On November 7, 2014, Judge Rhodes confirmed the City of Detroit’s Eighth Amended Plan for the Adjustment of Debts. This decision resulted in the severe reduction of many creditors’ claims against the City. However, due to objections made by Demorest Law Firm on behalf of its clients with condemnation and inverse condemnation claims against the City, the Court explicitly excluded these clients’ claims from being discharged in the bankruptcy.
Condemnation (and inverse condemnation) claims are claims that arise under the Fifth Amendment of the Constitution. Under this provision, the government is required to pay “just compensation” for the taking of private property for public use. With regard to the treatment of condemnation claims in a municipal bankruptcy, the City of Detroit argued that these claims constitute “unsecured claims” subject to reduction in bankruptcy. At one point, the City’s proposed settlement of unsecured claims would result in the recovery of only 10 – 13% of the amount owed by the City.
Demorest Law Firm argued that these claims do not constitute merely “unsecured claims” that can be reduced to pennies on the dollar. Instead, these claims represent basic property rights that neither the City, nor the State, nor the Federal government can abrogate. The City of Detroit chose to take private property without the consent of the property owners and it may not now avoid its Constitutional obligations to pay for that property with the shield of bankruptcy.
At the suggestion of the United States Assistant Attorney General, who reviewed the briefs of both the City and Demorest Law Firm and found that “impairment of claims for just compensation arising under the Fifth Amendment would raise substantial Constitutional concerns,” the Court used its discretion under Section 944(c)(1) of the Bankruptcy Code to bar the discharge of condemnation claims against the City. In doing so, the Court specifically named the Demorest Law Firm clients whose condemnation claims were protected from being discharged by the City.
If you have any questions regarding the government’s obligation to pay just compensation for the taking of private property for public use, please contact the attorneys at Demorest Law Firm.
