A Guide To The City Of Detroit's Emergency Manager (Thursday, March 21, 2013)

A GUIDE TO THE CITY OF DETROIT’S EMERGENCY MANAGER

On March 14, 2013, an emergency manager was appointed for the City of Detroit. The Jaffe Insolvency Group has closely followed the progress of this event and has developed an expertise on the law concerning the emergency manager, so we can better represent our clients ensnared in this web—and it promises to be a huge web.

As an aid to our clients, we are providing some basic information discussing the effects of the appointment of an emergency manager on business people who deal with the City of Detroit. If you would like to have further discussions, please call Larry Rochkind (248-727-1444).

The emergency manager was appointed under a statute enacted in 1990. However, that statute will be superseded by a new emergency manager act that becomes effective March 28, 2013. Once effective, that new statute will govern all matters concerning the emergency manager, even if he was appointed under the earlier statute. As a result, this discussion focuses on the new statute, which is the one that will be pertinent.

We can provide more detail on request and we look forward to assisting you as this process develops.

1. What is an emergency manager?
 
An emergency manager is appointed by the state government after a process of investigating whether a financial emergency exists and the Governor confirms that conclusion. Governor Snyder did so on March 1, 2013. Any person appointed must be an individual and must have at least five years' experience and demonstrable expertise in business, financial, or local or State budgetary matters. He or she may but is not required to be a resident of the local government.

2. What role does the government of the City of Detroit play after the appointment of an emergency manager?
 
The emergency manager replaces the Mayor and the City Council. Once the emergency manager is appointed, the Mayor and the City Council have no further authority. The compensation of the Mayor and city Council is automatically eliminated upon appointment of the EM, who can restore the compensation on such terms as he determines. The emergency manager can also exercise any power or authority of “any officer, employee, department, board, commission, or other similar entity of” the government of the City of Detroit, whether elected or appointed. The power of the emergency manager supersedes all of these.

The emergency manager has the right to issue orders to all City of Detroit officials and employees, and all CONTRACTORS, as necessary to resolve the financial emergency. The emergency manager can bar from all government premises, electronic mail and information systems any person who fails to comply with his orders.

In short, the emergency manager and only the emergency manager runs the show.

3. Can the emergency manager terminate my contract with the City of Detroit even if I am not in default?
 
Yes. The emergency manager can modify, reject or terminate any contract at any time for any reason.

4. If the emergency manager terminates or modifies my contract with the City of Detroit when I am not in default, can I collect damages?

The statute does not provide for the payment of damages. But there is nothing in the statute that prohibits the collection of damages, according to applicable law, for breach of contract if the emergency manager unilaterally terminates or modifies a contract. However, the likelihood of collecting damages is problematic, due to both the litigation process and the possibility of a bankruptcy filing by the City of Detroit.

5. If my contract is terminated, will there be a rebidding process in which I can participate?
 
The statute requires competitive bidding only for contracts over $50,000. Procedures for that competitive bidding and for contracts under that amount are subject to the determination of the emergency manager.

6. Can the emergency manager sell assets owned by the City of Detroit?
 
Yes, with some conditions, other than the assets of public utilities. He can sell assets if the City of Detroit government and the Governor approve. If the City of Detroit government does not approve, the City of Detroit can offer an alternative proposal, and the state government will make the ultimate decision.

7. How can I be sure the emergency manager will pay me under my current contract?
 
You can’t. But we have developed legal techniques in similar situations that go a long way to ensuring that contracting parties do not need to deliver or perform absent payment.

8. What are the risks of entering into a contract with the emergency manager? Are these risks significant, and if so, can anything be done to minimize them?
 
There is always the risk the emergency manager will not pay promptly or will not pay at all, as in any business deal, but heightened by the City of Detroit’s problematic cash flow. We offer legal techniques to minimize that risk. There is also the risk that the contract may be rejected in a bankruptcy such that you would be paid only a percentage of what is owed to you.

9. Will the City of Detroit be required to honor the agreements entered into with the emergency manager when    the emergency manager is no longer in control?
 
The emergency manager will enter into contracts on behalf of the City of Detroit. They will be enforceable against the City of Detroit after the emergency manager is gone so long as the City of Detroit is still around and does not file bankruptcy.

10.  How long will the emergency manager retain his authority?

The emergency manager serves until (i) the financial emergency is resolved, (ii) the Governor removes the emergency manager at the request of the City of Detroit within the first 18 months, but then the City of Detroit must proceed with an arbitration process, (iii) the City Council and the Mayor vote to remove him more than 18 months after his appointment, but then the City of Detroit must enter into a consent decree with the State Treasurer or an arbitration process.

11. Once the emergency manager leaves, how does transfer of control return to the government of the City of Detroit?

The emergency manager must adopt a 2 year budget beginning on his termination for all contractual and employment agreements. The City of Detroit is not permitted to amend that budget unless the State Treasurer approves. In addition, the City of Detroit cannot revise any order or ordinance implemented by the emergency manager during the first year after his termination.

12. Can the emergency manager file bankruptcy for the City of Detroit?
 
The emergency manager can file bankruptcy with the approval of the Governor. The Governor may place conditions on that approval. Once in bankruptcy, the emergency manager continues to act as the representative of the City of Detroit in the bankruptcy case.