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Sixth Circuit Denies Detroit Pensioners’ Appeal under Equitable Mootness Doctrine

In Ochadleus v. City of Detroit (In re City of Detroit), Nos. 15-2194, 2337, 2353, 2371, 2379 (6th Cir. Oct. 3, 2016), the Sixth Circuit Court of Appeals affirmed an order prohibiting Detroit pensioners from challenging cuts to their pensions under the equitable mootness doctrine. The appeal arose out of the City’s bankruptcy, in which “the City crafted a complex network of settlements and agreements with its thousands of creditors and stakeholders, memorialized those agreements in a comprehensive Plan, and obtained the bankruptcy court’s ratification of that Plan in a final Confirmation Order.” One aspect of the plan involved the reduction of certain municipal-employee pension benefits under the City’s General Retirement System. At the time of Detroit’s bankruptcy filing, the pension plan was underfunded by $1.879 billion, therefore forcing the City to reduce the plan by 27% during the bankruptcy. In an effort to prevent such drastic cuts, the City reached a settlement with pensioners under which the City obtained outside funding, including from the City, the State of Michigan, and certain philanthropic organizations, totaling $816 million in exchange for a release of all claims. Overall, the settlement reduced pensions by 4.5% and eliminated cost-of-living increases; reduced retiree health coverage and eliminated dental, vision, and life insurance; and set out a mechanism for the partial recoupment of excess annuity savings funds distributions. The pensioners settlement, in addition to numerous other settlements, eliminated approximately $7 billion in debt and freed approximately $1.7 billion in revenue for reinvestment into City services and infrastructure. While 73% of the City’s pensioners voted in favor of the settlement, resulting in the plan’s confirmation, the remainder appealed, arguing that their pensions should be exempt from reduction under the plan. The Sixth Circuit held otherwise due to the equitable mootness doctrine. Equitable mootness is “a prudential doctrine that protects the need for finality in bankruptcy proceedings and allows third parties to rely on that finality by preventing a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract.” In deciding whether an appeal is equitably moot, the court examines: (1) whether a stay has been obtained; (2) whether the plan has been “substantially consummated;” and (3) whether the relief requested would significantly and irrevocably disrupt the implementation of the plan or disproportionately harm the reliance interests of other parties not before the court. In this instance, the Sixth Circuit held, “all three factors favor the application of equitable mootness: the appellants did not obtain a stay; the Plan has been substantially consummated, inasmuch as numerous significant—even colossal—actions have been undertaken or completed, many irreversible; and the requested relief of omitting the bargained-for (and by majority vote agreed-upon) pension reduction would . . . unravel the entire Plan and adversely affect countless third parties, including . . . the entire City population.” Overall, the court’s decision was “not a close call,” as “the doctrine of equitable mootness was created and intended for exactly this type of scenario.”

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