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Business Restructuring Alert: New emergency manager bill passed by Michigan Legislature

Today (December 27, 2012), Governor Snyder signed into law the Local Financial Stability and Choice Act (LFSCA) just days after its introduction in the Michigan House of Representatives and passage by the Michigan Legislature. The LFSCA replaces Public Act 4, the 2011 emergency manager law repealed by voters on November 6, 2012. It provides additional tools to address the numerous municipal financial crises in the State of Michigan.

Under LFSCA, if the state determines a financial emergency exists, the municipality has four options:

  1. Mediation to reach an ultimate settlement with interested parties
  2. Entering into a consent agreement with the state to review and determine all fiscal matters
  3. Allowing the appointment of an emergency manager
  4. Filing a Chapter 9 bankruptcy

Under the LFSCA, municipal leaders have the power to remove the emergency manager by two-thirds majority vote, or ask the governor to remove the emergency manager after a year on the job. In addition, the LFSCA provides the municipal leaders an opportunity to present counter-proposals to those set forth by the emergency manager. The office of Michigan Governor Rick Snyder stated publicly that the purpose of the LFSCA is to provide struggling municipalities with more local control and options over their future, and to ensure the proper tools exist to protect schools and other community needs.

The repealed Public Act 4, originally signed into law by Governor Snyder on March 16, 2011, increased powers given to emergency managers from those powers included in Public Act 72, Michigan’s first, and arguably outdated, emergency manager law enacted in 1990. More specifically, Public Act 4 expressly repealed Public Act 72 and granted Michigan’s governor broad powers to intervene in a municipality’s financial emergency and to appoint an emergency manager with the power to, among other things, break a municipality’s collective bargaining agreements. Governor Snyder’s office said the LFSCA would respect Michigan voters’ repeal of Public Act 4 by permitting input from local municipal officials, as listed in the four options above, rather than mandating increased powers to the governor and emergency managers. In an effort to shield the LFSCA from the risk of being overturned by referendum, the LFSCA was signed into law as a spending bill containing approximately $770,000 in appropriations to cover emergency managers’ salaries. Spending bills are not subject to repeal by referendum.

The repeal of Public Act 4 has, in effect, resurrected Public Act 72. More specifically, in a lawsuit challenging the validity of Public Act 72, Ingham County Circuit Court Judge Rosemarie Aquilina held ineffective the language of Public Act 4 that repealed Public Act 72 in light of the repeal of Public Act 4 itself. Judge Aquilina’s ruling aligned with an order issued by the Michigan Court of Appeals in November, and an opinion from Michigan Attorney General Bill Schuette, that Public Act 72 remains in full force and effect.

The LFSCA is unlikely to have a direct impact on the City of Detroit’s financial condition. The bill did not receive enough votes to take immediate effect, so the LFSCA would not take effect until March and would not affect the state’s current financial review under Public Act 72. Estimates have projected that Detroit could have a deficit of anywhere from $62 million to $122 million by June 30, 2013 and will be unable to pay city employees, bills and debts. If the City of Detroit files for Chapter 9 bankruptcy protection, it will be the largest municipal bankruptcy in U.S. history.

McDonald Hopkins’ Business Restructuring and Bankruptcy Practice understands the growing complexities in this area of law, has the experience to provide solutions in matters involving economic distress and stands ready to provide you with the insight necessary to navigate these uncertain times.

For more information, please contact:

Stephen M. Gross

Jeffrey S. Grasl

Jayson B. Ruff

Jason L. Weiner

Joshua A. Gadharf

Business Restrucuring and Bankruptcy 

The twists and turns of business restructuring are complex and demanding. Our attorneys approach every case with creativity and insight to ensure the solutions are cost-effective and practical. At every turn, you can be confident that our attorneys will guide you through the process, always providing practical and informed advice. We are positioned to respond to the special demands of a variety of matters in a wide range of industries, including health care, automotive, retail/distribution, real estate/construction, telecommunications, and mining/exploration.

Carl J. Grassi, President
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© 2012 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.