Detroit’s Bankruptcy and the Michigan Constitution

Last week, the city of Detroit declared bankruptcy. As a municipality, Detroit filed under Chapter 9 of the bankruptcy code. Shortly after Detroit filed, however, a state judge declared that Michigan’s Governor could not approve the filing (as required by Chapter 9) because doing so would violate the state of Michigan’s Constitution, which provides that the state and its political subdivisions may not act to impair the contractual obligations embodied in state employee pension plans. Citing this limitation the court concluded the Michigan governor could not approve a filing that threatens to diminish the pensions of city retirees. The Governor said he plans to appeal.

The state court’s ruling raises some interesting questions about the interaction between state law and the bankruptcy code. Federal law trumps the state constitution under the Supremacy Clause, to be sure, but there’s also an argument that insofar as the bankruptcy code contemplates or requires official actions by state officials, such actions are constrained by a state’s constitution. Adam Levitin offers some comments on this question here.