Judge Declines To Intervene As Detroit Resumes Water Shutoffs


Michigan Gov. Rick Snyder (R) and the man he appointed to manage Detroit's financial emergency, Kevyn Orr

The federal judge presiding over Detroit’s bankruptcy trial denied a request for an injunction against the Detroit Water and Sewer Department on Wednesday, ensuring that the DWSD can continue shutting the water off at homes and businesses that are behind on their bills for at least the next two weeks. If shutoffs continue at the same rate over that period, between 3,000 and 6,000 customers will lose their access to clean, running water.

A group of Detroit activists had asked U.S. Bankruptcy Judge Steven Rhodes to order DWSD to temporarily cease the shutoffs, which began in April. Instead, Rhodes ordered the two parties into mediation to resolve the roots of the conflict, which primarily involve poor communication between water officials and citizens. The attorney arguing for the injunction earlier this week “said residents with small children, elderly parents or life-threatening medical conditions face an ‘imminent’ danger if their water is shut off,” and that the city is failing to accommodate such circumstances or provide assurances to such families, the Detroit News reported Tuesday.

City attorneys countered that Rhodes does not have authority over the city’s daily operations. That authority now rests with Mayor Mike Duggan after the city’s emergency manager handed control of DWSD back to the mayor’s office in late July. After a brief pause in shutoffs, the department resumed the aggressive practice in late August.

Regardless of Rhodes’ authority over DWSD, the plaintiffs’ core argument that the city is applying water shutoffs in a haphazard, unjust way has some supporting evidence. Records from the spring indicated that about half of the $175 million in unpaid water bills was owed by a handful of business clients, yet DWSD primarily targeted individual households for shutoffs. Individual delinquencies averaged less than $600 when the cutoffs began, and 40 corporate clients who owe between $37,000 and $588,000 to DWSD have not been targeted for shutoffs, according to Detroitography. Months after the cutoff began, Citizens reported having their water shut off before the date that the city had given them for the cut-off. A barber named Antonio Wymes has had the water at his shop cut off even though he is current on his bills because another customer in the same building is delinquent and the department can’t distinguish between the two lines. In a June interview, DWSD’s Bill Johnson disputed the claim that the agency is failing to pursue corporate clients as aggressively as individuals. “There are no sacred cows. We aren’t discriminating in terms of individuals or businesses,” Johnson said.

Judge Rhodes’ decision defers the water shut-offs question until September 17, when his court will hear arguments about the dispute again. The DWSD’s total $5.4 billion in debts are one of the largest components of the city’s total insolvency. The broader trial over Detroit’s bankruptcy resolution plan will continue in the meantime.

The primary dispute facing Rhodes at this point is between the city and large financial companies who believe Detroit’s plan is unfair to them. If Rhodes approves the city’s plan, bondholders will receive far less money from Detroit than they are entitled to under pre-bankruptcy debt deals. Because those bonds are insured, the companies that are giving the most vocal opposition to the plan in Rhodes’ court are bond insurers that would lose hundreds of millions of dollars if the deal is approved.

Several months ago it seemed like things were going to play out very differently for Detroit. Workers and retirees argued that the city and emergency manager Kevyn Orr had not dealt with them in good faith prior to declaring bankruptcy, and had significant evidence both in sworn testimony and documents. Retirees’ argument against cuts to the pensions they were promised also benefited from the Michigan Constitution’s prohibition on cutting retirement benefits in bankruptcy court. And there was evidence that Orr and his accountants were misrepresenting the financial condition of city pension funds in order to justify imposing cuts on retirees.

But Rhodes found in the city’s favor on the relevant legal matters, rendering the questions about Orr’s accounting methodology irrelevant.

At the same time, the city struck a deal with a trio of banks to resolve a roughly $300 million debt for $85 million. While that deal is small in dollar terms next to a purported $18 billion total bankruptcy, the specifics of the debt involved made it crucial to the city’s ability to access operating revenue. And according to the rules of municipal bankruptcies, winning the unanimous agreement of those three banks granted Orr’s Detroit the ability to stop negotiating with other creditors and simply impose cuts upon them at will under what bankruptcy experts call “cramdown” rules. Retirees had lost their last practical route to avoiding cuts to their pensions, which are modest by national standards and did not cause the city’s insolvency.

Retirees found themselves with a choice between two bad outcomes, and threw their support behind the least-bad option Orr offered: significant health care cuts and pension cuts of up to 4.5 percent that would protect them from far steeper benefit cuts if they continued to fight the city’s plan in court.