The DPS Bailout – The Bankruptcy Alternative Not Taken

Part I - No, The Richmond USD Case Did Not Challenge U.S. Bankruptcy Court Authority

Daniel Howes ImageGovernor Snyder browbeat the Michigan Legislature to approve the $ 617 million bailout of Detroit Public Schools which he signed today by regaling them with a parade of horribles which would occur if the bailout was defeated and DPS was forced to file for bankruptcy. Daniel Howes regurgitated Governor Snyder’s compelling tales of impending doom delivered behind closed doors in a Detroit News article, but was any of it true?

Right at the top of Governor Snyder’s parade of horribles was the Federal bankruptcy filing of the Richmond [California] Unified School District on April 19, 1991 . Governor Snyder portrayed the outcome of this action as the U.S. Bankruptcy Court denying the petition and ordering the State of California to financially bail out the district.  From Daniel Howes’ article:

There is scant precedence for school districts filing for bankruptcy, the Snyder administration found. In 1990, according to an administration letter to state Rep. Laura Cox, R-Livonia, the Richmond Unified School District in Northern California filed for bankruptcy because of $42.5 million in debt. The judge ruled the district could not be protected by the court in bankruptcy and ordered the state to provide the district with operating funds.

Nothing could be farther from the truth.

Richmond CaliforniaThe Richmond Unified School District did file for bankruptcy on 19 April 1991 (Snyder and his stenographer Howes have the year wrong), but the State of California acquiesced when a California (county level) Superior Court Judge ordered the State to bailout the USD 10 days later. The State of California and the Richmond USD never sought the protection of the (legally superior) U.S. Bankruptcy Court against the (legally inferior) county court ruling. The order, which required the State of California to bailout the Richmond USD, came from Contra Costa Superior Court Judge Ellen James, a county judge whose authority was similar to that of a Michigan Circuit Court judge.

The very same argument played out at the state level during the Detroit bankruptcy. Judge Rosemary E Aquilina On July 19, 2013, Judge Rosemarie E. Aquilina of the Ingham County Circuit Court found that the bankruptcy filing by Detroit violated Article IX, Section 24, of the Michigan Constitution and ordered Governor Rick Snyder to withdraw the filing immediately.  On July 24, U.S Bankruptcy Court Steven W. Rhodes stayed all the state court proceedings.  The U.S. Bankruptcy Court eventually ruled Detroit eligible for Chapter 9 on December 3, 2013.  Federal bankruptcy law prevailed over the Michigan Constitution.  As the very same (now retired) U.S. Bankruptcy Judge Steven Rhodes is now the ‘Transition Manager’ of DPS, Governor Snyder should have known that the Richmond USD case was not a valid legal precedent.

The U.S. Bankruptcy Court for Northern California never ruled on the Richmond USD bankruptcy petition, nor did it order the State of California to assume the debts of the USD. The only significant U.S. Bankruptcy Court ruling in the Richmond USD case was allowing the withdrawal of the Richmond USD bankruptcy petition in October 1991, over the objections of the parents and the California Teachers Association who had won the Superior Court ruling!

Had Governor Snyder told the truth, he would have more properly disclosed the 1983 bankruptcy petition of the San Jose Unified School District. Here U.S. Bankruptcy Court Judge Seymour Abrahams declared the San Jose USD bankrupt and threw its contracts out under Chapter 9 of the Federal Bankruptcy Code. Judge Abrahams established a clear, unchallenged precedent that Chapter 9 of the U.S. Bankruptcy Code can indeed be used to impair the contracts and obligations of a financially struggling school district.

The Richmond USD analogy was a complete prevarication. U.S. Bankruptcy Court has the very same authority over a financially troubled school district’s obligations under Chapter 9 that they wielded over Detroit’s sorry financal morass.  Because DPS is under State control, the State of Michigan would have had the dominant role in a Chapter 9 DPS filing.  The Michigan Legislature swallowed a lie, pure and simple.  California’s bailout of the Richmond USD was an act of political acquiescence, not bankruptcy law.

Now that we have established the complete authority of the U.S. Bankruptcy Court over bankrupt school districts, we will examine the nature of the Detroit Public Schools debts and obligations in the next part of this series.

You Betcha! (8)Nuh Uh.(0)

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