Since I'm still working on my piece drawing on the Stockton, California's bankruptcy, I was a bit peeved that Kevyn Orr put Detroit into Chapter 9 in mid-July. Couldn't he have waited another month? On the other hand, maybe Detroit isn't in bankruptcy after all. By now most folks have read that a Michigan Circuit Court judge ruled that the Governor's authorization to file violated the Michigan constitution. On Monday The New York Times reported that Bankruptcy Judge Steven Rhodes will consider the Michigan constitutional issue today. For a good analysis of why the state court judge is wrong read Adam Levitin's post at Credit Slips here.
All this debate about the Supremacy Clause vs. the Tenth Amendment and state pension law vs. federal bankruptcy law convinced me to post a (very) working draft of my paper on SSRN (abstract here). While focused primarily on Stockton, my ultimate conclusion is that state law priorities are unenforceable in bankruptcy. However, following bankruptcy priorities instead of state law ones may violate the requirement that a plan be in the "best interests" of creditors (since some would have done better outside of bankruptcy) thus rendering any non-consensual plan unconfirmable. (Warning: only two-thirds of the argument to back up my contentions currently shows up. Stay tuned for the rest.)
In any event, a fine kettle of fish--which, however, should drive all parties to agree on something. In other words, Chapter 9 as a penalty default system.
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