Detroit bankruptcy case puts federalism on center stage

Detroit’s bankruptcy case has the potential to be the latest in a series of high-profile power conflicts between the federal government and states with constitutional roots.

800px-Buildings_around_Hart_PlazaIn case you missed it, Detroit has filed for Chapter 9 bankruptcy protection, claiming more than $18 billion in debts (including more than $8 billion in pension and retiree health-care liabilities).

The state’s governor and a city manager approved the move, but a state court then said the bankruptcy filing violated the Michigan state constitution.

For now, the bankruptcy ball has been bounced to a federal court, as a judge and squadrons of lawyers wrangle over the case.

The issue of federalism, the power-sharing agreement between our central government and state governments, was one of the key issues at the Constitutional Convention in 1787. Since then, the federalism debate has taken place in the Supreme Court, regional courts, Congress, the White House, and on battlefields within the United States.

The Detroit case sets up a potential courtroom battle between different parts of the Constitution.

The Supremacy Clause in Article VI of the Constitution states that “This Constitution, and the Laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding.”

However, the 10th Amendment says, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

The concept of nullification–that states can overrule federal laws–predated the Civil War by decades, and the ultimate issue of nullification (secession) was settled in the 1860s. Since then, there’s been a flow of federalism or states’ rights cases heading to the Supreme Court, on a regular basis.

This June, the Supreme Court dealt with issues such as voter ID laws, affirmative action and voting rights that pitted states’ interests against federal laws.

Another recent case that involves the Supremacy Clause was Gonzales v. Raich, which reaffirmed that the laws passed by Congress regulating controlled substances trumped state laws that approved marijuana for medical use. (Two states, Colorado and Washington, are testing that decision by legalizing recreational marijuana use.)

But the Court doesn’t always side with the federal government on cases in which it has a conflict with states.

In the 2012 Affordable Care Act decision, the Court sided with the states on an important part of the case: that the federal government couldn’t place conditions on states that accepted or declined expanded Medicaid funding.

However, during that same term, the Court ruled against an attempt by the state of Arizona to impose aggressive laws about immigration that conflicted with federal regulations and powers.

Whether the Detroit case makes it to the Supreme Court remains to be seen, but it’s gotten a lot of attention for some obvious reasons.

On Wednesday, federal bankruptcy Judge Steven Rhodes told a packed courtroom that Detroit’s bankruptcy filing will be settled in federal court, without getting involved in lawsuits filed in state court. CNBC said that Rhodes cited that nothing in the 10th Amendment barred federal jurisdiction in the case.

The attorneys for pension funds, unions and other creditors wanted state courts in Michigan take up the legality of the bankruptcy filing. Instead, the fight will happen in Rhodes’ federal court room.

In an opinion piece for Thomson Reuters, Alison Frankel laid out the basic long-term constitutional issue.

“As I’ve written any number of times … no federal bankruptcy court has ruled whether municipalities may cut pension benefits through a Chapter 9 plan. The issue pits the Supremacy Clause and the Bankruptcy Code against the Contract Clause and the 10th Amendment, which reserves to states the right to manage their own affairs,” she said.

Constitution Daily contributor Lyle Denniston, who has covered the Court for more than 54 years, analyzed the case for us, earlier this week (and before Rhodes’ decision was announced).

“The developing clash between federal bankruptcy powers and the Michigan state constitution is a reminder that national authority does not always go unchallenged at the state level, even though the Constitution’s Supremacy Clause, in Article VI, does tip the balance sharply in favor of national power,” he said. “And that may be especially true, when Congress’s authority over bankruptcy includes the explicit power to make it uniform among the states.”

Another factor, at least on a national level, could be the municipal bankruptcy proceedings in two California cities: Stockton and San Bernardino.

Whatever happens in Detroit may take a long time to make its way through the legal system. The city will have to win approval of its eligibility for Chapter 9 protection and then spend at least a year in court beyond that deadline.

And its impact could be felt far beyond Detroit.

“For Motown, the question will be settled in court. The outcome will send ripples far and wide, affecting the holders of municipal bonds, the insurers that guarantee such bonds, state and municipal public-sector workers and, last but not least, taxpayers around America,” said The Economist in a recent analysis of the Detroit problems on pensions nationwide.

The magazine points to conservative estimates that pensions for state workers nationwide are underfunded by at least 27 percent.

Scott Bomboy is the editor-in-chief of the National Constitution Center.

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