Detroit’s mediated settlements are “an extraordinary accomplishment in bankruptcy and an ideal model for future municipal debt restructurings.”
–Judge Steven W. Rhodes, from Detroit Bankruptcy’s Plan Confirmation Ruling
A new report
“Who Pays for Police Misconduct in Bankrupt Cities” is the title for the report of a study, published on August 21, 2016. The report is most helpful–and well worth reading in its entirety!
Here’s how the report begins:
“In March 2015, the United States Department of Justice released a report finding racial bias and discrimination pervading police and court practices in Ferguson Missouri. When asked to comment shortly thereafter, Ferguson’s mayor suggested that an unduly aggressive stance by DOJ could push Ferguson into bankruptcy.”
Given the developing role of mediation in resolving municipal bankruptcy cases, this report warrants our consideration.
Who pays the misconduct claims?
Here is empirical information cited in the report:
“[A] recent empirical study . . . found that governments, rather than individuals, pay the vast majority of § 1983 judgments—even in the absence of an indemnification mandate. In large departments, officers contributed to the settlements or judgments in only .41% of the actions. In small departments, officers did not contribute at all to settlements or judgment payments.”
Municipal bankruptcy eligibility
The report identifies and discusses a “conjunctive list” of the following statutory requirements (contained in 11 U.S.C. § 109(c)) for a city’s bankruptcy filing under Chapter 9 of the Bankruptcy Code:
1. The city must meet the definition of a “municipality” in 11 U.S.C. § 101(40).
[Editorial Comment. This item should not be a significant hurdle for a city.]
2. State law must authorize the city to file. The report says some states already authorize such action; while other states require more. There is, for example, “no express authorization in Illinois law for the City of Chicago to file.”
[Editorial Comment. A state statute where I reside, for example, says: “Any county, city . . . is hereby permitted, authorized, and given the power to file a petition . . . under 11 U.S.C. chapter 9.” Neb. Rev. Stat. § 13-402.]
3. The city must be insolvent, as defined in § 101(32)(c). The report says this requirement “is enforced quite rigorously” and “prevents a city in stable financial condition from filing for bankruptcy solely as leverage to manage one particular type of debt, such as civil rights liability.”
4. The city must be genuinely pursuing a plan confirmation, rather than merely seeking delay.
5. The city must have negotiated in good faith prior to bankruptcy (or meet an alternative requirement).
6. The bankruptcy Petition must be filed in good faith.
Debt restructuring and discharge
Regarding “debt restructuring and discharge,” the report provides the following information:
–“In a municipal bankruptcy, only the debtor can propose a plan to restructure debts, although it requires substantial creditor support, as well as compliance with a long list of statutory requirements; the list is conjunctive and thus all must be satisfied.”
–If a court confirms a municipality’s plan as adhering to all statutory requirements, “the debtor is discharged from all debts as of the time when the plan is confirmed.”
–“There is no explicit exception to discharge for civil rights debts in municipal bankruptcy.” Exception to discharge for “willful and malicious injury by the debtor to another entity or to the property of another entity” applies “only to individuals“ and not to “entities.”
The article then cites and discusses various “key cases.” Here are two items on the City of Detroit case:
–“Detroit classified claims arising from § 1983 litigation as general unsecured claims and proposed . . . an estimated recovery of ten to thirteen cents on the dollar.” The Court approved this proposal.
–“Detroit’s restructuring plan also sought to release the individual capacity liability of . . . individual officers, to whom the city had indemnification obligations. The court . . . refused to approve this part of the plan.”
The report’s conclusion contains these four opinions:
First: “[K]ey details of the law remain unsettled.”
Second: “[T]here is case law support for the proposition that a discharge of debt in bankruptcy can include a release of a city’s liability stemming from police misconduct claims.”
Third: “Due to the other requirements associated with municipal bankruptcy, including the eligibility threshold and good faith, it is unlikely that a city could file for bankruptcy solely for the purpose of shedding liability associated with unconstitutional police practices.”
Fourth: “On the other hand, it is entirely possible that a city facing lawsuits for widespread police misconduct is also in dire straits financially and thus far more likely to be eligible for the extraordinary relief offered by the federal bankruptcy system.”
[Editorial Comment: Three of these four opinions appear to be well-supported. However, the “Third” conclusion is probably subject to significant exceptions.]
Note: The second article in this series considers the “insolvency” element for Chapter 9 eligibility. The third article will consider “good faith” requirements and exceptions mentioned in the Editorial Comment immediately above. A fourth article is “10 Practical Lessons for Cities Facing Bankruptcy.”