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Contracts and the Constitution

Curt Guyette

Curt Guyette

By Curt Guyette
Special to the Michigan Citizen

A Pontiac lawsuit, which could have far-reaching implications throughout Michigan, was heard by the U.S. Court of Appeals for the Sixth Circuit in Cincinnati last week.

The case was brought by city retirees who had their healthcare benefits slashed by then-Emergency Manager Louis Schimmel in December 2011. A federal lawsuit was filed on behalf of retirees in June 2012. Among other allegations, it was claimed that Schimmel, given the circumstances, didn’t have the authority to break a contract arrived at through collective bargaining. If such a contract is going to be discarded, it’s argued in the lawsuit, the proper way to do so is through bankruptcy.

It is a high-stakes issue because the court, in essence, is being asked to void a key component of the state’s Emergency Manager Law, Public Act 4, which followed the original emergency financial manager law PA72. Such a ruling could, conceivably, set the precedent for decisions regarding PA 436, the current Emergency Manager Law that was passed one month after voters rejected PA 4 in a referendum.

When the Pontiac case first went before U.S. District Court Judge Lawrence P. Zatkoff, he was asked to stop the cuts from being implemented until all the legal issues could be sorted out.  After the judge refused to do so, the retirees’ lawyer, Alec Gibbs, appealed that decision.

Here’s where things get complicated.

A three-judge appellate panel, in a 2-1 ruling, said there were state law issues the lower court should decide before trying to answer the constitutional questions. For one thing, there is strong evidence the state Legislature illegally implemented PA 4 immediately. As noted in court filings, “Two-thirds of the (House) members did not support that motion (as required by law) and the combination of eye-witness testimony, contemporaneous written documents and the videotape of the actual proceedings will prove conclusively the required two-thirds majority was not attained.”

That immediate effect allowed the Pontiac emergency manger to take actions that lacked legal authority.

The city, joined by the state, then appealed the decision to send the case back to Judge Zatkoff with the order that he sort out those issues, asking the entire 15-member Sixth Circuit Court of Appeals to weigh in on the matter.

Instead of the state law issues, however, the court, March 19, focused much of its attention on the authority given emergency mangers to break contracts. And how the court rules could have precedent-setting potential that extends far beyond Pontiac.

“During oral arguments, the Sixth Circuit was primarily interested in the federal questions raised on appeal, including the Contracts Clause and Bankruptcy Clause preemption,” reported retiree attorney Gibbs. “Many judges seemed concerned the law placed the power to break contracts in the hands of one person. If the court finds the state of Michigan cannot give this power to emergency managers, it would restore the integrity of promises made to retirees and honored for decades before PA 4 and PA 436 gave EMs the power to turn our cities into broken promise zones.”

Critics of both PA 4 — which greatly expanded the scope of power wielded by state-appointed receivers in cities and school districts facing financial crises — and the current EM law, which in many ways mirrors its predecessor, would certainly agree with the comment of Appeals Judge Raymond Kethledge.

“It just strikes me as totally unprecedented that one official can walk around and terminate and modify contracts,” Kethledge said Wednesday. “It’s just amazing.”

The ACLU of Michigan filed what’s known as an amicus curiae brief in the case, supporting the contention that Schimmel’s actions violated the contracts clause of the U.S. Constitution.

As pointed out in that brief, “… the way city retirees were treated in this case appears to be part of a disturbing trend throughout Michigan in which state-appointed ‘emergency managers’ threaten to slash compensation and benefits that have been promised to civil servants in exchange for work they have already performed, and after those civil servants have relied on legally binding collective bargaining agreements in making important employment-related decisions and other choices throughout their lives.”

Whatever the full court of appeals decides, there is a strong likelihood the U.S. Supreme Court will be asked to decide the matter.

Because it directly involves Pontiac retirees, the case hasn’t received much attention from Detroit’s mainstream media. But this is a very important case, and everyone in Michigan should be paying attention to it.

Curt Guyette is an investigative reporter for the ACLU of Michigan. He can be contacted at 313.586.6834 or

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