Article on Chapter 9 Bankruptcy & Charitable Trust Law

Elizabeth K. Butler recently published an Article entitled, “How Fair Art Thou?”—Managing the Intersections of Charitable Trust Law and Municipal Bankruptcy, 93 U. Det. Mercy L. Rev. 691 (2016). Provided below is an abstract of the Article:

As the largest municipality to file for chapter 9 bankruptcy in United States history, the City of Detroit and its bankruptcy presented exceptional challenges for the city’s citizens and municipal bankruptcy law. The City of Detroit (the “City”) encompasses a massive 138.75 square miles of southeastern Michigan but is home to only 680,250 people. Compared to cities of near equal population (Boston–a tiny 48.28 square miles with 655,884 people; Seattle–83.94 square miles with 668,342 people), Detroit’s footprint is vast. This massive area is a remnant of more bustling days in the “Motor City,” mainly the 1940s and 50s, when Detroit held nearly two million residents. This enormous population manned the City’s automotive plants and entertained itself in Thomas Edison’s new, electrified downtown. But, by the 1960s, hard times and out-of-state manufacturing saw the flight of residents and businesses, diminishing the City’s tax base and weakening its economy. Without the tax dollars necessary to maintain its infrastructure, the City left many of its assets to crumble. The result was devastating for Detroit’s citizens. They were left behind in a rotting city with a level of destruction that damaged even the sturdiest human spirit. In 2013, this sad state of affairs left the city’s emergency manager, Kevyn Orr, with no choice but to ask the governor if he could petition for the municipality’s debt relief under chapter 9 of the U.S. Bankruptcy Code.

Once the City filed for chapter 9, the City’s creditors could not ignore such a lucrative payout. They clamored for the court to order the collection’s sale. Yet, the DIA’s supporters cried that liquidating the collection would seriously delay the City’s revitalization. Moreover, if the court ordered a liquidation, the DIA’s donors could contest the sale and sue the City for breaching its fiduciary duties as the collection’s charitable trustee.

The conflict between the City’s creditors and the DIA’s supporters pulled the bankruptcy court into uncharted territory: How should a federal bankruptcy court treat a municipality’s charitable trust assets, protected under state charitable trust law, in chapter 9 bankruptcy? This Note attempts to answer that question by (1) summarizing chapter 9 and its intersection with charitable trust law; (2) examining possible arguments under this analysis; and (3) sketching a guide for insolvent municipalities seeking to protect their charitable trust assets through mediation. If insolvent municipalities follow this guide, they may present strong arguments for the confirmation of their chapter 9 plans and may more efficiently exit bankruptcy.