I feel only a bit sheepish for snatching Melissa Jacoby‘s Federalism Form and Function in the Detroit Bankruptcy (Yale J. on Reg. forthcoming) from all the other sections that could claim it, notably Constitutional Law and Courts Law. Although it is the richest law review article I have read in a while—sweeter for being the first in a cycle—I worry that it might fall through the interdisciplinary cracks. Debt rarely takes center stage in constitutional theater these days, ditto bankruptcy procedure in procedure. Even by bankruptcy standards, the project might seem exotic—a deep dive into audio recordings and other primary sources from Chapter 9 (municipal) bankruptcy hearings. Whatever your discipline, you would be mad to miss it. The subject is the biggest-ever public debt restructuring under a statutory scheme. The article is packed with doctrinal, theoretical, and methodological insights. The treatment is sophisticated and empathetic. The policy salience is obvious, as Detroit taps the markets, Chicago totters, Puerto Rico defaults, and the United Nations and the Pope endorse bankruptcy for states.
Chapter 9 of the U.S. Bankruptcy Code is one of the few statutory regimes in the world for public debt restructuring. Its effort to balance federalism and democratic deference against the need to put an over-indebted (likely mismanaged) political unit on a sound financial footing has inspired imitation and criticism. Chapter 9 combines a high barrier to filing with extraordinary deference to the debtor’s policy decisions once it files. There is no bankruptcy estate, no equity, and no liquidation. In theory, states retain sovereignty over municipalities, while federal bankruptcy courts must keep their noses out of municipal affairs. Some commentators have argued that such reticence fuels debtor moral hazard; others have used it to highlight the limitations of Chapter 9 as a framework for bigger, more complex political units.
Until recently, the debate was mostly academic because real political units never restructured under Chapter 9; most of the filing activity involved special tax districts and the like. Detroit’s bankruptcy, coming on the heels of Vallejo and Stockton, CA, Central Falls, RI, and Jefferson County, AL, among others, is arguably a game changer. Having shed over $7 billion of debt in 17 months, Detroit comes closest to testing the proposition that statutory bankruptcy could deliver durable debt relief without compromising people power.
Federalism Form and Function gets at the heart of the question in a novel way. Taking a cue from complex litigation, Jacoby sifts through months of courtroom recordings in real time to draw a framework for managerial intervention by the bankruptcy judge. Those who know the procedure scholarship would not be surprised to discover that courts can exercise tremendous power over the debtor municipality and its creditors through seemingly mundane channels, such as fixing the calendar, appointing mediators and experts, monitoring costs, and conditioning motion rulings. Yet this insight upends the bankruptcy consensus about how Chapter 9 actually works, and poses uncomfortable questions for those who would extend the model to states and countries on the assumption that statutory bankruptcy and third-party adjudication are easily compatible with debtor democracy.
Judge Steven Rhodes used process leverage to force a stream of information out of city officials, then used the information to force the officials to reckon with tort claims, pensions, water services, and other big challenges in a systematic fashion. The all-star team of outsiders assembled under the judge’s direction did exactly what outsiders are meant to do. Unburdened by local political and financial ties, often out of public view, they made practically irreversible decisions with an eye to long-term viability. The outsiders seemed to be people of good will and reasonable priorities: restoring city services, preserving irreplaceable cultural assets, protecting the vulnerable. The end was impressive—a record-fast restructuring, oodles of new money for the city, a renewed sense of possibility—but was it impressive enough to justify the means?
The author comes across as unsettled about the implications of judicial power she documents in Detroit. I was unsettled by my own reaction—I came away from the article in awe of the “Detroit Blueprint.” Intense collaboration among circuit, district and bankruptcy judges, state and local officials left little room for deviation in Detroit. It is as if every part of the process were meticulously rigged to permit a particular range of expressions and outcomes. Thinking outside the box is encouraged; wandering into the woods is unthinkable. No Syriza-Schauble clash-of-democracies circus here. Detroit stayed on the path; now the future looks bright and the all-star team moves on.
Where I live, it is not hard to imagine a city becoming a political football for outsiders whose good will and good judgment are suspect. For all the problems one might have with the Detroit outcome, the Detroit Blueprint could be used in much scarier ways. Federalism Form and Function and its sequels are well-placed to illuminate the possibilities and design the safeguards. No time to waste.