William & Mary Business Law Review

Volume 7 (2016) Issue 1 Article 7

February 2016

From Wreckage Comes Reason: How Detroit’s Chapter 9 Filing Helps Develop a Practicable and Principled “Good Faith” Standard

Scott A. Krystiniak

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Repository Citation Scott A. Krystiniak, From Wreckage Comes Reason: How Detroit’s Chapter 9 Filing Helps Develop a Practicable and Principled “Good Faith” Standard, 7 Wm. & Mary Bus. L. Rev. 235 (2016), https://scholarship.law.wm.edu/wmblr/vol7/iss1/7

Copyright c 2016 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/wmblr FROM WRECKAGE COMES REASON: HOW DETROIT’S CHAPTER 9 FILING HELPS DEVELOP A PRACTICABLE AND PRINCIPLED “GOOD FAITH” STANDARD

SCOTT A. KRYSTINIAK

ABSTRACT

The city of Detroit is beginning to rise from the ashes following decades of fiscal ineptitude, social failure, and corruption. Bolstered by protections under Chapter 9 of the Bankruptcy Code, Detroit has eliminated billions of dollars in debt and established a feasible plan for municipal reorganization. Now, Detroit is even considered an American “comeback story.” However, Detroit’s revi- talization began on a tenuous foundation. The city’s creditors ob- jected vigorously to the bankruptcy petition by claiming that Detroit had not filed its bankruptcy petition in good faith under § 921(c). Despite the relatively scarce and imprecise case law and jurispru- dence surrounding § 921(c), Judge Stephen Rhodes ruled that Detroit met the good faith requirement in addition to all of the requirements for Chapter 9 eligibility. In doing so, however, Judge Rhodes forged a new path in Chapter 9 analysis and established a practicable and principled “good faith” test. Now, Judge Rhodes’s approach to § 921(c) good faith can serve as a beacon of reason in an imprecise area of bankruptcy law.

* J.D. Candidate2016, William & MaryLaw School.Firstand foremost, the authorwouldliketothank hisfriendsand familyfortheirunyielding support.Theauthorwouldalsoliketothank allthewonderfuleditorsand staffofthe William & Mary Business Law Review, who made thisNote possible.Yourdiligenceandpatienceisforeverappreciated.

235 236 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

TABLE OF CONTENTS

INTRODUCTION...... 237

I. BACKGROUND:CHAPTER 9 BANKRUPTCIES ...... 239 A. The History of Chapter 9 Bankruptcy...... 240 B. Chapter 9 Eligibility Standards Under § 109(c)...... 243 C. The Good Faith Filing Requirement...... 247 1. The Chapter 11 Good Faith Test...... 248 2. Other Alternative Tests for Chapter 9 Good Faith ...... 253

II. AN OVERVIEW OF DETROIT’S BANKRUPTCY ...... 256 A. Detroit in the Twentieth and Early Twenty-First Century...... 256 B. Detroit’s Chapter 9 Bankruptcy Filing ...... 260 C. Detroit’s Chapter 9 Eligibility...... 263

III. DETROIT’S BANKRUPTCY PETITION AND THE §921(C)GOOD FAITH REQUIREMENT...... 265 A. Step One: Contemplation of Chapter 9 Relief...... 266 B. Step Two: Consistency with the Remedial Purpose of Chapter 9 ...... 267 C. Step Three: Detroit’s Efforts to Improve the State of its Finances...... 268 D. Step Four: Residents of Detroit Potentially Prejudiced ... 269 E. The Effects of Detroit’s Eligibility on the City ...... 269

CONCLUSION:SPERAMUS MELIORA |RESURGET CINERIBUS...... 272 2016] FROM WRECKAGE COMES REASON 237

INTRODUCTION

Oncea thriving m etropolisand thebackboneofthenation, thecityofDetroitisnowfacingunprecedentedsocialandfinancial hardship. Between2012 andearly2013, leadershipfrom thecity ofDetroitand the stateofMichigan began planning a civil restructuring to com bat the city’s destitute condition.1 Shortly aftertheappointmentofEm ergencyManagerKevynOrrinthe summ erof2013, thecityofDetroitoptedforChapter9 bank- ruptcyafterloosenegotiationproceedingsfailedtoassuagethe city’s abundant creditors.2 It wasthe largestm unicipalbank- ruptcyfiling inUnitedStateshistory, surpassing theprevious recordbyover400 percent.3 Finance experts calculated Detroit’s debtatover$18 billion.4 Over100,000 creditorsclaimedtohave a stakeinthem assivedebt.5 Despiteitsapparenturgency, the bankruptcyfilingwasstronglycontestedbym anyofthesecred- itors.6 Withover100 partiesactivelyopposing thebankruptcy, the objections included constitutionalchallenges and alleged improprietyandlackofgoodfaith.7 Theobjectionsbasedonlackofgoodfaithprovedtobeformi- dablecontentions.8 Mostoftheaccusationsalleginglackofgood

1 MonicaDavey& MaryWilliamsWalsh, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. TIMES (July18, 2013), http://www.nytimes.com/2013 /07/19/us/detroit-files-for-bankruptcy.html?pagewanted=all&_r=2&;MattHelms & Nathan Bomey, Detroit Bankruptcy Time Line,DETROIT FREE PRESS (July14, 2014), http://archive.freep.com/article/20140713/NEWS01/307130100 /detroit-bankruptcy-timeline-DIA [http://perma.cc/D3CU-ZCAF]. 2 Davey& Walsh, supra note1. 3 See Aryn McCumber, Beauty and the Beast: The Taxing Tale of the Detroit Institute of Arts and the Largest Municipal Bankruptcy in History, 40 MI TAX L. 42, 65 (2014).Thepreviousmarkwassetin2011 byJeffersonCounty, Alabama, withathen-record$4billioninestimateddebt. Id. 4 Helms& Bomey, supra note1. 5 Id. 6 McCumber, supra note3, at43. 7 In re CityofDetroit,504 B.R. 97, 110 (Bankr. E.D. Mich. 2013).Bank- ruptcy Judge Steven Rhodes noted that 110 parties filed objections to Detroit’s bankruptcyfiling. Id. 8 See generally id. at 181–86. Before reaching his decision on Detroit’s good faith, Judge Rhodes took the initiative to consider each of the objectors’ theoriesofbadfaithandthefactualsupportbehindthem. Id. 238 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 faithcenteredonwhetherthebankruptcyproceedingsallowed Detroit’s leadership to skirt the city’s financial obligations and contraveneworkerbenefitsentrustedundertheMichiganState Constitution.9 In decidingontheseobjections,bankruptcyJudge StevenRhodesadopteda rationalefrom severalpreviousChap- ter9 cases.10 However, Judge Rhodes’s consideration of the appli- cablelaw tosupporthisruling wasmadem uchm oredifficult because the term “good faith” is not defined anywhere within Title 11’s provisions.11 Furthermore, the caselaw addressing §921(c)ism eagerinitsguidanceforsubsequentcases.12 De- spitetherelativelyscarceand imprecisecaselaw and jurispru- dencesurrounding§921(c),JudgeRhodesruledthatDetroitmet thegoodfaithrequirementinadditiontoalloftherequirements forChapter9 eligibility.13 This Note will explore Detroit’sbankruptcyproceedingswith an emphasis on Detroit’s alleged bad faith in its initial Chapter 9 bankruptcyfiling. PartI willfirstprovideabackgroundonChap- ter9 bankruptcyfilingsgenerally, beginningwiththepurposes andhistoryofmunicipalbankruptcies.Then, PartI willdiscuss thegoodfaithpetitioningrequirementunder11 U.S.C. §921(c) anditsrelevantjurisprudence,orlackthereof.PartII willsetthe

9 NickCarey, Analysis: Constitutional, Good Faith Arguments Unlikely to Halt Detroit Bankruptcy,REUTERS (Aug. 20, 2013, 2:26 AM), http://www .reuters.com/article/2013/08/20/us-usa-detroit-court-analysis-idUSBRE97J05 620130820 [http://perma.cc/T7TE-F3L4]. 10 See In re CityofDetroit,504B.R. at180. In addressingwhetherthecity ofDetroitfileditsChapter9 bankruptcypetitioningoodfaithpursuantto §921(c),JudgeRhodeslookedtonumerouscasestoconstructtheapplicable law. ThesecasesarediscussedinPartII andPartIII ofthisNote. 11 See Good Faith Standard Required for Confirmation of Chapter 9 Plans, GOODWIN PROCTOR (2012), http://www.goodwinprocter.com/~/media/82A5B4 B8568B4E239A228D5CB4980745.pdf [http://perma.cc/DUD3-52LN] (“The term ‘good faith’ is not defined in the Bankruptcy Code, and there is lim ited case law exploring its m eaning in the context of a Chapter 9 plan.”). 12 Id. 13 ChadHalcom, Judge Rhodes: Detroit Bankruptcy, Filed in Good Faith, Will Continue, CRAIN’S DETROIT BUS. (Dec. 3, 2013, 9:46 AM), http://www .crainsdetroit.com/article/20131203/NEWS/131209960/judge-rhodes-detroit-bank ruptcy-filed-in-good-faith-will-continue[http://perma.cc/FR6J-YZLE]. 2016] FROM WRECKAGE COMES REASON 239 backdrop for Detroit’s financial history leading up to the bank- ruptcyfiling,andthenaddressthe§921(c)objectionsindetail. Finally, PartIII ofthisNotewillhighlighttheapproachJudge Rhodes took in ruling that Detroit’s bankruptcy filing was ulti- matelyconductedingoodfaith. ThisNotewillreasonthatJudge Rhodes’s analysis on Chapter 9 good faith postulates a pragmatic andprincipledexplorationoftheChapter9 goodfaithrequirement and laysa solidfoundationforan 11 U.S.C. § 921(c)analysis. More specifically, this Note will argue that Judge Rhodes’s four- partanalysison good faith Chapter9 filings createsa new frameworkthatfillsa voidininconsistentandimpreciseChap- ter9 bankruptcylaw. Now, withthe nation heldasa captive audience, Detroit’s bankruptcy case can be a beacon of reason in anebulousareaofbankruptcylaw.

I. BACKGROUND:CHAPTER 9 BANKRUPTCIES

Chapter9 ofTitle11 oftheUnitedStatesCodeprovidesthe statutorym echanism form unicipalitiestofileforbankruptcy.14 Likeotherbankruptcyproceedings, them aingoalofChapter9 bankruptcyistoprotectthefinanciallydistressedentityfrom its creditorswhileallowing theentitytorestructureitsdebtwith the added oversightofthe judiciary.15 Forindividuals, bank- ruptcylaw originatedinparttoprotectcitizensfrom creditorsin ordertoavoidsubstantialdebtbecomingtantamounttoinden- turedservitude.16 Municipalbankruptcy, ontheotherhand, is designedtoallow a m unicipalentitytocontinueitsgovernmen- talfunctionswhilecivicofficialsworktorestructurethem unici- pality’s debt.17 Althoughcriticsremainferventastothevalueof

14 11 U.S.C. §§ 901–946 (2014). These sections m ake up Chapter 9 of the BankruptcyCode. 15 Chapter 9: Municipality Bankruptcies, USCOURTS.GOV (2014),http://www .uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter9.aspx[http:// perma.cc/KUB8-RXMY].JustasChapter9 providesthelegalmechanism for m unicipalbankruptcy, Chapter11 providescorporationswithanavenuefor thereorganizationofdebt. 16 See ThomasE. Plank, The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 487, 516–18 (1996). 17 See Chapter 9: Municipality Bankruptcies, supra note15. 240 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

Chapter 9 bankruptcy, and it is often considered a “last resort” fora strugglingmunicipality,18 Chapter9 bankruptcyremainsan importantfacetoftheBankruptcyCode. Asa legalinstitution, bankruptcyisacomplexconglomeration oflegalprocedure,businesslaw, andconstitutionallaw.19 Chapter 9 bankruptcyisno different.20 In ordertoprovidecontextfor Chapter9 bankruptcyissues, Section A ofPartI ofthisNote willprovidefurtherhistoryandbackgroundonChapter9 bank- ruptcy. SectionB willthendiscussChapter9 eligibilityrequire- m entsunder11 U.S.C. §109(c).Finally, SectionC willexamine Chapter 9’s good faith filing requirement under 11 U.S.C. § 921(c).

A. The History of Chapter 9 Bankruptcy

DespitethepaucityofChapter9 bankruptcyfilingsincom- parison totheirindividualand corporatebankruptcycounter- parts,21 Chapter9 filingsarestillanemergentfieldinboththe businessandthelegalworld.22 In fact,theabilityofam unicipal- ity to filefor bankruptcy onlybecame possibleduring the 1930s.23 TheUnitedStatesCongressfirstenacteda law allowing m unicipalitiestofileforbankruptcyin1934.24 Despitearticulate

18 HenryC. Kevane, Chapter 9 Municipal Bankruptcy: The New “New Thing”?,AMERICAN BAR ASSOC.:BUS. LAW TODAY (May 2011), http://www .americanbar.org/publications/blt/2011/05/01_kevane.html [http://perma.cc/TAU7 -J6RN]. 19 See generally DavidA. Skeel,Jr., When Should Bankruptcy be an Option (For People, Places, or Things)?, 55 WM. & MARY L. REV. 2217, 2217–25 (2014). 20 Id. 21 U.S. CensusBureau, Statistical Abstract of the United States (2012), http://www.census.gov/library/publications/2011/compendia/statab/131ed/busi ness-enterprise.html[http://perma.cc/7V76-UA4V].AccordingtotheAmerican BankruptcyInstitute,ofmorethan55,000 m unicipalentities,fewerthan600 havefiledforbankruptcyprotectionsince1937. In comparison, forthetwelve m onthperiodendingJune30, 2007 alone, theAdministrativeOfficeforthe U.S. Courtsreported450,332 Chapter7 filings,5,586 Chapter11 filings,and 23,889 totalbusinessfilings. Id. 22 Om erKimhi, Chapter 9 of the Bankruptcy Code: A Solution in Search of a Problem, 27 YALE J. ON REG. 351, 352 (2010). 23 Chapter 9: Municipality Bankruptcies, supra note15. 24 BankruptcyActof1898, Pub. L. No.251, 48 Stat.798 (1934). 2016] FROM WRECKAGE COMES REASON 241 drafting, however,onlytwoyearslater,theSupremeCourtheld thatthelaw wasunconstitutionalin Ashton v. Cameron County Water Improvement Dist. No. 1.25 Asa federallaw thatheavily influenced the state’s ability to oversee its internal affairs, the bankruptcyprovisionatissuein Ashton raisedstatesovereignty concernsundertheTenthAmendment.26 Thiscomesasnosur- prise, asconcernsstemm ing from theTenthAm endmentarea persistentpointofcontentioninChapter9 filingsandcontinue tooccurinbankruptcyfilingstoday.27 In thewakeofAshton, Congressfolloweditsunsuccessfulen- deavorwitha revisedm unicipalbankruptcyactin1936.28 The SupremeCourtultimatelyruledthatthisiterationwasconstitu- tionallypermissibletwoyearslaterin United States v. Bekins.29 ThestatutorystructureofChapter9 bankruptcieswouldremain largelyunchangeduntilthe1970s.30 As m entioned above, Chapter9 bankruptcysharessimilar goalswithitsindividualandcorporatebankruptcycounterparts.31 However,alargedifferencebetweenChapter9 bankruptcycases and othertypesofbankruptciesisthe relativeinvolvementof the court.32 In allbankruptcycases, a specialized bankruptcy court is responsible for overseeing an entity’s debt restructur- ing.33 In corporate or individual bankruptcy cases, the court’s oversightinvolvesa painstakingreview ofa vastnumberofthe entity’s transactions.34 A bankruptcy courtm ay also play a substantialpartinactuallycreatingtherestructuringplanforin- dividualsandcorporations.35 However,thebankruptcycourthas

25 298 U.S. 513, 532 (1936). 26 Id. 27 Kevane, supra note18. 28 BankruptcyActof1989, Pub. L. No.302, 50 Stat.653 (1937). 29 UnitedStatesv. Bekins,304U.S. 27 (1938). 30 Kimhi, supra note22, at365. 31 Kevane, supra note18. 32 Id. 33 Id. 34 Id. 35 Id. 242 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 a reducedroleinChapter9 cases.36 Generally, thebankruptcy courtshavetwom ainobjectivesinChapter9 cases.37 First,the bankruptcycourtwillactasa gatekeeperinthebeginningofa m unicipalbankruptcycase.38 Atthisstage,thebankruptcycourt will determine a municipality’s Chapter 9 eligibility.39 Thesecond m ainobjectiveofthebankruptcycourtistoapprovethem unici- pality’s finalized restructuring plan upon the com pletion of the bankruptcyproceedings.40 Furthermore,municipalitiesthemselves arelefttocreatetheirown restructuringplan.41 Althoughthebankruptcycourtswillhavea reducedrolein theoverallrestructuring scheme, m unicipalitiesdeemedChap- ter9 eligibleareentitledtocertainspecialprotectionsthatare uniquetoChapter9 cases.42 Theseprotectionsaredesignedto furtherassistthem unicipalityincontinuingitscivicoperations for the benefit of the public; meanwhile, the municipality’s officials can restructurethedebt.43 Theprotectionsaffordedtom unici- palitiesgenerallylimitthe ability of creditors to “reach” the m unicipality.44 Forexample, inindividualorcorporatebank- ruptcy, a creditor m ay be able to foreclose or repossess a debtor’s assets in order to satisfy the debtor’s debt. Such an analog is not availableintheChapter9 context;am unicipality’s creditor m ay notforeclosea civicbuildinginan efforttorecuperateitsdebt becausethebuildingisputtouseforthegeneralpublicwithin

36 Id. 37 Id. 38 Id. 39 Id. 40 Id. 41 Id. Thereducedroleofthejudiciaryinmunicipalbankruptcycasesis groundedinTenthAmendmentconcerns. Id. FormorereadingonTenthAmend- mentconcernsinChapter9 cases, see JulietM. Moringiello, Goals and Gover- nance in Municipal Bankruptcy, 71 WASH. & LEE L. REV. 403, 458–59 (2014). 42 Kevane, supra note18. 43 Id. 44 In re MountCarbonMetro. Dist., 242 B.R. 18, 33 (Bankr.D. Colo.1999) (“[U]nlike Chapter 11 [of the Bankruptcy Act], Chapter 9 cases cannot be in- voluntarilyinitiatedbycreditors;creditorsm aynotproposeaplan;atrustee cannotbeappointed;and the inabilitytoreorganizecannotresultinliqui- dation of the m unicipality’s assets under Chapter 7.”). 2016] FROM WRECKAGE COMES REASON 243 them unicipality.45 Furtherm ore, a m unicipality’s debtors cannot forcethem unicipalitytoliquidateitsassetsinvoluntarily.46 Some ofthe otherprotectionsaffordedtom unicipalitiesin Chapter9 bankruptciesthatarenotreciprocatedinothertypes ofbankruptciesalsodirectlyreflectthelevelofinvolvementofthe court.Forexample,am unicipalityisnotsubjecttothereporting dutyinwhichitmustcommunicatetransactionaldatadirectlyto thebankruptcycourt.47 Thisfreedom isnotreciprocatedinother typesofbankruptcy.48 Furthermore, a m unicipalityisstillaf- fordedtherighttoborrowandspendwithoutcourtauthority.49

B. Chapter 9 Eligibility Standards Under § 109(c)

Becauseofthe added protectionsand freedoms afforded to m unicipalitiesinChapter9 bankruptcyproceedings, oneofthe m ainproceduraldifferencesbetween Chapter9 bankruptcies and theircorporateand individualbankruptcycounterpartsis the thresholda m unicipality m ustm eetin establishing its Chapter9 eligibility.50 Furthermore, creditorshavethe added abilitytochallengesucheligibility.51 Section921(c)ofChapter9 iswritten asifitbestows upon the judiciarya discretionary powerindismissing a bankruptcypetition forfailing tom eet this threshold: “After any objection tothe petition, the court, afternoticeand a hearing, m ay dismissthe petition ... ifthe petitiondoesnotm eettherequirem ents of this title.”52 In prac- tice, however,courtshavebeenreluctanttointerpret§921(c)so broadlyandconcludethatfailuretom eettheChapter9 eligibil- itystandardsrequiresm andatorydismissalofthe bankruptcy

45 Moringiello, supra note 41, at 458–59. 46 DavidG. Heiman, HeatherLennox, LoriSinanyan, MarkK. Sisitsky& JayantW. Tambe, An Overview of Chapter 9 of the Bankruptcy Code: Municipal Debt Adjustments,JONES DAY (Aug. 15, 2010), http://www.jonesday.com /an-overview-of-chapter-9-of-the-bankruptcy-code-municipal-debt-adjustments -08-15-2010/[http://perma.cc/57ZB-9W2R]. 47 See 11 U.S.C. §1107 (2012). 48 Id.;see also 11 U.S.C. §904(2012). 49 See 11 U.S.C. §904(2012). 50 See Kimhi, supra note 22, at 356–57. 51 See id. at357. 52 11 U.S.C. §921(c)(2012). 244 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 petition.53 Therefore, thepetitioningm unicipalitym ustshow by a preponderanceoftheevidencethatitsatisfieseachofthefive elementsunder11 U.S.C. §109(c)inordertom eettheChapter9 eligibilitythreshold.54 Thefirstelementofeligibilityunder§109(c)mandatesthatan entityfilingforChapter9 bankruptcym ustm eetthedefinitionof “municipality” under Title 11.55 Title11 readsthe definition of “municipality” as a “political subdivision or public agency or instru- mentality of a state.”56 Thisrequirementdoesnotlimittheeligibil- itystrictlytocitiesorotherlocalgovernments.57 By including “public agency” or “instrum entality of the state,” the Bankruptcy Codeallowsentitiessuchasschooldistricts,sanitationresourcepro- viders,andevenlocalhealthsystemstofileforChapter9 relief.58 The second elementforChapter9 eligibilityissetoutin §109(c)(2)and requiresthestatetoauthorizethem unicipality as a “debtor” under Title 11:

An entitym aybea debtorunderchapter9 ofthistitleifand onlyifsuchentity... isspecificallyauthorized, initscapacity asam unicipalityorbyname,tobeadebtorundersuchchap- terbyStatelaw, orbya governmentalofficerororganization empoweredbyStatelaw toauthorizesuchentitytobeadebtor undersuchchapter....59

Stateauthorization isan importantaspectofChapter9 cases becauseitcircumventsmanystatesovereigntyissuesarisingfrom theTenthAm endment.60

53 See Int’l Ass’n of Firefighters, Local 1186 v. City of Vallejo, 408 B.R. 280, 289 (B.A.P. 9th Cir. 2009) (“[C]ourts have construed § 921(c) to require them andatorydismissalofa petitionfiledbya debtorwhofailstom eetthe eligibility requirem ents under § 109(c).”); In re Sullivan Cty. Reg’l Refuse Disposal Dist., 165 B.R. 60, 83 (Bankr. D.N.H. 1994) (“The debtors in the present casehave failed toestablish the requisitesforChapter9 relief... under § 109(c) ... and therefore their petitions m ust be dism issed ....”). 54 Heimanetal., supra note46. 55 11 U.S.C. §109(c)(2012). 56 11 U.S.C. §101(40)(2012). 57 CHARLES JORDAN TABB, THE LAW OF BANKRUPTCY 109 (3ded. 2014). 58 Id. 59 11 U.S.C. §109(c)(2)(2012). 60 Moringiello, supra note 41, at 458–59. 2016] FROM WRECKAGE COMES REASON 245

Third, thepetitioningm unicipalitym ustbe “insolvent” under 11 U.S.C. § 109(c)(3).61 Insolvencyisa heightenedrequirement thatisnotreciprocatedinnon-Chapter9 bankruptcyprovisions.62 “Insolvent” is defined within the Bankruptcy Code as a “financial condition” whereby a m unicipality is “generally not paying its debtsastheybecomedueunlesssuchdebtsarethesubjectofa bona fide dispute” or is “unable to pay its debts as they becom e due.”63 Despite this definition, “insolvent” is still a som ewhat in- definiteterm withpotentiallyoutcome-determinativepowers.64 However,somecourtshavegonetoconsiderablelengthstoaddress thishazinessinthepast.65 Ultimately, objectionsbasedonthe insolvency requirem ent are substantial weapons in a creditor’s arsenalbecausetheysurreptitiouslyallow creditorstoweighin onaChapter9 filingwhilestallingthebankruptcyproceedings66 and ensuring thatm unicipalitiesarenotundulyresorting to Chapter9 reliefinsteadofoptingforprivaterestructuring.67

61 11 U.S.C. §109(c)(3)(2012). 62 SaraCoelho, Is the Debtor Bankrupt Enough? Application of the Chap- ter 9 Insolvency Test to the City of Vallejo, WEIL, GOTSHAL & MANGES LLP (Apr.13, 2011), http://business-finance-restructuring.weil.com/chapter-9/is-the -debtor-bankrupt-enough-application-of-the-chapter-9-insolvency-test-to-the-city -of-vallejo/[http://perma.cc/J7ZL-BD8W]. 63 11 U.S.C. § 101(32)(C)(i)–(ii) (2012). 64 See Coelho, supra note62. 65 See generally In re CityofVallejo, 408 B.R. 280 (B.A.P. 9thCir. 2009). When the city of Vallejo, California filed for bankruptcy in 2009, the city’s cred- itors argued that the city was not “insolvent” for purposes of § 109(c)(3). Id. The bankruptcy court overseeing the case viewed “insolvency” as a financial condition whereby a m unicipality’s “cash flow” is so restricted that it cannot payoffdebtsduewithinthenextyearandstillhavetheflexibilitytouseits remainingfundstocontinuerequisitemunicipaloperationsand progresswith othercreditornegotiations. See id. at 290–94. The court ultim ately upheld the city’s eligibility and a bankruptcy appellate panel from the Ninth Circuit af- firmed. Id. at290. 66 See Coelho, supra note62. Evenwhencreditorsfailtogetabankruptcy petitiondismissedforwantofeligibility, Coelhosuggeststhatcreditorsreceive a “tactical advantage” just from contesting a m unicipality’s eligibility because eligibilitylitigation can tieup the bankruptcyproceedingswhilecreditors seekprivatenegotiationswiththem unicipality. Id. 67 MeaganCostello, Chapter 9 Eligibility: The Test for Insolvency (Part 2 of 3),GOODWIN PROCTOR (Jan. 29, 2013), http://blog.m unibk.com/chapter-9-eligi bility-the-test-for-insolvency-part-2-of-3[http://perma.cc/Q3FQ-9C7W]. 246 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

The fourthelementofChapter9 eligibilityunder§ 109(c) requires the petitioning m unicipality to “desire[]toeffectaplan to adjust such debts.”68 This requirem ent is “highly subjective” and correspondswiththe good faithfiling requirementunder §921(c),whichisaddressedlaterinthisNote.69 Essentially, the petitioningmunicipalitymustillustratethatitsbankruptcyfiling istheresultofanintentiontorestructureitsdebtratherthanto evadecreditorsorbuytime.70 ThefinalelementforChapter9 eligibilityunder§109(c)ad- dressespre-petitioningnegotiationsbetweenthemunicipalityand itscreditors.71 Under§109(c)(5),them unicipalitycansatisfythe fifthrequirementifitfallsintoany offourcategoriesforpre- petitioning negotiations.72 More specifically, the m unicipality m ustdemonstratethat(1)ithasreachedanagreementwithits creditors;(2)ithasnegotiatedwithitscreditorsingoodfaith;(3) negotiationswouldbeimpracticable;or(4)a creditorwouldbe abletoobtaina preference.73 The categoriesunder§ 109(c)(5) ensurethatChapter9 filingsarenotcapriciousbutstillprovide Chapter9 bankruptcyasanoptionform unicipalitiesstruggling tonegotiatewithcreditorsprivately.74 Thefiverequirementsunder§109(c)aremandatoryhurdlesa municipalityfaceswhenfilingforChapter9 bankruptcy.However, a m unicipality’s eligibility does not end with those five require- m ents. Evenifa m unicipalitycan m eettheeligibilityrequire- m entsunder11 U.S.C. §109(c),acreditorcanstillchallengethe m unicipality’s Chapter 9 bankruptcy petition basedon lackof goodfaithinitsfiling.75

68 11 U.S.C. §109(c)(4)(2012). 69 COLLIER ON BANKRUPTCY P 900.02[2][d](Alan N. Resnick& HenryJ. Somm erseds., 16thed. 2014). 70 Id. (“A statem ent by the m unicipality of its intent to im plem ent a plan ofadjustmentcoupledwithevidenceofactionstakenand/orbeingtakenby them unicipalityinfurtheranceofsuchintentshouldbesufficienttom eetthe statutory requirem ent.”). 71 11 U.S.C. §109(c)(5)(2012). 72 Id. at (B)–(D). 73 Id. 74 COLLIER ON BANKRUPTCY, supra note69. 75 11 U.S.C. §921(c)(2012). 2016] FROM WRECKAGE COMES REASON 247

C. The Good Faith Filing Requirement

Althoughsomeoftherequirementsunder§109(c)touchupon Chapter 9’s good faith filing requirement,theBankruptcyCode stillexplicitlymandatesthemunicipalitytofileitspetitioningood faithunder§921(c).76 PartI, SectionB ofthisNotecited§921(c) duetoitsroleinrequiringthem unicipalitytomeetcertaineligi- bilitythresholds.77 However, inadditiontoprovidingthestatu- toryscaffolding forthe courttodismissChapter9 bankruptcy petitionsbasedonineligibility, theprovisionalsoimposesaduty on the m unicipalitytoconductitsfiling ingoodfaith.78 In its entirety, § 921(c) reads: “After anyobjectiontothepetition, the court,afternoticeanda hearing, m aydismissthepetitionifthe debtordidnotfilethe petition in good faith orifthe petition does not m eet the requirem ents of this title.”79 ThegoodfaithfilingrequirementisnotuniquetoChapter9 cases.80 However,therationalebehind§921(c)alsoalignsitself withsomeoftheotheruniquerequirementsforChapter9 bank- ruptcy. Asm entionedbefore,someoftheserequirementsentwine themselveswithconstitutionalissuesundertheTenthAm end- m ent.81 The m ostcompelling reason fortheserequirementsis thenatureoftheentityfilingforbankruptcy. Asm entionedin Part I, Section B, both the court’s and the creditor’s roles are m inimized compared toindividualand corporatebankruptcy cases.82 AttheheartofChapter9 bankruptcyistheprotectionof themunicipalityforthebenefitoftheciviccommunity. However, §921(c)oftheBankruptcyCodeisa finalthresholdthata m u- nicipalitym ustovercome.

76 Id. 77 See supra PartI.B. 78 See 11 U.S.C. §921(c)(2012). 79 Id. (emphasisadded). 80 TheBankruptcyCodeexpressesa goodfaithfilingrequirementinalmost everytypeofbankruptcy. To bespecific, 11 U.S.C. § 707(a)establishesthe goodfaithfilingrequirementforChapter7 cases.11 U.S.C. §1112(b),aswell asawealthofcaselaw, establishesthegoodfaithfilingrequirementforChap- ter11 cases. TheChapter13 goodfaithfiling requirementiscodifiedat11 U.S.C. §1307(c). 81 See supra PartI.A;see also Moringiello, supra note 41, at 458–59. 82 See supra PartI.B. 248 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

Section921(c)oftheBankruptcyCodeisthecornerstoneof thisNote.Because§921(c)hasthepotentialtocompletelythwart am unicipalityfrom successfullyfilingforChapter9 bankruptcy, itcarriesa wealthofstatutorypotency.83 Surprisingly, “good faith”— the core term of the provision— is not defined anywhere within§921(c),noranywhereelsewithintheBankruptcyCode, despitethisoutcome-determinativepower.Leftwithlittlestatu- toryguidance, courtshave considered the good faithrequire- m entunder§921(c)inm yriadways.Despitethesevariousgood faithpracticesunder§ 921(c),thereisstillnodefinitivestan- dardinthe Chapter9 bankruptcycontext. Furthermore, asit stands, no single “good faith” adaptationorinterpretationstands outasparticularlyinstructiveorillustrativeinChapter9 cases.84 TheremainderofPartI, SectionC willaddressalternativegood faithpracticesanddiscussthedifficultiestheypresent.

1. The Chapter 11 Good Faith Test

The m ostestablishedendeavortosystematizea goodfaith testoccursintheChapter11 bankruptcycontext.85 Becausethe Bankruptcy Code fails to offer a “good faith” definition, judges haveusedChapter11 casestodevelopa goodfaithanalysis.86

83 See supra PartI.B. SpreadthroughoutChapter9 jurisprudence,however, courtsandscholarshavenotedthatthediscretionarylanguageof§921(c)does notcallforthe m andatorydismissalofa bankruptcypetition form unic- ipalitieswhofailtofilethepetitioningoodfaith. See In re Cty. ofOrange,183 B.R. 594 (Bankr. C.D. Cal.1995). See also COLLIER ON BANKRUPTCY, supra note69. However,almostnocaseshavespecificallyaddressedthispermissive nature. See In re CityofSanBernardino,Cal., 499 B.R. 776 (Bankr.C.D. Cal. 2013)(statingthatalmostnocaseshaveaddressedthepermissivelanguage of§ 921(c)intermsofa dismissalrequirementbutrationaleregarding the finalityofa dismissalofa m otiontodismissthepetitionbasedonbadfaith under § 921(c) sheds light on the judiciary’s discretion in dism issing the Chapter9 bankruptcypetition). Id. at791. 84 See generally PaulD. Leake, Making the Case for a “Good Faith” Chapter 11 Filing,JONES DAY (Dec. 2004),http://www.jonesday.com/newsknowledge /publicationdetail.aspx?publication=2083 [http://perma.cc/LA7V-4PL7] (“Unfor- tunately, case law guidance on the concept of ‘good faith’ is often abstruse, offeringlittleconcreteguidance, and som etim es contradictory.”). 85 See id. 86 See, e.g., In re Sullivan Cty. Reg’l Refuse Disposal Dist., 165 B.R. 60, 80 (Bankr.D.N.H. 1994). 2016] FROM WRECKAGE COMES REASON 249

SomebankruptcycourtspresidingoverChapter9 caseshavethen lookedtotheseChapter11 casesinthepastinordertograspa m eaningful test for § 921(c)’s good faith requirem ent.87 Although Chapter 11’s test has been the basis for Chapter 9 good faith determinationsinthepast,noformaladoptionhasoccurred.88 ThetestinChapter11 callsforalargelysubjectivegoodfaith assessm ent that evaluates the petitioner’s bankruptcy filing with aneyetowarddismissingthebankruptcy petition “for cause.”89 IntheseChapter11 cases,thelongstandingtestpresentsadichot- omy: “[t]he test is whether a debtorisattemptingtounreason- ablydeterandharasscreditorsor attemptingtoeffecta speedy, efficient reorganization on a feasible basis.”90 Thistestallows the courts to look into an “am algam ” of factors,91 butultimately asks the courts to “get into the debtor’s head” and subjectively determ ine the debtor’s m otives for filing for bankruptcy.92 Be- cause of this, alleged “bad faith” is often found when debtors attempttousebankruptcyproceedingsinanefforttoabusethe judicialprocessfortheirbenefit.93 LikeinChapter9 cases,ifthe courtdeterminesthatthedebtorhasfailedtofileitsbankruptcy petitioningoodfaith, thenthecourtshoulddismissthecase.94

87 See id. at 81 (“Determ ining whether a [chapter 11] petition has been filed in good faith requires an evaluation of a debtor’s ‘financial condition, m otives, and the local financial realities.’ These com m ents would appear to be equally applicable, at least in part, to a Chapter 9 petition.”). 88 See id. 89 See In re Arnold, 806 F.2d 937, 939 (9thCir. 1986);In re Marsch, 36 F.3d825, 828 (9thCir.1994). See also 11 U.S.C. §1112(b)(2012). 90 In re Marsch, 36 F.3dat828 (citingIn re Arnold, 806 F.2dat939). 91 In re Marsch, 36 F.3dat828. 92 See Leake, supra note84. 93 See id. Badfaithgenerallyreferstoa chapter11 filingwiththepur- poseofabusing thejudicialprocess. Forinstance, a chapter 11 filing forthe solepurposeoffending offlitigation (e.g., foreclosure)ifthedebtorhasnorealprospectofreorganizing itsbusinessisoftenfoundtoqualifyasthekindofabusethat risestothelevelofbadfaith. Similarly, a filingbya solvent debtormerelytoobtaina tacticallitigationadvantagehasalso beenfoundtobeabusive. Id. 94 See 11 U.S.C. §1112(b)(2012). 250 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

Although thisgood faithtestprovesm ostlysufficientand equitableintheChapter11 context,95 subsumingthesameChap- ter11 goodfaithtesttoChapter9 bankruptciesasan official practiceposesthreesignificantproblems.Theseproblemsoriginate from thefactthatthedichotomy derivedfrom Chapter11 case law presentsaneither/orscenarioinwhichtheentirebankruptcy case sits on a knife’s edge. Thefirstproblem arisesregardlessofthefactsofthespecific Chapter9 caseathand orthe standardthe bankruptcycourt usestoreachitsdetermination. Itarisesbecausecurrentbank- ruptcycourtsarenotgiven any statutoryguidanceon how to adjudicatethe goodfaithfiling requirementand m ustrelyon inconsistentcaselaw orforgetheirown path.96 In sucha context, judgesarefrequentlyaskedtospeculateontheintentionsofthe

95 See LawrencePonoroff& F. Stephen Knippenberg, The Implied Good Faith Filing Requirement: Sentinel of an Evolving Bankruptcy Policy, 85 NW. U. L. REV. 919, 921, 946–47 (1991) (“[T]he bankruptcy courts’ adaptation of thegoodfaithdoctrinepresentsanexcellentexampleofthelaw inevolution, a processwebelievetobedescribableinm eaningfultermsfrom thepositive law of the cases.”). Ponoroff and Knippenberg discuss how Chapter 11 bank- ruptcycasesusethe good faithfiling requirementtocombatcorporations abusing bankruptcyproceedingsinordertosolveparticularbusinessprob- lemsorexigenciesthatcannotbesolvedthrough m oretraditionalbusiness m odels. Id. at 921 (“[G]ood faith is transform ed from a tired cliché, invoked in suspiciousresponsetoanarrayofnovelfilings,toausefulinstrumentpressed intoserviceby the courtstobring orderand standardstothe businessof assuringthatbankruptcypolicyandpurposesevolveinasensible,purposeful way.”). But see RobertJ. Bein, Subjectivity, Good Faith and the Expanded Chapter 13 Discharge, 70 MO. L. REV. 656, 658 (2005) (“[T]he law views sub- jective determ inations ... as inherently less stable.”). In this article, the author ultimatelyarguesfora m ixofbothsubjectiveand objectiveanalysisinde- termininggoodfaith;however,healsohighlightsdifficultiesofaninherently subjectiveanalysis. Id. at 685 (“The law m ust be sufficiently objective as to be predictablesothatindividualscanordertheiraffairswithsomeconfidencein how theywillbetreatedbythelaw. Withoutobjectivity, thelaw devolvesinto disorder.” (footnote om itted)). 96 In thecontextofChapter7 bankruptcies,theEighthCircuithasechoed concerns that the lack of a statutory basis for good faith “will be ‘employed as aloosecannonwhichistobepointedinthedirectionofadebtorwhosevalues do not coincide precisely with those of the court.’” In re Huckfeldt, 39 F.3d 829, 832 (8thCir.1994)(citing In re Latimer,82 B.R. 354, 364 (Bankr.E.D. Pa. 1988)). 2016] FROM WRECKAGE COMES REASON 251 bankruptcypetitioners.97 Leaving suchan unrestrainedoppor- tunityforunilateraljudicialdiscretion hasraisedredflagsin thepast,and theseconcernsarefound inm anytypesofbank- ruptcylaw.98 In fact,Congressrespondedtoalackofuniformity inbankruptcycasesinthenottoodistantpastwhenitcreated theBankruptcyAbusePreventionandConsumerProtectionAct of2005.99 In ordertocurbpotentialprejudicesandraisejudicial accountabilityinthebankruptcycontext,somescholarsadvocate forfurtherlegislativeactivism.100 However,afittingpieceoflegis- lationhasyettosolvethisproblem, and theparticularissueof lackofstatutoryguidancewithregardto§921(c)islikelytopersist untiltheBankruptcyCodeisamended, ora single, unifiedtest becomesawidelyacceptedstandardforfuturecases. Thesecond problem isthattheChapter11 testcouldresult intoolightaburdenform unicipalitiestom eetwhenpetitioning forChapter9 bankruptcy. The thrustofthe Chapter11 good faithfilinganalysisistom akesure that the debtor’s m otives are not “antithetical to the basic purposes of bankruptcy.”101 Mean- while, challenging a m unicipality’s good faith is only one of a verylimitednumberofopportunitiesthatacreditorhastocombat a m unicipal bankruptcy due to the m unicipality’s protections underChapter9.102 Therefore, ifcreditorsareonlylefttochal- lengea Chapter9 bankruptcypetitionbasedontheargument thatthem unicipalityhasfileditspetitionforreasonsadverseto the basicpurposesofbankruptcy, then creditor-objectorsm ay repeatedlyfailto have a m unicipality’s Chapter 9 petition dismissed.103 Thisfailureisalikelyresultbecausemunicipalities

97 See Bein, supra note95, at658. 98 In re Huckfeldt,39 F.3dat832. See also Bein, supra note95, at658. 99 KaraJ. Bruce, Rehabilitating Bankruptcy Reform, 13 NEV. L.J. 174, 189 (2012). “BAPCPA” was signed into law alm ost a decade ago with an im petus tostreamlinetheadministrationofbankruptcycases.Thenew statutorypro- visionscreatedenhancedstatutorystandardsforbankruptcyprofessionalsto m eetwhenattemptingtorestructuredebt. Id. 100 Bein, supra note95, at658. 101 See Leake, supra note84. 102 In re MountCarbonMetro.Dist., 242B.R. 18, 33 (Bankr.D. Colo.1999). 103 See In re CityofSanBernardino, Cal., 499 B.R. 776, 788 (Bankr.C.D. Cal.2013).In thiscase, thecourtconcludedthatitwasenoughtoshow proper intent for Chapter 9 bankruptcy by taking an “affirm ative step to file chapter 9 252 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 haveaninherentpowertoarguethattheChapter9 bankruptcy petitionwasfiledsothatthem unicipalitycancontinueitscivic functions whilebenefiting from Chapter9 protection from its creditors.104 IftheChapter11 testofpeekingintothem indsof the petitioneristhe testused inChapter9 cases, then civic officialswilllikelybeabletopreemptgoodfaithchallengesby showingtheiraspirationstokeepam unicipalityrunning, despite bothwell-groundedandardentpressuresfrom itscreditors,and actualbadfaithinthem unicipality’s subjective intentions.105 Finally— and in contrast to m akingthegoodfaithpetitioning requirem ent too easy— the third problem is that Chapter 11’s good faith test could afford creditor-objectors an unbridled opportunity to thwart a municipal debtor’s Chapter 9 bankruptcy attempt. Thiswasa primaryconcern in Detroit’s bankruptcy case.106 In thealternativetothesecondproblem above, thisthird problem couldresultwheneverthecourthasthecapabilitytode- terminewhetherthedebtorisusingthebankruptcyproceedings inany wayinconsistentwithan “efficient reorganization on a feasible basis.” Again, challenging a m unicipality’s good faith filingisoneofthefew safeguardscreditor-objectorsaregivenin a Chapter9 bankruptcycase.107 However, asm entionedprevi- ously, §921(c)hasoutcome-determinativepowerandthisallows

thatitcouldrestructurethedebtand impairthe creditorsasnecessaryto achieve a balanced budget.” Id. 104 See id.;see also In re Sullivan Cty. Reg’l Refuse Disposal Dist., 165 B.R. 60, 82 (Bankr.D.N.H. 1994).In In re Sullivan, thecourtdismissedthebank- ruptcy petition because the m unicipality presented “no evidence of any m eaningfuldiscussionof[sic]whattypeofplanm ightbeappropriateunder Chapter 9.” Id. ThissuggeststhatevenamenialeffortindiscussingaChapter9 wouldjustifyfilingforChapter9 bankruptcy. Id. 105 See generally In re RavennaMetro. Dist., 522 B.R. 656, 684(Bankr.D. Colo.2014).Thiscaseseemstosuggestthatthegoodfaithrequirementunder § 921(c)islikelytobemetifthe petitioning m unicipalitycan articulatea threattothe healthand well-being ofthe citizens. Id. Becauseproviding servicesiswithinthepurview ofm unicipalitiesand theycan controlthese services, almostany m unicipalityfacing budgetissuescouldarticulatea threattothehealthandwell-beingofthecitizensbystatingthattheservices areinjeopardy. 106 In re CityofDetroit,504B.R. 97, 180 (Bankr.E.D. Mich. 2013). 107 In re MountCarbonMetro.Dist., 242 B.R. at33. 2016] FROM WRECKAGE COMES REASON 253 creditor-objectorstheopportunitytohavea Chapter9 casedis- m issed.108 Therefore, acreditor-objectorneedonlyshow thatthe m unicipalityhastakenactionsthatarenotdirectedtowardsan “efficient reorganization on a feasible basis” and the bankruptcy courtcoulddismisstheChapter9 petition, eveniftheChapter9 filing wasonsetbytheproperpurposesand bankruptcyisthe m ostadequatelegalremedyforthem unicipality. TheChapter11 goodfaithtestultimatelyprovestooimpre- ciseand eithertooaccomm odating orharshforthe m unicipal bankruptcycontext,dependingonthespecificcircumstancesof thecase. Overall,a Chapter11 analogyisanimpracticableand m isguidedprospectfora unifiedChapter9 goodfaithanalysis. Although a void exists in Chapter 9’s good faith jurisprudence, thevoidlikelywillnotfind an adequatesubstituteinitsindi- vidualorcorporatebankruptcybrethrenunderChapter11.

2. Other Alternative Tests for Chapter 9 Good Faith

Without a form al “test” to draw from, courtshaveapproached Chapter9 casesinamultitudeofways.In somecases,bankruptcy courts m erely take a cursory glance into the m unicipality’s good faith filing requirement.109 However, bankruptcy courtshave alsotakenam oreholisticapproachinpreviousChapter9 bank- ruptcycasesand considered many importantaspectsthatfre- quentlyariseingoodfaithfilingchallenges.110

108 See supra PartI.B. 109 See In re PleasantView Util.Dist., 24 B.R. 632, 639 (Bankr. M.D. Tenn. 1982);In re Vills. atCastleRockMetro. Dist.No. 4, 145 B.R. 76, 81 (Bankr.D. Colo. 1990).In thesecases,thecourtsdonotevenprovidea basis for§921(c)eligibility, yettheybothstillciteitasm andatoryauthority. 110 See In re CityofSanBernardino, Cal., 499 B.R. 776, 790 (Bankr.E.D. Cal. 2012) (“As in m any other considerations of good faith in the context of bankruptcy, thetestisatotalityofthecircumstanceswheretheCourtisgiven thepowertoweigh thenumerousfactorsinlightofthecircumstancesasa whole in determining whether good faith is lacking.”); In re MountCarbon Metro. Dist., 242 B.R. at 40–41: Borrowing from thegood faithanalysisofChapter11 and Chapter13, itiseasytoconcludethattheCourtshouldcon- siderthe totalityofthe circumstances. The factorswhicha 254 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

WhilesomecourtswillimputetheChapter11 goodfaithtest intoa Chapter9 case, some ofthe jurisprudencesurrounding Chapter 9’s good faith requirementm erelypayshomagetoChap- ter 11’s dichotom ous test.111 Perhapsthem ostpermeatingcon- sideration is the bankruptcy court’s willingness to inquire into theintentofthebankruptcypetitioner.112 AsseeninChapter11, thisconsiderationisnotasignificantbreakthroughinChapter9 goodfaithanalysisbutillustratestheimportanceofthebank- ruptcy petitioner’s m otives and goals in its filing. Overall, for reasonssimilartothedifficultyofapplyingthisinquiryinChap- ter11 cases,determiningthesubjectivem otivesofthepetitioning m unicipalityaloneisalargelyunpersuasivetestthatm akesthe proceedingsverydifficultforboththebenchandopposingparties. WhilemanyChapter9 casesfacetiouslydancearoundChapter 11’s good faith test, some cases go well beyond the sim ple either/or analysisthattheChapter11 testmandates.113 Today, manyschol- ars and opinions cite Collier’s bankruptcy resources as the m ost unifiedcollectionofChapter9 goodfaithanalysis.114 Itreads:

Courtshouldexamineineachchapterinclude:(1)whethera plan comportswiththe provisionsand purposeofthe Code andthechapterunderwhichitisproposed, (2)whetheraplan isfeasible,(3)whetheraplanisproposedwithhonestyandsin- cerity, and (4) whether a plan’s term s or the process used to seekitsconfirmationwasfundamentallyfair. 111 See In re PleasantViewUtil.Dist., 24B.R. at639;In re Vills.atCastleRock Metro.Dist.No.4,145 B.R. at81. In thesecases,thecourtsdonotevenprovide abasisfor§921(c)eligibility,yettheybothstillciteitasmandatoryauthority. 112 See In re City of San Bernardino, Cal., 499 B.R. 776, 789–91 (Bankr. C.D. Cal.2013);In re N.Y. City Off-Track Betting Corp., 427 B.R. 256, 280–81 (Bankr.S.D.N.Y. 2010);In re Pierce Cty. Hous. Auth., 414 B.R. 702, 720–21 (Bankr. W.D. Wash. 2009);In re Cty. ofOrange, 183 B.R. 594, 608 (Bankr. C.D. Cal.1995).Allthesecasescitetheinquiryintothesubjectiveintentof them unicipalitywhenfilingforChapter9. 113 See id. 114 See In re City of San Bernardino, Cal., 499 B.R. at 785–86; In re N.Y. CityOff-TrackBettingCorp., 427 B.R. at274;In re PierceCty. Hous.Auth., 414 B.R. at714;In re Cty. ofOrange, 183 B.R. at608. Thesefourcasescite Collier’s when determ ining § 921(c)’s requirem ents. 2016] FROM WRECKAGE COMES REASON 255

Thefactsthatmayberelevantinagoodfaithinquiryinclude (i) the debtor’s subjective beliefs; (ii) whether the debtor’s fi- nancialproblems fallwithinthe situationscontemplatedby chapter9;(iii)whetherthedebtorfileditschapter9 petition forreasonsconsistentwiththepurposesofchapter9;(iv)the extent of the debtor’s prepetition negotiations, if practical; (v) theextentthatalternativestochapter9 wereconsidered;and (vi) the scope and nature of the debtor’s financial problem s.115

Much of the language in Collier’s is subsum ed from Chapter 11 analysis.116 However, even withsixfactorsforbankruptcy courtstoconsider,thereisstillnoinstructiveimpetusfordealing with § 921(c)’s concerns. Without more specificity, judges continue towieldunbridledpowerwhendealingwithbankruptcycases.117 Becauseofthis, thebasicconcerns associated with the judge’s discretionarypowerinotherbankruptcycontextsarereciprocated in Collier’s take on Chapter 9’s § 921(c) good faith requirement.118 Overall,courtshavenotshiedawayfrom imputingathorough analysisforChapter9 goodfaith. Somecourtshavegonetogreat lengthsbyanalogizingChapter9 casestoChapter11 cases.119 Theyhaveexploredam ultitudeofanalyses,suchaslookinginto theintentofthebankruptcypetitionertofindgoodorbadfaith,120 aswellasotherfact-intensiveconsiderationssuchasthosefound in Collier’s Chapter 9 good faith scheme.121 However,thisholistic approachhasnotbeenmethodizedorwidelyadopted.Eventhough theChapter9 goodfaithanalysishasfoundsomewhatreasonable footing inthesepastcases, noneofthepreviousanalyseshave proventobea viable, definitivestandardortestgoing forward. Nonehavestoodouttobetheholisticapproachworthyofwide- spread adoption. However, Detroit’s bankruptcy case can fill the

115 COLLIER ON BANKRUPTCY, supra note69. 116 Both Collier’s schem e (in particular, item s (i)–(iii)) and the Chapter 11 goodfaithtestaregroundeduponviewingthesubjectiveintentofthedebtor. 117 Bein, supra note95. 118 See id. 119 See infra PartII.C. 120 Id. See also In re City of San Bernardino, Cal., 499 B.R. 776, 789–91 (Bankr. C.D. Cal.2013);In re N.Y. CityOff-TrackBetting Corp., 427 B.R. 256, 280–81 (Bankr. S.D.N.Y. 2010); In re PierceCty. Hous. Auth., 414 B.R. 702, 720–21 (Bankr. W.D. Wash. 2009); In re Cty.ofOrange,183 B.R. 594, 608 (Bankr.C.D. Cal.1995). 121 COLLIER ON BANKRUPTCY, supra note69. 256 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 void left by Congress’s silence in addressing § 921(c)’s good faith requirem ent. In order to understand both how Detroit’s case can betheleadingand preeminentguideforfuturecases, and how thecourthandledthecomplexitiesassociated with Detroit’s Chap- ter 9 bankruptcy filing, an overview of Detroit’s financial history leadinguptoandincludingitsbankruptcyispertinent.

II. AN OVERVIEW OF DETROIT’S BANKRUPTCY

To som e extent, Detroit’s financial distress was largely fore- seeable.122 JudgeRhodesopinedthatbecauseDetroitfacedsuch overwhelmingfiscalexigency, eventheobjectingcreditorsknew that the Chapter 9 bankruptcy filing was ultimately a “foregone conclusion.”123 The origins of the city’s anguish can be traced through the last seven decades of Detroit’s history.124 Thishistory, however,demonstratesthatnosingularpersonalityoreventled totheultimatefinancialdownturn. Indeed, manyfactorsgaverise to Detroit’s downward spiral.125 Part II, Section A of this Note will discuss Detroit’s financial historypriortothebankruptcyfiling. SectionB willexplorethe timeperioddirectlyinlinewith Detroit’s Chapter 9 filing. Finally, SectionC willprovidean overview of Detroit’s Chapter 9 eligi- bility and the challenges raised by the city’s creditors.

A. Detroit in the Twentieth and Early Twenty-First Century

TherewasalongperiodinAm ericanhistorywhenthecityof Detroitseemedinfallible.126 Ridingalongsidethesuccessesofthe boomingautoindustry, Detroitblossomedintheearlyyearsof thetwentiethcentury.127 In fact,thefirstsevendecadesofthe

122 Nathan Bomey & John Gallagher, A Free Press Investigation: How Detroit Went Broke,DETROIT FREE PRESS (Sept.15, 2013). 123 In re CityofDetroit,504B.R. 97, 176 (Bankr.E.D. Mich. 2013). 124 Bomey& Gallagher, supra note122. 125 See Am y Padnani, Anatomy of Detroit’s Decline, N.Y. TIMES (Dec. 8, 2013), http://www.nytimes.com/interactive/2013/08/17/us/detroit-decline.html ?_r=0 [http://perma.cc/NQ8Z-SL9P]. 126 Bomey& Gallagher, supra note122. 127 SCOTT MARTELLE,DETROIT:A BIOGRAPHY 95 (2012). 2016] FROM WRECKAGE COMES REASON 257 twentiethcenturyearmarkedtheswiftriseofDetroitasa rich, prosperouscity.128 Detroit’s clim b to the upper strata of Am erican society stem s from itsroleasthebirthplaceand hotbedform uchofthena- tion’s industrialization.129 Theriseofautomobilemanufacturing atthe turn ofthe twentiethcenturypredicated thisboom in industry.130 In 1908, FordMotorCompanyintroducedtheModel T.131 HenryFord then announced the five-dollar workday in 1914.132 Subsequent tothesetwo events, Ford produced and distributedover15 m illionModelTs133 and Detroit’s population exploded, eventuallybecoming the fourth largestcityinthe UnitedStates.134 Suddenly, Detroitcouldoffera livablewageto justaboutanyone. Bolsteredbythisindustrialinflux, Detroitevenm anagedto enduretheGreatDepression. In the1930s,formerDetroitMayor Frank Murphy stated: “[Detroit] is a great, rich city it has neverrepudiatedanobligation nor defaulted upon a debt— and it never will.”135 Mayor Murphy’s words m ostly rang true as the citysurvived the GreatDepression without a totaleconomic collapse, although itdidcome withgreathardship.136 Automo- bilesalesplungedduetolackofconsumerism.137 Jobswerecut, taxeswentunpaid, and thepopulationfluctuated.138 Duetoits lackofrevenue, thecityitselffacedsuchgreathardshipthatit paidpolicemen, teachers, andothercivicworkersinpromissory

128 Bomey& Gallagher, supra note122. 129 JoelKurth, MikeWilkinson& LouisAguilar, Special Report—Six decades in Detroit: How abandonment, racial tensions and financial missteps bank- rupted the city,DETROIT NEWS (Oct. 4, 2013), http://www.detroitnews.com /article/20131004/METRO01/310040001 [http://perma.cc/5S3J-49WS]. 130 MARTELLE, supra note127. 131 HENRY FORD & SAMUEL CROWTHER, MY LIFE AND WORK (2008). See also Kurth, Wilkinson& Aguilar, supra note129. In thearticle, long-timeDetroit city residents describe their m em ories of looking back into Detroit’s past and seeingaUtopia. 132 FORD & CROWTHER, supra note131. 133 Id. 134 Bomey& Gallagher, supra note122. 135 Id. 136 Id. 137 Id. 138 Id. 258 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 notes, then known as “scripts.”139 Thecitystruggled, butthere wasatleastanintermediateendinsightwhenthenationwould calluponDetroitforhelp.140 ThecityofDetroitfoundanewpurposewiththeonsetofWorld WarII.141 Eventually, thecitycompletelyshutdown comm ercial automobilemanufacturingandbeganm anufacturingtanksand airplanes for the Allied forces.142 Jobs that had evaporated during the GreatDepression became availableagainand the industrialboom ofWorldWarII broughtnewfoundprosperityto thecityofDetroit.143 The economy stabilized and the city’s popula- tionsettled.144 Soonafterthewar,Detroitagainbecamethehub forAm ericanautom anufacturing.145 In fact,theU.S. Censusof 1960 revealedthatDetroithadthehighestper-capitaincomeof anyAm ericancityatthetime.146 WhileDetroitmaintaineditsfiscalopulencethroughoutthe majorityofthetwentiethcentury,thecityalsofacedsocialillsand drug issues that threatened the city’s populace as well as its prosperity.147 Although m uchofthe nation endured egregious hardshipsbroughtonbyracetensions,Detroitmayhavesuffered the worstofit. Finally, in1967, policeinvadedan unlicensed speakeasyoperated by African Am ericans, and a ruinous riot eruptedandleft43 dead, 1,189 injured, and2,000 buildingsde- stroyed.148 The violencewouldcontinue and eventuallycause m anyfamiliesandindividualstom oveoutofthecity.149 Thecity alsosufferedfrom theprevalenceofdrugs.150 According tothe

139 DETROIT PUB. LIBRARY, WARTIME DETROIT:THE ARSENAL OF DEMOCRACY, http://web.archive.org/web/20070901171535/http://www.detroit.lib.mi.us/Golden JubileeExhibit/GJ%20WEB/II_Wartime_Detroit.htm [http://perma.cc/MUW2 -5EPR]. 140 See id. 141 Id. 142 Id. 143 MARTELLE, supra note127. 144 See id. 145 See id. 146 Detroit is Dying Quickly,FREAKONOMICS (Mar.23, 2011),http://freako nomics.com/2011/03/23/detroit-is-dying-quickly/[http://perma.cc/BK26-AKTD]. 147 Kurth, Wilkinson& Aguilar, supra note129. 148 Id. 149 Id. 150 Id. 2016] FROM WRECKAGE COMES REASON 259

DetroitNews,theabuseofcrackcocaineservedasacatalystfor illnessandviolence.151 Bothhospitaladmittancesandcrimerates rosedramatically.152 Detroitbecameknown asthem urdercapital ofAm erica.153 In addition to a plague of social decay, Detroit’s steady de- clinewouldcontinueasthecityfellvictimtostunningfiscallosses during the 1970s.154 As warbroke outinthe MiddleEastin 1973, gaspricesspiked.155 TheDetroiteconomy, whichwasbut- tressed by gas-guzzling automobiles, faced an uphillbattle.156 Meanwhile, foreignautomakerswerefindingnew footinginthe automobileindustryandthreatenedtheAm ericanautoindustry withcompleteobsolescence.157 NotablejournalistPeterHitchins wrote that “the U.S. car industry lost the confidence even of patriotic Am ericans, and has never fully regained it.”158 BecauseDetroitreliedsoheavilyonthissingleindustry, the autoindustrywouldremaina comm onindicatorofthedifficulties ahead. Duringthe1980sand1990s,theMichiganautoindustry facedanimm ensedownturn.159 Tradeagreementswereputinto placethatostensiblyallowedAm erican manufacturerstoleave the country infavorofforeign countries.160 Therefore, when these and many other economic and industrial trends left Detroit’s

151 Id. 152 Id. 153 Id. 154 PeterHitchins, From Motown to Ghost Town: How the Once Mighty Detroit is Heading Down a Long, Slow Road to Ruin,DAILY MAIL (July9, 2011), http://www.dailymail.co.uk/news/article-2012971/From-Motown-Ghost -town-How-mighty-Detroit-heading-long-slow-road-ruin.html[http://perma.cc /U659-CXJZ]. 155 Id. 156 Id. 157 Id. 158 Id. 159 See RichardN. Block& DaleL. Belman, Automotive and Other Manu- facturing Industries in Michigan: Output, Employment, Earnings, and Collective Bargaining, 1980–2001, in MICHIGAN AT THE MILLENNIUM 145 (CharlesL. Ballard et al. eds., 2003) (providing an in-depth analysis of Michigan’s eco- nomicstatureduringthelastfewdecadesofthetwentiethcentury). 160 See BarryLynn, How Detroit Went Bottom-Up,THE AMERICAN PROS- PECT (Sept.19, 2009),http://prospect.org/article/how-detroit-went-bottom [http:// perma.cc/SN2T-WWZ5]. 260 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 autoindustryinaprecariousposition, thecity, too,founditselfon hardtimes. Finally, General Motors’s Rick Wagoner, Ford’s Alan Mulally, Chrysler’s Robert Nardelli, and the president of the United Auto WorkersUnion, RonGettelfinger, petitionedfora bailoutfrom Congressin2008.161 SittingbeforetheSenateBankingCommittee, the corporateexecutivescouldnotmusterlogicalorprecisean- swerswhenconfrontedwithwhatwouldotherwisebeconsidered fairlystraightforwardquestions.162 At one point, SenatorBob Corker of Tennessee retorted, “I just want the numbers!”163 Unsur- prisingly, the autoexecutivescame backtothe cityofDetroit empty-handed. After continued efforts to assuage Congress’s concerns,allbutFordwouldpartakeina bailoutfundedbythe U.S. Treasury.164 Thewoesoftheautoindustryprefacedwhat wastocomeofthecity.165

B. Detroit’s Chapter 9 Bankruptcy Filing

Despitetheabsenceofonesingulareventorpersonalityin Detroit’s history that led to the city’s financial collapse, there werestillpivotaldecisionsand circumstancesthathastenedor altogetherensuredthe downwardspiral.166 Whilethe reliance ontheautoindustrycertainlydid not help Detroit’s chances of successattheturnofthetwenty-firstcentury, m anyofthem ore overwhelmingdifficultiesthecityfacedstemm edfrom the city’s poorleadership.167

161 CHARLIE LEDUFF, DETROIT:AN AMERICAN AUTOPSY 82 (2013). 162 Id. 163 Id. 164 KimberlyAm adeo, Auto Industry Bailout (GM, Ford, Chrysler):Why the Big 3 Needed a Bailout and What It Cost the U.S. Taxpayer, US ECONOMY (Dec.21, 2014), http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm [http://perma.cc/3CZC-XY42]. 165 Padnani, supra note125. 166 Id. 167 See Bomey& Gallagher, supra note122. Oneofthefrequentchallenges Detroit’s leadership faced was trying to balance a budget and m ake cuts that favorlong-term reliefbutadverselyaffectshort-term gains.Few, ifany, were willingtorisetomeetthesechallenges. Id. 2016] FROM WRECKAGE COMES REASON 261

Detroit’s civic leadership has a storied past.168 Whilesomeof Detroit’s m ayors— such as Hazen Pingree and Frank Murphy— willgodown inhistoryassome ofthebestthenationhasever seen, m anyotherswillalsogodown assome ofthem ostinept and corrupt.169 Outoftheseineptand corruptm ayors, Kwame Kilpatrick, iswidelyregardedastheworstofthem.170 Because Detroitfaceda plethoraofissuesthatwentbackm anydecades, KwameKilpatrickshouldnotbesingledoutasthelonereasonfor Detroit’s affliction.171 However,hislegacyservesasam icrocosm oftheanguishanddespairthatbefellDetroit. During Kwam e Kilpatrick’s tim e inoffice, thecityofDetroit wasalready feeling the oppressiveapproachofbankruptcy.172 However,inanefforttoevadetotalfinancialcollapse,Kilpatrick m adedecisionsthatfavoredshort-term acquiescenceoverlong- term strategy.173 In acrime-riddencity, Kilpatrickcutthepolice forcebyover25 percent.174 Healsoreducedthenumberofpolice precincts, whichresulted inan exponentialincreaseinpolice responsetime.175 Thecombinationofthesedecisionsessentially madethecityunlivableformany. Althoughtheexodusawayfrom Detroithadstarteddecadesearlier,thepopulationcontinuedto dwindleas Detroitlosteven m oreofitstax revenue.176 The faultsofKwameKilpatrickwerem any, butthem ajorissuewas thathehadfavoredshort-term relief over long-term strategy— a

168 DanAustin, Meet the 5 Worst Mayors in Detroit History,DETROIT FREE PRESS (July23, 2014), http://www.freep.com/article/20140723/OPINION/3072 30054/Meet-5-worst-mayors-Detroit-history[http://perma.cc/J4KE-84FA]. 169 Id. 170 Id. (“‘Kilpatrick is more culpable— and his conduct more pervasive— than anyotherpubliccorruptiondefendantsentencedinrecentm em ory,’ federal prosecutors said. ‘The scale of his corruption was astonishing. The im pact on the region was devastating.’”). 171 Id. 172 Id. 173 Id. 174 Id. The author notes that Detroit’s police force went from 4,200 officers to3,000 officers. Id. 175 Id. 176 See Editor’s Note: The Harris Manifesto,DETROIT METRO TIMES (Apr.27, 2005), http://www.metrotimes.com/detroit/the-harris-manifesto/Content?oid=218 1304[http://perma.cc/R845-2MFX]. 262 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 strategy thatexacerbated Detroit’s financial condition.177 The majorconsequenceofthisfailedreliefwasthatthecityofDetroit facedunprecedentedmunicipaldebtwithnowaytopayitback.178 The breaking point for Detroit’s indebtedness occurred in early 2013. From 1998 to 2012, politicians from Michigan’s state government, seated in Lansing, cut Detroit’s state-shared revenue by 48 percent and withheld$172 million from the city.179 Duetotheserevenuecutsandthelossessufferedfrom the reduction of its tax base, Detroit leadership— including Kwam e Kilpatrick— began to reallocate funds in order to m eet short-term obligations.180 However,theseresponsesfurtherexacerbatedthe city’s destitute condition.181 Most of Detroit’s indebtedness arose from unfundedpensionbenefitstopreviouscivicemployeesand healthcareliabilitiesforemployeespastand present.182 Over half of the city’s budget was consum ed by these “legacy costs.”183 Thesedebtholdershadbeenshovedaside, despiteothercorner- cuttingstrategiesbyDetroitleadership.184 Theleveesoonbroke. In thesumm erof2013, KevynOrr,a prominentbankruptcy attorney at Jones Day, was appointed as the city of Detroit’s emer- gencym anagerina heavilycontestedsituationthatbroughtto lightmanystateconstitutionalconcerns.185 Theappointmentalso

177 Id. 178 BobAdelmann, Detroit’s Bankruptcy Plan Reveals Fraud in Funding Pensions,THE NEW AMERICAN (Feb. 10, 2014),http://www.thenewamerican.com /usnews/crime/item/17591-detroit-s-bankruptcy-plan-reveals-fraud-in-funding -pensions[http://perma.cc/3NNP-JJPE].Thisarticlesuggeststhatevenwhen Kwame Kilpatrick did try to address the pension liabilities, he did so by “clever legal circum vention” that allowed the city to exceed its debt lim it. Id. 179 See Bomey& Gallagher, supra note122. 180 Id. 181 Id. 182 Id. 183 See CharlieLeDuff, The Americans with Charlie LeDuff: Detroit’s Bank- ruptcy is Helping Police Do Their Jobs,YOUTUBE (June26, 2014),https://www .youtube.com/watch?v=zOWG8Xq3dZA [http://perma.cc/3EBQ-KY38]. 184 Austin, supra note168. 185 MonicaDavey& MaryWilliamsWalsh, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. TIMES (July18, 2013),http://www.nytimes.com/2013/07/19 /us/detroit-files-for-bankruptcy.html?pagewanted=all&_r=2& [http://perma.cc/5X RA-4YGZ]. 2016] FROM WRECKAGE COMES REASON 263 calledintoquestionthelegitimacyofstatelawsthatwerethen recentlypassedwiththeintentionoffuelinga pushforDetroit tofileforbankruptcy. In the end, the Michigan leadership, spearheadedbytheeffortsofGovernorSnyderand Em ergency ManagerOrr,optedforChapter9 bankruptcyinafinaleffortto savethecity.

C. Detroit’s Chapter 9 Eligibility

In som e ways, Detroit’s financialhistoryisanalogoustothe historiesofmanyotherbankruptm unicipalentities.Detroitcer- tainlywas notthe firstm unicipality toface bankruptcy in responsetoinsurmountabledebtwroughtbya m ultitudeofad- verseconditions.186 For exam ple, Detroit’s predecessor in the recordbooksforlargestm unicipalbankruptcy, JeffersonCoun- ty, Alabama, also had m illions— if not billions— in debt accrued through similardebtissuances, such asm unicipalbondsand retirementandhealthcareservicesrenderedtopastandcurrent civicemployees.187 However,Detroitisa uniquecase, especially initsm agnitude. Withitsdebtcalculatedsomewherebetween $18 and $20 billion,188 Em ergencyManagerKevynOrrand the financial manager’s team had to m ovequicklyinordertostop the bleeding. Subsequently, Orrimm ediatelyinitiatedprepeti- tionbankruptcyproceedings.189 TheHonorableJudgeStephenRhodes, sittingonthebench forthebankruptcycourtfortheEasternDistrictofMichigan, was assigned Detroit’s caseatthetriallevel.190 Hisfirstassignment was to rule on Detroit’s Chapter 9 eligibility under 11 U.S.C §109(c).191 Thistaskwasthebeginningofwhatwastobecome anarduousprocessofweedingthroughstateconstitutionallaw

186 MaryWilliamsWalsh, In Alabama, a County That Fell Off the Financial Cliff, N.Y. TIMES (Feb. 12, 2012),http://www.nytimes.com/2012/02/19/business /jefferson-county-ala-falls-off-the-bankruptcy-cliff.html?pagewanted=all [http:// perma.cc/K7HH-9TCR]. 187 Id. 188 Helms& Bomey, supra note1. 189 Id. 190 Id. 191 Id. 264 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 andbankruptcylaw whilealsom anagingtheoutwardchallenge of a vast num ber of creditors who actively contested Detroit’s eligibility. Despitethisaddeddifficulty, JudgeRhodesultimate- ly ruled in favor of Detroit’s Chapter 9 eligibility.192 Forthem ost part, Judge Rhodes gracefully considered the creditors’ arguments forineligibilitybutcamedown firm onwhyDetroitm aintained itseligibilityunder§109(c).193 The m ost pertinent conclusions reached in Judge Rhodes’s § 109(c) analysis were (1) that Detroit’s prepetition negotiations wereconductedingoodfaith;194 and (2) that Detroit “desire[d] to effect a plan to adjust such debts.”195 Thesedeterminationswould play a continued role later in Judge Rhodes’ opinion, in which he tackled Detroit’s good faith filingrequirementunder§921(c).196 In addition to challenges under § 109(c), Detroit’s creditor- objectorstookissue withthe petition being filedingoodfaith under§ 921(c).197 JudgeRhodesnotedthatsomeoftheseobjec- tionsmayhavebeenbroughtonbypotentiallyvalidfindingsstem- ming from importantconcerns.198 However, had JudgeRhodes considered these objections without looking at the petition’s broader context, Detroit’s creditor-objectors could have thwarted the city’s only reasonable m eans of recovery. Judge Rhodes could haveonlylookedattheintentandactionsofthosefilingthepeti- tion oradopted the basicChapter11 test. Furthermore, the court could have sim ply decided on the creditor-objectors’ claim thatEm ergencyManagerOrrand GovernorSnyderactedwith improprietyinthe firstplace. In bothofthesecircumstances, which were used in other Chapter 9 cases, Detroit’s chances of recoverycouldhavebeenlost.Instead, JudgeRhodesappropri- ately viewed Detroit’s circum stances wholly to decide the § 921(c) and § 109(c)eligibilitythresholds, inlightofthe possibilityof validconcernsraisedbythecreditor-objectors.199

192 Id. 193 Id. 194 11 U.S.C. § 109(c)(5)(2012);In re CityofDetroit, 504 B.R. 97, 110 (Bankr.E.D. Mich. 2013). 195 11 U.S.C. §109(c)(4)(2012);In re CityofDetroit,504B.R. at172. 196 In re City of Detroit, 504 B.R. at 179–89. 197 Id. at112. 198 See id. at187. 199 See id. at 187–89. 2016] FROM WRECKAGE COMES REASON 265

III. DETROIT’S BANKRUPTCY PETITION AND THE §921(C) GOOD FAITH REQUIREMENT

In thelastsectionofIn re Detroit, JudgeRhodesaddressed Detroit’s good faith filing requirem ent under § 921(c).200 By this point,JudgeRhodeshadalreadyruledthatGovernorSnyderand Em ergencyManagerOrrdidnotviolateMichigan stateconsti- tutionalconcerns.201 Adding ontothis, JudgeRhodesconvinc- inglyarrivedattheconclusionthatDetroithadsufficientlym et § 921(c)’s good faith petitioning requirem ent.202 However,Judge Rhodesusedconsiderabletactnotonlytoaddressthecreditor- objectors’ claim s but also to address the good faith requirem ent inlightofcircumstancesnottraditionallyprescribedby§921(c) caselaw.203 Whathearrivedatwasa m orecompleteand thor- oughanalysisoftheissuesimplicatedunder§921(c).204 By doing so, Judge Rhodescarved a path fora m orepracticableand principledgoodfaithanalysis.However,JudgeRhodeshadtogo togreatlengthstoputthisanalysistogether. The creditor-objectors(many ofwhom wererepresentedby some ofthe bestattorneysinthe country)broughtup every instancepossibleinordertoshow thatDetroithadpetitionedfor Chapter9 bankruptcyinbadfaith.205 Indeed, JudgeRhodesnoted dozensoftestimonialsthatallegedimproprietyinallstageslead- ingup tothebankruptcy.206 Forexample, unionsrepresenting Detroit’s police and firefighters argued “one of the City’s express purposes... istoattempttousetheseChapter9 proceedingsto illegallyimpairtheconstitutionallyprotectedpensionrightsof em ployees and retirees.”207 However, thisargument,aswellas

200 Id. at 179–89. 201 See id. at 154–67. 202 See id. at 179–89. 203 MelissaB. Jacoby, The Detroit Bankruptcy, Pre-Eligibility, 41 FORDHAM URB. L.J. 849, 853 (2014) (“The written decision finding Detroit eligible for Chapter9 respondedtoaremarkablenum ber of objections in detail.”). 204 Id. at 865 (“[W]hat happens in this bankruptcy could set a blueprint for future m unicipal cases.”). 205 See In re City of Detroit, 504 B.R. at 181–87. 206 See id. 207 Id. 266 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

manyothers,provedtolackmeritbecauseJudgeRhodesalready ruled thatMichigan stateconstitutionalityconcerns wereun- founded. Ultimately, a largeportionoftheobjectionsweredis- missedupona findingthattheywereeithertoovagueorsimply unsupported by particularevidencetom ovethe resultinthe creditor-objectors’ favor.208 Whileaddressingthem ostpotentofthecreditor-objectorcon- cerns, JudgeRhodeslaidouta four-partanalysistodetermine whetherDetroithadm ettherequirementsforgoodfaithfiling under§921(c).209 Itisimportanttonote, however,thatnowhere intheopiniondidJudgeRhodesstatethatthefour-partanalysis heprovidedforconsidering§ 921(c)goodfaithissueswastobe understoodasthedefinitivetestmoving forward. Furthermore, JudgeRhodescitedotherprominent§921(c)caseswhilesetting up his test for Detroit’s good faith assessm ent.210 Therefore, m uch of Judge Rhodes’s test is akin to past Chapter 9 assess- m ents,211 but Judge Rhodes’s test also explores deeper and m ore equitablefacetsassociatedwiththeconsequencesofa dismissal of a Chapter 9 petition under § 921(c). Judge Rhodes’s test offers a compelling hybridofm any ofthe prominent§ 921(c)cases whilealsoconsideringthecomplexity of Detroit’s bankruptcy case.

A. Step One: Contemplation of Chapter 9 Relief

The first step in Judge Rhodes’s test was to ask whether “the City’s financial problem s are of atypecontemplatedforChapter 9 relief.”212 Atthisstage, JudgeRhodes argued that Detroit’s

208 Id. at 183 (“The Court finds, however, that in som e particulars, the record does support the objectors’ view of the reality that led to this bank- ruptcyfiling. Itis, however, notnearlysupportedinenough particularsfor the Court to find that the filing was in bad faith.”). 209 Id. 210 Id. at187. Thetwo primarycasesJudgeRhodesusedinestablishing hisgood faith analysiswere Stockton and N.Y. City Off–Track Betting. However,healsousedindividualcasestosupporteachstepofhisgoodfaith determination. See id. at 187–89. 211 The first two— and arguably the first three— parts of the “Rhodes Test,” havebeenexploredinpreviouscasesthataddress§921(c).However,looking into the prejudice placed upon the city’s residents was a largely unprecedented stepinChapter9 caselaw. 212 In re CityofDetroit,504B.R. at187. 2016] FROM WRECKAGE COMES REASON 267 financialsituationwasexacerbated by the city’s shortcom ings, but that the city’s problem s were very rightfully in line with the typescontemplatedforChapter9 relief.213 In theopinion, Judge Rhodeswrote:

ItistruethattheCitydoesnothavea clearpictureofitsas- sets,income,cashflow, andliabilities,likelybecauseitsbook- keeping and accounting systems areobsolete. Butthisonly suggeststheneedforrelief.Itdoesnotsuggestbadfaith. More- over, as the City’s financial analysts’ subsequent m onths of work have sharpened the focus on the City’s finances, the re- sultingpicturehasonlybecomeworse.214

Here, JudgeRhodesnotedthatmanyoftheobjectionspushedfor bythecreditor-objectorswerenotgroundedinindicationsoflack ofgoodfaith, butm oreproperlyexpresseda m ultitudeofareas wherethecityhasexperiencedegregiousproblemsandshortcom- ings.215 Moreover,JudgeRhodesconcludedthatChapter9 islikely theonlyremedythataffordsthecitytheprotectionitneedsto solvetheseissues.216 What is most important about Judge Rhodes’s analysis here is that he focused on the municipality’s objectively identifiableproblemsthatcalledforChapter9 reliefand noton thesubjectiveargumentspushedforwardbytheopposingparties.

B. Step Two: Consistency with the Remedial Purpose of Chapter 9

In his second consideration of Detroit’s good faith under § 921(c), Judge Rhodes looked to see if the “reasons for filing [for Chapter9]areconsistentwiththeremedialpurposeofChapter 9.”217 JudgeRhodesnotedthatthe remedialpurposesoughtby Detroit was to receive a “breathing spell” in order to “establish a plan for adjustm ent.”218 This language m irrors the “highly sub- jective”219 elementof§ 109(c)(4)inwhicha m unicipalitym ust

213 Id. 214 Id. 215 Id. 216 Id. at189. 217 Id. at187. 218 Id. (quoting In re Cty. ofOrange, 183 B.R. 594, 607 (Bankr. C.D. Cal. 1995)). 219 COLLIER ON BANKRUPTCY, supra note69. 268 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235

“desire[ ] to effect a plan to adjust such debts.”220 Here, Judge Rhodesdelvedintoanypossibleulteriorm otivesofthem unici- pality’s leaders and looked for em piricalevidence, ratherthan guessingatthesubjectiveintentionsofthem unicipality.221 Judge Rhodes ultim ately found that Detroit’s bankruptcy petition was filed for the exact reason of achieving a “breathing spell” so that it could adjust its debt.222 The creditor-objectors argued that the city’s endeavor toimpairthepaymentofpension obligations was inconsistent with any remedialpurpose for Chapter9.223 However,JudgeRhodesreducedthisargumentto semanticsbyillustratingthatimpairingpensionpaymentswith the helpofChapter9 is, inthe netresult, equivalenttodis- chargingdebtowedtocreditors.Ultimately, itisconsistentwith alawfulavailmentoffederalbankruptcylaw.224

C. Step Three: Detroit’s Efforts to Improve the State of its Finances

In exploringa thirdfactorin Detroit’s good faith petitioning requirement, JudgeRhodesm ade a difficultdetermination of whether the m unicipality had “m adeeffortstoimprovethestate of its finances prior to filing, to no avail.”225 JudgeRhodesquickly determined thatEm ergencyManagerKevyn Orrhad gone to considerable lengths in order to im prove the m unicipality’s fi- nances.226 Judge Rhodes noted that the efforts included “reducing the numberofCityemployees, reducing laborcoststhrough implementationoftheCityEm ploymentTerms, increasingthe City’s corporate tax rate, working to im prove the City’s ability to collecttaxes,increasinglightingrates,deferringcapitalexpend- itures, reducing vendorcosts, and reducing subsidiestothe DetroitDepartmentof Transportation.”227 Theseeffortsproved

220 11 U.S.C. §109(c)(4)(2014). 221 In re City of Detroit, 504 B.R. at 187–88. 222 Id. at187 (quotingIn re Cty. ofOrange,183 B.R. 594, 607 (Bankr.C.D. Cal.1995)). 223 Id. at188. 224 Id. (citing In re Chilhowee R–IV Sch. Dist., 145 B.R. 981, 983 (Bankr. W.D. Mo.1992)). 225 Id. 226 Id. 227 Id. at188. 2016] FROM WRECKAGE COMES REASON 269 insufficienttostaveofftheinevitablebankruptcypetition, butthey pavedthewayforhealthydecisionstobem adeunderChapter9 protections.228 Furthermore, Judge Rhodesreduced any argu- m enttoanabsurditybystatingthatdeny[ing]Detroit’s “oppor- tunitytoreorganizeinchapter9 based on lackofgood faith wouldbetoignorefiscalrealityandthegeneralpurposesofthe Bankruptcy Code.”229

D. Step Four: Residents of Detroit Potentially Prejudiced

The biggestdepartureJudgeRhodestook inruling on De- troit’s § 921(c) good faith was in his final step, where he asked whether “[t]he residents of Detroit will be severely prejudiced if this case is dism issed.”230 JudgeRhodesnotedthatthisconsider- ation was of “param ount” im portance.231 However,thisconsider- ation was unique to Detroit’s bankruptcy case. This uniqueness is likelyduetoalongstandingbankruptcyprinciplethatthedebtors and creditorsarethe onlypartieswithwhom bankruptcylaw shouldconcernitself.232 However, Chapter9 isonceagaindis- tinctfrom otherformsofbankruptcyinthisregard. Thetruebene- fit of considering the prejudice to the city’s residents is that if thedismissaloftheChapter9 bankruptcywouldresultinpreju- dicetothem, thenitvalidatesthenecessityforChapter9 relief. Ultim ately, the city of Detroit’s residentshavebenefitedm ore than anybody by Judge Rhodes’s decision to allow the city bank- ruptcyprotection.

E. The Effects of Detroit’s Eligibility on the City

With over one hundred parties actively opposing Detroit’s bankruptcy and challenging it from a multitude of angles, Detroit’s Chapter9 eligibilitywastenuous.233 Asmentionedabove,ifJudge Rhodeshadtakenanapproachsimilartom anyotherChapter9 cases,whichturnedonthegoodfaithrequirementunder§921(c),

228 Id. 229 Id. 230 Id. 231 Id. at189. 232 Plank, supra note 16, at 516–18. 233 Jacoby, supra note203, at853. 270 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 then Detroitcouldhavelostitsonlyvaluableopportunityfor recovery.234 However, the im portance of Detroit’s Chapter 9 eligibility, inlightofpotent§921(c)challenges,isunmistakable inhow thecityhasusedthiseligibilitytoreviveitself. Although Detroit’s bankruptcy exit plan was approved in No- vemberof2014, thepositiveeffects of Detroit’s Chapter 9 eli- gibility were felt alm ost im m ediately upon Judge Rhodes’s decision. Withpermissiontogoahead, KevynOrrtookboldand dramaticstepstohelptheailing city. Thecityreceivedm uch- needed flexibilitybecauseitcouldusethe m oneysaved from paying offimm ediatedebtobligationsonfunctionsessentialto the city’s operation.235 Theseoperationswouldhavebeenm uch m ore difficult without Chapter 9 protection. One of Kevyn Orr’s strongest moves as Detroit’s Em ergencyManagerwasappointing a new ChiefofPolice.236 HeappointedJamesCraigandallotted extrarevenue toadd m oreofficersand provide betterequip- m ent.237 JamesCraigbroughtm uch-needed experiencetothe position, asheformerlyservedasthechiefofpoliceforthecityof Cincinnati.238 Due to these changes m ade under Orr and Craig’s direction, crimehasgonedown.239 Detroithasalsofoundnew lifewithincreasedindustryfrom sourcesbotholdand new.240 Detroit’s fabled auto industry has

234 Id. 235 See also CharlieLeDuff, The Americans with Charlie LeDuff: Detroit’s Bankruptcy is Helping Police Do Their Jobs,YOUTUBE (June26, 2014),https:// www.youtube.com/watch?v=zOWG8Xq3dZA [https://perma.cc/TAK3-3VLU] (“Ironically, because Detroit is bankrupt, Detroit police are doing better. Less moneybeingpaidtothecreditorsmeansmore money invested in the police.”). 236 GenaDamron& MattHelms, Detroit’s New Police Chief James Craig: ‘I’ve Come Home,’ DETROIT FREE PRESS (May15, 2013),http://archive.freep .com/article/20130515/NEWS01/305150098/Detroit-police-chief-Craig [http:// perma.cc/PG64-V7B7]. 237 Id. Someofthem uch-neededfundscamefrom generousdonationsfrom Detroit’s Big Three autom akers. GM, Ford, and Chrysler offered Detroit $22 m illion to help revitalize the city’s civic functions. Id. 238 Id. 239 BarbaraL. McQuade, U.S. Attorney: Violent Crime is Falling in Detroit, DETROIT NEWS (Oct. 10, 2014),http://www.detroitnews.com/story/opinion/2014 /10/10/mcquade-violent-crime-falls-detroit/16992633/ [http://perma.cc/E8SA -HDFB] (“Detroit is on pace to have its fewest homicides in the city since 1967.”). 240 See TimAlberta, Why Detroit’s New Mayor Thinks His City Is Poised for an Economic Reinvention,NAT’L JOURNAL (Feb. 25, 2014),http://www.national 2016] FROM WRECKAGE COMES REASON 271 found renewedsuccess.241 Therealestatemarketindowntown Detroithasseenasignificantspike.242 Em ploymenthasrisen.243 Recognizinghigheremploymentrates,thepopulationhasbegun toreturn.244 Even foreign investorshavepinnedtheireyeson Detroit as an inevitable “comeback story.”245 However,therecent revitalizationwouldlikelynothavebeenpossibleifDetroithad notgonethroughbankruptcy.246 The “com eback story” m ay not have begun without Judge Rhodes’s part in Detroit’s bankruptcy. Indeed, JudgeRhodeswenttoconsiderablelengths toad- dress Detroit’s good faith petitioning in accordance with § 921(c). Suchan in-depthanalysisisunparalleledinotherChapter9 cases. Yet it is inescapable that Judge Rhodes’s test is, at m ost, a judiciallyrenderedguideline for conducting Chapter 9’s good faithfiling analysis. In itspresentincarnation, itisnot, and

journal.com/next-economy/america-360/why-detroit-s-new-mayor-thinks-his-city -is-poised-for-an-economic-reinvention-20140225 [http://perma .cc/6E3W-B7BZ] (interviewing MayorDuggan on the economiccomeback ofDetroit);Dan Rafter, Life After Bankruptcy? in Detroit, it’s Getting Better,RE JOURNALS (Dec.12, 2013),http://www.rejournals.com/2013/12/12/life-after-bankruptcy-in -detroit-its-getting-better/[http://perma.cc/8VUG-B59Z](discussingthegrowing realestatemarket);ShahrukhKhan, Detroit’s Bankruptcy: Motor City’s Path to Recovery,HARVARD UNIV. INST. OF POLITICS, http://www.iop.harvard.edu/de troit%E2%80%99s-bankruptcy-motor-city%E2%80%99s-path-recovery [http:// perma.cc/GA46-UXGE](discussingtheeliminationofabandonedstructuresand theincreaseininvestment). 241 DanAlexander, Four Months After Bankruptcy, Michigan Leaders Re- frame Detroit as America’s Comeback City,FORBES (Nov. 8, 2013),http://www .forbes.com/sites/danalexander/2013/11/08/four-months-after-bankruptcy-m ichi gan-leaders-reframe-detroit-as-americas-comeback-city/. 242 Rafter, supra note240. 243 Alexander, supra note241. 244 Id. 245 See Foreign Billionaires Are on a Detroit Real Estate Buying Spree, MODELD (Apr. 13, 2015), http://www.m odeldmedia.com/inthenews/foreign investment041315.aspx[http://perma.cc/T9S7-E9BC]. 246 See generally Khan, supra note 240. This article discusses Detroit’s ef- fortstoprovidea sustainableeconomicfoundationinthewakeofthebank- ruptcy proceedings (“Toying with Detroit’s balance sheet issues will not be enough, however, tobring the cityback. Detroithasbeen stabilizing itself slowly:bydiversifyingitseconomy and becominghome tonew, powerfulfi- nancial institutions.”). Id. 272 WILLIAM & MARY BUSINESS LAW REVIEW [Vol.7:235 likelywillnotbe, m andatoryauthoritythatothercourtsm ust follow. However, witha substantialgap instatutoryauthority andsilencefrom Congress,thereisperhapsnom orepracticable or principled approach than Judge Rhodes’s test for determ ining Chapter9 eligibilityinlightofcreditor-objectorgoodfaithchal- lenges. Therefore, untilamendmentstothe BankruptcyCode provide new statutory scaffolding for § 921(c)’s good faith re- quirem ents, Judge Rhodes’s test can stand out as particularly instructive. Itprovidesm anageablepointsofassessmentinthe good faithanalysisand ensuresthatthe bestinterestsofall partiesina m unicipalbankruptcycasearebeing considered. Municipalities and bankruptcy courts alike can look to Detroit’s casetofindapragmaticandprincipledapproachwhereadearth oflegislative instruction and statutory authority has lefta substantialgapinbankruptcylaw.

CONCLUSION:SPERAMUS MELIORA |RESURGET CINERIBUS

The city of Detroit’s flag is em blazoned with two wom en ges- turingtowardstwoverydifferentcityscapes.On theleft,asorrow- fulwomanisfacinga burningcitysilhouette, whichrepresents the once-fallen Detroitafterthe greatfireof1805. Below this scene, the Latin words “speramus meliora” areinscribed, which translates to “we hope for better things.” On the right, however, a womanwitha m oreuprightandconfidentpostureispointing towardsa lush, reconstructedcityscape. Thispicturesitsatop the Latin words “resurget cineribus,” which m eans “it will rise from the ashes.” The im agery depicted in Detroit’sflagisa fittingdisplayof the city’s past and current hardships. Indeed, the last seven decades of Detroit’s historym arkthesecond time thecityhas fallen. Thistime, thecitysufferedtheslow burnofineptitude, failure,andcorruption. However, throughout Detroit’s Chapter 9 bankruptcy pro- ceedings,thecityhasbegunthelong, slow riseoutoftheashes. Althoughthehardshipisfarfrom over, thecityofDetroithas takensignificantstepssinceitwasaffordedbankruptcyprotec- tionunderChapter9. Theyear2014 m arkedthearduousand painfulprocessofdebtrestructuring, butthe cityfound relief andevensuccessthroughitsbankruptcyprotection. 2016] FROM WRECKAGE COMES REASON 273

JudgeRhodesultimatelyruledthat Detroit’s eligibility could notbethwartedbyitscreditors.Hisrulingconsideredfourm ain principles.Eachoftheseprincipleshelpedpaintthelandscapeof § 921(c)’s good faith requirem ent. However, before Judge Rhodes opinedonthem atter,theseconsiderationshadnotbeensynthe- sizedintooneopinionandm ethodizedwithinexistingcaselaw. Histestcanbringa practicableand principledgoodfaithstan- dardtom unicipalbankruptcyproceedings. Now, otherm unici- palitiesandbankruptcycourtsalikecanlooktoIn re Detroit as asignalofstabilitywithinanimpreciseandprecariousrealmof bankruptcyjurisprudenceandAmericacanlooktoDetroittofind hopethatit,too,canfindreasoninwreckage.