Judge says Detroit bankruptcy filing was unconstitutional, must be withdrawn

[Alan M]

39. The State May Have to Pay them anyway

While Bankruptcy law is a Federal and Federal law trumps state law, bankruptcy law is unique in that it uses a State’s law to determine what is exempt from the bankruptcy estate. In this case the Pension funds would seem to be exempt.
Furthermore, this is a totally untested part of Bankruptcy law because there have been so few municipal bankruptcies and this is the largest one ever. However, I believe existing Federal bankruptcy case law also says a municipality can’t file if the filing would be contrary to state law and that also seems to be the case here. It will be exciting to watch and I suspect the litigation will drag on for some time.

Anyway even if it doesn’t t stand I am not so sure the effect of that clause in Michigan’s constitution doesn’t set the State up as having guaranteed those pensions. If the State Courts would find that argument persuasive the State of Michigan could be on the hook for making those pensions good even if the city of Detroit was discharged from those pension obligations.