United States: Court Approves Extension Of The Automatic Stay In Detroit’s Chapter 9 Case To State Officials

Last Updated: July 29 2013
Article by Lary Stromfeld, Mark C. Ellenberg, Howard R. Hawkins, Jr., Ingrid Bagby and Thomas Curtin

Most Read Contributor in United States, October 2018

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.1

On the same day that the City filed its chapter 9 petition, the State Court entered the temporary restraining orders sought by the Litigants in each of the prepetition lawsuits. Further, on July 19, 2013 (a day after the City filed its petition), the State Court amended the injunction orders to include "the agents and representatives" of the Emergency Manager, the Governor, and the City. The State Court also amended the order to enjoin the defendants from filing a "plan of adjustment or any other filing" that might adversely affect pension benefits in a chapter 9 case. Finally, the State Court also entered a declaratory judgment finding that (i) PA 436 is unconstitutional to the extent that it permitted the Governor to proceed under chapter 9 in a manner that impairs pension benefits, and (ii) ordering the Governor to direct the Emergency Manager to "immediately withdraw the chapter 9 petition...[and] not authorize any further chapter 9 filing" which threatens to diminish accrued pension benefits.

The Stay Motions and Objections

In response to the State Court orders, the City filed a motion in the Bankruptcy Court seeking confirmation of the protections of the automatic stay and a motion seeking to extend the automatic stay to certain non-debtor parties, including state officials (the "Stay Motions"). In its motion, the City requested that the Court confirm the application of the automatic stays to the Emergency Manager and other City officers, among other things. Further, the City requested that, pursuant to section 105(a) of the Bankruptcy Code, the Court extend the automatic stay to state officials (including the Governor, State Treasurer, and Loan Board), certain non-officer employees, and the representatives and agents of the City and Emergency Manager. The City contended that the extension of the stay was necessary due to the state officials' close affiliation with the City, and the adverse effects that certain lawsuits against those non-debtor parties would have on the City's ability to reorganize . Various parties, including the Litigants and the AFSCME, objected to the City's Stay Motions arguing that (i) the Bankruptcy Court could not decide the stay motions until a state court determined that the City was authorized to file under Michigan law, (ii) any determination by the Bankruptcy Court on the constitutionality of the City's petition would violate the Tenth Amendment, (iii) the stay motions were procedurally deficient because the City did not commence an adversary proceeding, and (iv) the City could not use section 105(a) to create rights that did not otherwise exist under the Bankruptcy Code. The AFSCME also argued that the City was not eligible to file for chapter 9 because the State Court held that PA 436 was unconstitutional, and also raised various arguments pertaining to the feasibility of the City's plan of adjustment.

The Court's Decision

Judge Rhodes granted the Stay Motions, and held that the extension of the automatic stay to the state officials was warranted in this case. The Court also stated that the issue before the Court was not whether the City was eligible to file, but rather, whether it should extend the protections of the automatic stay to various non-debtor parties, including the state officials.

The Stay Confirmation Motion

First, the Court approved the City's motion to confirm the protections of the automatic stay, and expressly overruled the Tenth Amendment objections raised by the Litigants and certain unions. At the hearing, the Litigants argued that the City's authorization to file under state law is a threshold issue that must be determined prior to the issuance of any orders in this case. Further, the Litigants maintained that the bankruptcy court did not have subject matter jurisdiction to address whether the City is duly authorized under state law to file for chapter 9. The Court disagreed and held that the issue of eligibility to file for chapter 9 is within the exclusive jurisdiction of the Bankruptcy Court, including whether the City was duly authorized to file for chapter 9 under Michigan law. The Court found that nothing in the Tenth Amendment or the principles of state sovereignty suggests that it would be unconstitutional for the Court to have exclusive jurisdiction over these issues. Indeed, the Court saw no evidence to suggest that Congress intended for state courts to have concurrent jurisdiction over eligibility issues . In addition, the Court concluded that the Emergency Manager was an "officer" that was protected by the stay under section 922(a) of the Bankruptcy Code. According to the Court, PA 436 clearly provides the Emergency Manager with the powers of the officers of the City, including the mayor and city council. Therefore, the Court concluded that the Emergency Manager is an "officer" protected by the 922(a) stay.

The Stay Extension Motion

The Court also granted the City's motion to extend the stay, finding that the circumstances of this chapter 9 case warranted the extension of the stay to non-debtor entities. The Court noted that the standard for approving section 105(a) injunctions is ambiguous: some courts employ an "unusual circumstances" test, whereas other courts use a multi-factor test for preliminary injunctions. The Court determined that it was ultimately unnecessary to determine which standard applied because the City satisfied both standards. First, the Court concluded that "unusual circumstances" exist in this case because the litigation against the state entities and certain other non-debtor parties could have a significant and adverse impact on the City's ability to reorganize. Second, the Court held that the traditional preliminary injunction test was also satisfied because (i) the City would suffer prejudice if the stay extension is denied; (ii) the unions and other creditors would not be harmed if the stay extension motion is granted, as such creditors could still seek to lift the stay or seek abstention; and (iii) the injunction would be in the public interest because such stay extension would permit these issues to be adjudicated in one forum . The Court overruled the Litigants' objections to the purported procedural infirmities of the City's stay extension motion and held that the commencement of an adversary proceeding was not warranted in this instance. The Court concluded that there was significant merit to the City's argument that it would be impossible and expensive to start an adversary proceeding against all parties affected by the stay extension. Here, the stay extension would potentially apply to future litigation against the state officials and the City could not possibly ascertain the identity of those future litigants.

Further, the Court rejected the unions' argument that section 105(a) cannot serve as a basis for the stay extension because that extension would create rights that do not exist under the Bankruptcy Code. Citing section 105(a)'s equitable powers and applicable case law, the Court found that it clearly had the authority to issue a stay extension if it deemed it necessary to carry out the provisions of the Bankruptcy Code. Here, the Court concluded that the stay extension was necessary because it would assist the Court in making the bankruptcy process more efficient and would give the Court control over the bankruptcy process. Thus, the Court was not convinced that "new rights" would be created by extending the stay in this case, as such extension was necessary. The Court approved the City's motion to extend the stay to certain non-debtor entities, but explicitly preserved the right for creditors to move to lift the automatic stay. The Court made clear that its ruling did not relate to the City's eligibility to file under chapter 9, the feasibility of the City's plan of adjustment, or the impairment of the pensions under section 365. In particular, the Court stated that its ruling did not address whether the state constitution prohibited the Emergency Manager's appointment or the Governor's authorization of the chapter 9 filing. Further, the Court noted that its ruling did not address whether the state court orders (including the declaratory judgment) would have a preclusive effect under collateral estoppel. All of these issues, according to the Court, will be fully preserved and addressed later in the case.


The Court's ruling allows the City to move forward with its case and prohibits the Litigants (or other creditors) from seeking to end run the City's chapter 9 case by pursuing actions outside of the bankruptcy court. Ultimately, the Court's ruling confirms the supremacy of the federal Bankruptcy Code, and clarifies that the issues of the City's eligibility will be determined by the bankruptcy court, not a state court. The Court will determine eligibility at a later date, and a dispute over the City's eligibility may take a substantial amount of time to resolve.


1 Article IX, Section 24 of the Michigan Constitution provides that accrued pension benefits of a state or municipal retirement system "shall not be diminished or impaired" by the state and its political subdivisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions