“We in bankruptcy impair contracts all day, every day . . . That is what we do.”
–Judge Steven Rhodes, as quoted by Nathan Bomey in “Detroit Resurrected: To Bankruptcy and Back.”
Michigan’s State Constitution provides that public pension rights cannot be impaired. So, pensioners take the position, in Detroit’s bankruptcy, that pension rights are sacrosanct and cannot be touched. Their positions in mediation are, therefore, inflexible.
An Initial Supporting Order
Judge Rhodes wrestles with the question of whether contract rights of pensioners can be impaired in bankruptcy. And he issues an early order on that question. He rules:
–The U.S. Bankruptcy Code takes precedence over pension provisions in Michigan’s Constitution; and
–Therefore, the contract rights of public pensioners can be modified and impaired in bankruptcy.
Bomey reports in “Detroit Resurrected” that this ruling, “delivered a blow to unions” and exposed “a serious crack in a financial foundation” previously believed “to be indestructible.” This ruling brings unions and pensioners to the mediation bargaining table to negotiate the best deal possible–and they negotiate a very good deal.
Without this ruling, Detroit’s bankruptcy might still be slogging along in bankruptcy. Instead, it creates an incentive for unions and pensioners to bargain for settlement. And the ultimate results are invaluable for the pensioners—their decision to bargain, instead of fighting in court, proves to be well-taken.
Another Example of Supporting Mediation with a Timely Order
Similarly, Judge Rhodes supports the mediation effort in another context by expressing his opinion on a contentious issue. Bomey reports:
–Detroit is in a dispute with outlying counties over regionalization of Detroit’s water system, and the mediation is at impasse.
–Judge Rhodes addresses the dispute by declaring his “sense” that “a regional water authority” is “in the best interest” of the City and all its customers.
–Judge Rhodes adds that, “if we do not take advantage of this unique opportunity,” it will, in all likelihood, “be lost forever.”
–The result: “the counties caved” and reached a settlement, “rather than risk having one imposed” upon them by Judge Rhodes.
Such supportive-rulings work!
And they provide a model for other courts to follow.
–Judicial action addressing the merits of contentious issues can be useful, if not essential, in creating incentives for settlement.