Nick Krieger (@nckrieger):
Michigan Governor Rick Snyder has announced the appointment of former U.S. Bankruptcy Judge Steven Rhodes to serve as the transition manager of the Detroit Public Schools. Rhodes will replace Emergency Manager Darnell Earley, who resigned from the post effective today.
I am extremely troubled by the choice of Rhodes for several reasons, including his apparent coziness with Snyder and anti-public-education legislators, his willingness to engage in tasteless backslapping with Gerry Rosen and Kevyn Orr, and his repeated calls to dismantle and eliminate public-employee pensions. But even more problematic for me is the fact that Rhodes was all too willing to disregard Michigan law during Detroit’s Chapter 9 proceedings.
The entire purpose of bankruptcy is the impairment of contractual obligations. In order to be eligible for Chapter 9 bankruptcy under the federal Bankruptcy Code, a municipality must be “specifically authorized . . . to be a debtor under [Chapter 9] by State law, or by a governmental officer . . . empowered by State law to [so] authorize[.]” 11 USC 109(c)(2). That is, unless a municipality is specifically authorized by “State law” to become a debtor in Chapter 9 proceedings, it cannot file for bankruptcy. Period.
In Michigan, the relevant “State law” for purposes of 11 USC 109(c)(2) is the Local Financial Stability & Choice Act, Public Act 436 of 2012—the so-called “Emergency Manager Law” that was hastily enacted by the Michigan Legislature following the people’s rejection of its predecessor statute at the 2012 general election. Does this surprise you? I didn’t think so.
Section 18 of the Emergency Manager Law provides that the governor may authorize a financially distressed municipality, upon recommendation of the emergency manager, to become a debtor in Chapter 9 bankruptcy proceedings. MCL 141.1558(1). Stated differently, the Michigan Legislature has declared that the governor may authorize a municipality to file for bankruptcy in a proceeding that will, by definition, result in the impairment of its contractual obligations. Recall that in the absence of the Emergency Manager Law, the City of Detroit would not have been allowed to file for bankruptcy protection at all.
The Contracts Clause of the Michigan Constitution provides that “[n]o . . . law impairing the obligation of contract shall be enacted.” Const 1963, art 1, sec 10. It is beyond serious dispute that the legislative purpose underlying section 18 of the Emergency Manager Law, MCL 141.1558, is the impairment of municipal contracts. That is the entire reason section 18 was enacted—to comply with 11 USC 109 and expressly permit municipalities to evade their contractual obligations through Chapter 9 bankruptcy.
It is axiomatic that Congress cannot authorize a state legislature to violate its own state constitution. Thus, while Congress can surely require a municipality to be authorized by “State law” to become a Chapter 9 debtor (as it has done in 11 USC 109), Congress cannot magically exempt any such “State law” from compliance with state constitutional requirements. If the term “State law” in 11 USC 109(c)(2) has any meaning at all, it must necessarily refer to a constitutionally enacted state law.
So here’s the real problem: The Emergency Manager Law purports to authorize something that the Michigan Constitution expressly forbids. Because the Emergency Manager Law would authorize the governor to pre-approve the impairment of municipal contracts, it violates Const 1963, art 1, sec 10, and is consequently not a valid “State law” within the meaning of 11 USC 109(c)(2). Stated differently, there was never any valid “State law” authorizing Detroit to become a Chapter 9 debtor. And without a valid “State law” authorizing it to become a debtor, Detroit was never legally able to go bankrupt at all. Do you see where I’m going here? No wonder Rhodes conveniently skirted this issue throughout the Detroit bankruptcy proceedings.
Will Rhodes be more faithful to Michigan law as the Detroit Public Schools transition manager than he was as a bankruptcy judge? I doubt it. He has already proven himself to be dishonest, first denying that he would run the Detroit Public Schools and then accepting the position mere days later. Moreover, if Rhodes refused to follow the law as a federal judicial officer, there is little hope that he will do so as an appointee of Governor Snyder. I pray for the Detroit Public Schools, and shudder at the thought of Rhodes behind the wheel. Remember the so-called “Grand Bargain”? Rhodes and his buddies have shown that they are not afraid to seek special legislative fixes from Lansing when an obstacle blocks their personal vision. I view the appointment of Rhodes to serve as the final manager of the Detroit Public Schools as a signal—a signal that further reductions in teacher compensation, employee-benefit cuts, the authorization of more charters, and even complete privatization are probably on the table. Good luck to Detroit’s teachers, children, and parents. It’s only a matter of time before the Snyder/Rhodes team has sold all the remaining assets and converted all Detroit Public Schools buildings into for-profit charters. After all, that’s exactly what they’ve wanted since day one. At last, they have a real chance to accomplish it.