Court Approves Extension of the Automatic Stay in Detroit’s Chapter 9 Case to State Officials

On July 24, 2013, Judge Steven W. Rhodes of the Bankruptcy Court for the Eastern District of Michigan approved the City of Detroit’s motion to extend the automatic stay to various non-debtor parties, including certain state officials. The Court’s ruling effectively stays all pending litigation against the City, allows the City to continue to move forward with its chapter 9 case, and paves the way for a dispute over the City’s eligibility to file for chapter 9.

The Chapter 9 Filing and the State Court Litigation -

The City of Detroit filed for chapter 9 on July 18, 2013, and, with a population of 685,000, is the largest municipality to seek protection under chapter 9. Prior to the commencement of the City’s chapter 9 case, certain unions, retirees and current employees of the City (collectively, the “Litigants”) commenced multiple lawsuits against the Emergency Manager, the Governor, and the State Treasurer in state court regarding the constitutionality of the City’s chapter 9 petition. The Litigants sought orders from the Ingham County Circuit Court (the “State Court”) temporarily or preliminarily enjoining the Governor, State Treasurer, and certain other officials from authorizing a chapter 9 filing and “taking any further action with respect to any filing which has already occurred.” The Litigants also sought to enjoin the defendants from authorizing any actions that might impair vested pension benefits. Moreover, certain of these Litigants sought a declaratory judgment that Michigan Public Act 436 (“PA 436”) violated the state constitution to the extent that it purported to authorize chapter 9 cases in which vested pension benefits could be modified or impaired.

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