders; transferred certain real property interests pursuant to separate settlement agreements within the plan; and implemented a two-year City budget. In its briefs on appeal, the city identified numerous additional aspects of the plan that have been implemented or completed.

GRS pensioners had urged a district court to strike the challenged provisions from the Confirmation Order and remand to the bankruptcy court with instructions to exempt pensions from adjustment. In response, the city moved to dismiss the appeals as equitably moot and the court agreed.

On appeal, the plaintiffs’ made an argument that equitable mootness does not apply in Chapter 9 cases, relying on the only other opinion to consider equitable mootness in the Chapter 9 context, an Alabama district court case, currently pending on appeal in the 11th Circuit, that declared equitable mootness inapplicable in Chapter 9 cases--Bennett v. Jefferson County. But the 6th Circuit concluded that “even though the circumstances in Bennett are validly distinguished from the usual equitable mootness scenario, this does not require the conclusion that equitable mootness does not apply in any Chapter 9 case. Instead, the better conclusion drawn from Bennett’s facts is that Jefferson County could not meet the third equitable mootness factor under a “case-by-case” assessment.”