City of Pontiac Retired Employees v. Louis Schimmel

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 14a0094p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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CITY OF PONTIAC RETIRED EMPLOYEES ┐

ASSOCIATION; DELMER ANDERSON; THOMAS │

HUNTER; HENRY C. SHOEMAKER; YVETTE TALLEY; │

DEBRA WOODS; JOHN CLAYA, │ No. 12-2087

Plaintiffs-Appellants, │

>

│

│

v.

│

│

LOUIS SCHIMMEL, Individually and in his official │

capacity as Emergency Manager of the City of │

Pontiac; CATHY SQUARE, Individually and in her │

official capacity as the Director of Human │

Resources and Labor Relations for the City of │

Pontiac; CITY OF PONTIAC, │

│

Defendants-Appellees,

│

│

BILL SCHUETTE, Attorney General of Michigan, │

Intervenor-Appellee. │

│

┘

Appeal from the United States District Court

for the Eastern District of Michigan at Detroit.

No. 2:12-cv-12830—Lawrence P. Zatkoff, District Judge.

Argued: March 19, 2014

Decided and Filed: May 5, 2014

Before: BATCHELDER, Chief Judge; BOGGS, MOORE, COLE, CLAY, GIBBONS,

ROGERS, SUTTON, COOK, McKEAGUE, GRIFFIN, KETHLEDGE, WHITE, STRANCH,

and DONALD, Circuit Judges.

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COUNSEL

ARGUED: Alec Scott Gibbs, LAW OFFICE OF GREGORY T. GIBBS, Flint, Michigan, for

Appellants. Stephen J. Hitchcock, GIARMARCO, MULLINS & HORTON, P.C., Troy,

Michigan, for Appellees. Aaron D. Lindstrom, OFFICE OF THE MICHIGAN ATTORNEY

1

No. 12-2087 City of Pontiac Retired Employees Ass’n, et al. v. Schimmel, et al. Page 2

GENERAL, Lansing, Michigan, for Intervenor-Appellee. ON BRIEF: Alec Scott Gibbs,

Gregory T. Gibbs, LAW OFFICE OF GREGORY T. GIBBS, Flint, Michigan, for Appellants.

Stephen J. Hitchcock, John C. Clark, John L. Miller, GIARMARCO, MULLINS & HORTON,

P.C., Troy, Michigan, for Appellees. Aaron D. Lindstrom, Heather S. Meingast, OFFICE OF

THE MICHIGAN ATTORNEY GENERAL, Lansing, Michigan, for Intervenor-Appellee.

Richard Soble, SOBLE ROWE KRICHBAUM LLP, Ann Arbor, Michigan, Daniel S. Korobkin,

Michael J. Steinberg, AMERICAN CIVIL LIBERTIES UNION FUND OF MICHIGAN,

Detroit, Michigan, John C. Philo, MAURICE & JANE SUGAR LAW CENTER FOR

ECONOMIC & SOCIAL JUSTICE, Detroit, Michigan, for Amici Curiae.

THE COURT delivered a per curiam order. McKEAGUE, J. (p. 9), delivered a separate

concurrence, in which BATCHELDER, C.J., joined.

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ORDER

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PER CURIAM. Legal, factual, and equitable considerations have developed significantly

since the district court denied the plaintiffs’ request for a preliminary injunction almost two years

ago. In light of these developments, we vacate the district court’s denial of injunctive relief and

remand for further proceedings.

I. BACKGROUND

The basic facts of this case are set out in the panel’s majority and dissenting opinions.

See City of Pontiac Retired Emps. Ass’n v. Schimmel, 726 F.3d 767, 769–71, 779–80 (6th Cir.

2013). In brief, Michigan’s Governor appointed Louis Schimmel as emergency manager for the

City of Pontiac. In December 2011, April 2012, and May 2012, under authority granted to him

by Michigan’s Public Act 4, Schimmel issued orders that would both reduce and eliminate health

care benefits of retired City employees.

In June 2012, the City of Pontiac Retired Employees Association and its representatives,

Delmer Anderson, Thomas Hunter, Henry Shoemaker, Yvette Talley, and Debra Woods (the

“retirees”), filed a putative class action against Schimmel, the City of Pontiac, and Cathy Square,

the City’s director of human resources and labor relations. Among other things, the retirees

claimed that the orders were prohibited by the Bankruptcy Code and violated the Contract and

Due Process Clauses of the United States Constitution.

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At the same time, the retirees moved to enjoin the City from implementing the proposed

changes to their health care benefits. The district court denied their request for a temporary

restraining order, but it scheduled a hearing to consider their request for a preliminary injunction.

The court heard argument from the parties in July 2012, and it denied preliminary injunctive

relief a week later. The retirees appealed, the district court stayed the case, and the emergency

manager’s orders took effect.

After the parties had filed their principal briefs in this court, Michigan voters repealed

Public Act 4 in November 2012. The Michigan Legislature responded the next month by

enacting Public Act 436, which granted Schimmel powers substantially similar to those he had

under Public Act 4. Under this reenacted authority, Schimmel issued orders in July 2013 that

eliminated all health, prescription drug, dental, life, disability, vision, and hearing insurance for

the retirees until “June 30, 2015, or for so long as the City remains in receivership, whichever is

longer.”

We reversed the district court’s decision in August 2013 and remanded the case for

additional fact-finding and full consideration of potentially dispositive state-law issues. City of

Pontiac Retired Emps. Ass’n, 726 F.3d at 769, 778–79. This court then agreed to rehear the case

en banc and allow the Michigan Attorney General to intervene on behalf of the State of

Michigan. The district court had jurisdiction over the retirees’ claims arising under federal law,

28 U.S.C. § 1331, and we have jurisdiction over the district court’s interlocutory order denying

the grant of an injunction, id. § 1292(a)(1).

II. ANALYSIS

A. Standard of Review

The district court properly identified the four factors it must balance when considering a

motion for preliminary injunction: “(1) whether the movant has a strong likelihood of success on

the merits; (2) whether the movant would suffer irreparable injury without the injunction;

(3) whether issuance of the injunction would cause substantial harm to others; and (4) whether

the public interest would be served by issuance of the injunction.” PACCAR Inc. v. TeleScan

Techs., LLC, 319 F.3d 243, 249 (6th Cir. 2003), abrogated on other grounds by KP Permanent

Make-Up, Inc. v. Lasting Impression I, Inc., 543 U.S. 111 (2004). “When a party seeks a

No. 12-2087 City of Pontiac Retired Employees Ass’n, et al. v. Schimmel, et al. Page 4

preliminary injunction on the basis of a potential constitutional violation, ‘the likelihood of

success on the merits often will be the determinative factor.’” Obama for Am. v. Husted,

697 F.3d 423, 436 (6th Cir. 2012) (quoting Jones v. Caruso, 569 F.3d 258, 265 (6th Cir. 2009)).

Whether the movant is likely to succeed on the merits is a question of law we review de novo.

NAACP v. City of Mansfield, 866 F.2d 162, 169 (6th Cir. 1989). We review “for abuse of

discretion, however, the district court’s ultimate determination as to whether the four preliminary

injunction factors weigh in favor of granting or denying preliminary injunctive relief.”

Tumblebus Inc. v. Cranmer, 399 F.3d 754, 760 (6th Cir. 2005). This standard is deferential, but

the court may reverse the district court if it improperly applied the governing law, used an

erroneous legal standard, or relied upon clearly erroneous findings of fact. NAACP, 866 F.2d at

166–67.

As an initial matter, the emergency manager’s orders issued in December 2011 and April

2012 under Public Act 4 have been superseded by orders issued in July 2013 under Public Act

436. The retirees’ claims for injunctive relief from the orders issued under Public Act 4,

however, still present a live case or controversy before us. Where a legislative enactment

forming the basis of a live case or controversy is superseded by a legislative enactment that has

not changed substantially from the initial one, the federal courts retain jurisdiction. See Ne. Fla.

Chapter of Associated Gen. Contractors of Am. v. City of Jacksonville, 508 U.S. 656, 662 & n.3

(1993). In such circumstances, the preferred procedure is to remand for reconsideration under

the amended law, see Green Party of Tenn. v. Hargett, 700 F.3d 816, 824 (6th Cir. 2012), which

we do here. Moreover, the superseding orders do not affect the retirees’ claims for damages

caused by the orders issued under Public Act 4.

B. Likelihood of Success on the Merits

First, the retirees argue that § 903(1) of the Bankruptcy Code prohibits the emergency

manager’s orders reducing their health care benefits from binding them. Section 903(1) provides

that “a State law prescribing a method of composition of indebtedness of such municipality may

not bind any creditor that does not consent to such composition.” 11 U.S.C. § 903(1). The plain

language of this section is not limited to bankruptcy proceedings. The retirees’ Bankruptcy Code

claim turns on whether Public Act 4 (or Public Act 436, to the extent relevant on remand)

No. 12-2087 City of Pontiac Retired Employees Ass’n, et al. v. Schimmel, et al. Page 5

prescribes a method of composition of indebtedness that binds the retirees without their consent

and, if so, whether principles of state sovereignty preclude application of § 903(1) in this case.

The record and briefing were not sufficiently developed to permit the district court, or this court,

to consider this and related issues.

Second, the retirees argue that the emergency manager’s orders violated the Federal

Constitution’s Contract Clause. This claim turns in part on whether the emergency manager was

exercising legislative authority when he issued the orders under Public Act 4. See Ross v.

Oregon, 227 U.S. 150, 162 (1913). A Contract Clause claim must be based on a legislative act

because the clause’s prohibition “is aimed at the legislative power of the state, and not at the

decisions of its courts, or the acts of administrative or executive boards or officers, or the doings

of corporations or individuals.” New Orleans Water-Works Co. v. La. Sugar Ref. Co., 125 U.S.

18, 30 (1888). Still, the Contract Clause reaches “every form in which the legislative power of a

state is exerted,” including an “order of some other instrumentality of the state exercising

delegated legislative authority.” Ross, 227 U.S. at 163. Whether actions “are, in law and fact, an

exercise of legislative power depends not on their form but upon whether they contain matter

which is properly to be regarded as legislative in its character and effect.” INS v. Chadha, 462

U.S. 919, 952 (1983) (quoting S. Rep. No. 54-1335, at 8 (1897)) (internal quotation marks

omitted). Some of the orders unilaterally modified collective bargaining agreements, and

another repealed a local ordinance. The district court concluded, without citation to legal

authority, that the emergency manager’s actions were not an exercise of legislative power

because the emergency manager “did not enact any laws.” The court conducted no further

analysis of and made no factual findings about whether the orders are properly regarded as

legislative in character and effect.

In the event the challenged orders are determined to be an exercise of legislative

authority, the Contract Clause claim also turns on whether the impairment of retiree health care

benefits was necessary and reasonable to address the City’s fiscal emergency. See U.S. Trust Co.

of N.Y. v. New Jersey, 431 U.S. 1, 25 (1977). For a substantial impairment of a contract to be

reasonable and necessary, the state must not “impose a drastic impairment when an evident and

more moderate course would serve its purposes equally well,” nor act unreasonably “in light of

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the surrounding circumstances.” Id. at 31. Furthermore, “a State is not completely free to

consider impairing the obligations of its own contracts on a par with other policy alternatives.”

Id. at 30–31. The district court conducted no analysis of whether the reductions and eliminations

were necessary and reasonable when made, nor did it consider what, if any, practical alternatives

existed. Again, the record central to a determination of this issue was not adequately developed

before the district court.

Third, the retirees argue that the City violated the Fourteenth Amendment by depriving

them of their health care benefits without due process of law. A procedural due process claim

requires a showing that the plaintiff has been deprived of a protected property interest without

adequate process. Hahn v. Star Bank, 190 F.3d 708, 716 (6th Cir. 1999). “A contract, such as a

collective bargaining agreement, may create a property interest.” Leary v. Daeschner, 228 F.3d

729, 741 (6th Cir. 2000). But to have a property interest in a contractual benefit, a person must

“have a legitimate claim of entitlement to it.” Bd. of Regents of State Colls. v. Roth, 408 U.S.

564, 577 (1972). This issue was not considered thoroughly by the district court. Moreover, we

cannot properly assess the retirees’ claim without analyzing the collective bargaining agreements

in their entireties, which were not before the district court when it considered this issue. Based

on excerpts alone, “it is difficult to discern the intent of the contracting parties and whether

health care benefits were guaranteed indefinitely or were instead subject to change.” City of

Pontiac Retired Emps. Ass’n, 726 F.3d at 788 (Griffin, J., dissenting). Furthermore, the district

court did not consider whether, as a threshold matter, the retirees’ procedural due process claim

is viable in light of Atkins v. Parker, 472 U.S. 115 (1985), and Bi-Metallic Inv. Co. v. State Bd. of

Equalization, 239 U.S. 441 (1915).

C. Irreparable Harm and Equitable Factors

The district court concluded that the retirees could not face irreparable harm because their

benefits were reduced but not completely eliminated. But “[n]umerous courts have found that

reductions in retiree insurance coverage constitute irreparable harm, meriting a preliminary

injunction.” Hinckley v. Kelsey-Hayes Co., 866 F. Supp. 1034, 1044 (E.D. Mich. 1994)

(collecting cases); see also Welch v. Brown, No. 13-1476, 2014 WL 25641, at *9 (6th Cir. Jan. 3,

2014) (“In totality, the affidavits and testimony in this case indicate that Plaintiffs’ medical

No. 12-2087 City of Pontiac Retired Employees Ass’n, et al. v. Schimmel, et al. Page 7

treatment may be interrupted by Defendants’ modifications, and such a disruption in care

constitutes irreparable harm.”). The district court failed to consider that a reduction in health

care benefits can cause irreparable harm.

In addition, factual considerations apparently have changed considerably during the

pendency of this appeal. For one, after oral argument to the initial panel, and under authority

granted by Public Act 436, the emergency manager issued orders eliminating all retiree health

care benefits. The orders remain in effect until June 30, 2015, or so long as the City is in

receivership—whichever is longer. For another, the City no longer has an emergency manager,

but it remains in receivership under control of a city administrator and a transition advisory

board.

These changes alter the equitable concerns balanced by the district court when it denied

the preliminary injunction. Moreover, the City claims that it could not provide the relief the

retirees seek because the particular health insurance in effect when the collective bargaining

agreements were signed or when the retirees retired is no longer commercially available. The

Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), too has

changed the health care landscape. The prudent course of action requires the district court to

examine, with the assistance of fuller briefing and a more developed record, the legal, factual,

and equitable considerations now in place.

III. CONCLUSION

For the foregoing reasons, we vacate the district court’s order denying a preliminary

injunction and remand for further proceedings consistent with this court’s order. On this general

remand, the parties and district court should develop a more thorough factual record supporting

carefully considered legal arguments about the following: (1) whether, under § 903(1) of the

Bankruptcy Code, Public Act 4 (or Public Act 436, to the extent relevant) prescribes a method of

composition of indebtedness that binds the retirees without their consent and, if so, whether

principles of state sovereignty preclude application of § 903(1) in this case; (2) whether the

emergency manager’s orders were legislative acts under the Contract Clause; (3) whether the

reductions and eliminations of health care benefits were “necessary and reasonable” under the

Contract Clause; (4) whether the retirees’ procedural due process claim is viable in light of

No. 12-2087 City of Pontiac Retired Employees Ass’n, et al. v. Schimmel, et al. Page 8

Atkins and Bi-Metallic; and (5) assuming the Due Process Clause’s procedural protections apply,

whether the collective bargaining agreements, considered in their entireties, establish protected

property rights.

The district court should also consider whether injunctive relief is proper in light of the

equitable considerations now facing the parties and the public. The parties and the district court

need not focus on the state-law issues presented to this court en banc. Finally, the district court

should permit the parties to supplement the record before it, perhaps through abbreviated

discovery or at an evidentiary hearing.

It is so ordered.

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CONCURRENCE

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McKEAGUE, Circuit Judge, concurring. I fully concur in the court’s ruling today, but

write separately to afford one point of clarification.

The majority opinion states: “The plain language of this section [meaning subsection

(1) of 11 U.S.C. § 903] is not limited to bankruptcy proceedings.” True enough. However,

§ 903(1) does not exist in a vacuum. It is part of, and in fact an exception to, the main point of a

longer sentence. The principal purpose of § 903 is to make clear that Chapter 9 of the

Bankruptcy Code does not limit or impair State power. In its entirety, § 903 provides:

This chapter does not limit or impair the power of a State to control, by legislation

or otherwise, a municipality of or in such State in the exercise of the political or

governmental powers of such municipality, including expenditures for such

exercise, butC

(1) a State law prescribing a method of composition of indebtedness of such

municipality may not bind any creditor that does not consent to such composition;

and

(2) a judgment entered under such a law may not bind a creditor that does not

consent to such composition.

11 U.S.C. § 903.

Thus, subsection (1) is an exception to the general proposition that Chapter 9 does not

limit or impair State power. The exception appears to reflect congressional intent that where

Chapter 9 is invoked, it does operate to limit or impair State power in relation to the specific type

of State law described in subsection (1). Viewed in context, then, the plain language of § 903(1)

may be construed to mean, and today’s opinion should not be read to foreclose the possibility,

that § 903(1) represents a specific limitation on State power only where Chapter 9 has been

invoked.