Pensioners, Bondholders, and Unfair Discrimination in Municipal Bankruptcy

Abstract

Detroit recently confirmed its plan of debt adjustment under which the city has endeavored to adjust its pension obligations. The court’s confirmation order and oral opinion on the record present what is perhaps the most significant decision regarding a key question facing any city attempting to adjust pensions in bankruptcy: can a city propose to pay its pension claimants significantly more than its other unsecured creditors? This question involves interpreting the Bankruptcy Code’s unfair discrimination rule.The Detroit bankruptcy court applied a novel interpretation of unfair discrimination, eschewing the relatively thin body of case law interpreting this rule, and suggesting that the rule should have a municipal bankruptcy-specific meaning.This article contends that there is no need for such a specialized interpretation of unfair discrimination. Many of the factors that motivated the court’s departure from the case law can actually be addressed more effectively under the case law developed for corporate reorganization. Adhering to the corporate reorganization statute has statutory and historical support. Further, such a rule would provide a more workable structure for determining when discrimination is unfair.