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Sixth Circ. Rules Against Detroit Pensioners

DETROIT (CN) — The Sixth Circuit on Monday rejected Detroit retirement system participants' challenge to previously agreed-upon cuts to their pensions and insurance coverage that were woven into a historic bankruptcy settlement with the city.

When the City of Detroit filed for Chapter 9 municipal bankruptcy in July 2013, it was sinking fast with more than $18 billion in debt. The city was unable to provide basic safety services or consistent street lighting and had nearly 150,000 lots with either dangerous, crumbling structures or vacant areas used often for illegal trash dumping.

The pension plan at issue was underfunded by more than $1.8 billion at the time, according to court records, and retirees would have been subject to a 27 percent reduction if not for a "grand bargain" that enlisted the help of private philanthropic organizations and the state of Michigan.

The $816 million gained from the bargain enabled only a 4.5 percent reduction in payments, changes to medical insurance coverage and the discontinuation of vision, dental and death benefits.

The plan was implemented in December of 2014 and was immediately impactful. It lifted $7 billion in debt off the beleaguered city and allowed $1.7 billion to be used to repair infrastructure, issue bonds and update police and fire departments.

The soon-to-be former home of the National Hockey League's Detroit Red Wings, Joe Louis Arena, was used as part of a real estate development deal crafted to appease certain creditors. Michigan transferred close to $200 million to the city's retirement fund. The Great Lakes Water Authority was established to provide water services.

Numerous pensioners were still perturbed over the settlement and challenged the bankruptcy proceedings, including a provision that barred retirees from pursuing claims against the state.

The district court sided with the city and concluded "(a)ll three factors of the equitable mootness analysis weigh in favor of dismissing appellants' appeal as moot: appellants did not obtain a stay; the confirmed plan has been substantially consummated; and reversal of the plan would adversely impact third parties and the success of the plan."

The appealing pensioners challenged that equitable mootness could not be applied to a Chapter 9 bankruptcy. They argued that recent U.S. Supreme Court decisions reversing judgments on dismissed cases based on prudential grounds proved the doctrine was no longer enforceable.

In Monday's Sixth Circuit ruling against the pensioners, Judge Alice Batchelder acknowledged that was a fair point, but that she had to abide by the law.

"More importantly, even if the Supreme Court would abolish equitable mootness, it has not yet done so (nor has any circuit). Equitable mootness is the law of the Sixth Circuit, and we continue to apply it. Consequently, we cannot reject it or abolish it in this appeal. Equitable mootness is a viable doctrine," she wrote for the majority of a three-judge panel.

The pensioners argued that even if equitable mootness was viable, the court had never applied it to a Chapter 9 bankruptcy, only for Chapter 11 cases.

A rare opinion supporting Chapter 9 equitable mootness submitted by the pensioners was deemed not applicable. The opinion described a dispute over a bankruptcy settlement between Jefferson County, Ala., and citizens because a tax hike on the water rates was not voted upon by the people.

When the county moved to dismiss using the equitable mootness argument, the court disagreed "because, among other reasons, the county-ratepayer relationship was significantly different from the normal debtor-creditor relationship in a Chapter 11 bankruptcy."

However, Judge Batchelder wrote that unlike ratepayers in the Alabama case, "these pensioners, as Class 11 claimants, were given a vote on the pension reduction and 73 percent of the class voted for it. Presumably, the appellants here voted against it, but they were given an opportunity in public hearings to present argument and evidence, and they were given a vote." (Emphasis in original).

In a dissenting opinion, Judge Karen Nelson Moore wrote that the denial would have "real-world consequences for the litigants before us—retirees who spent their lives serving the people of Detroit through boom and bust, and who feel that the city's bankruptcy was resolved through a game of musical chairs in which they were left without a seat."

"I fear that using such a justification to brush aside the retirees' legal claims will leave them with the impression that their rights do not matter. That the doctrine used to avoid their claims is a judicial invention with almost no legal basis only pours salt on the wound," Moore wrote. "Whatever the merits of the retirees' claims, this is lamentable, and I respectfully dissent."

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