6th Circuit: MSC got it wrong, DIBC is not a ‘federal instrumentality’

The procedural wrangling is impressive, the arguments are exhaustive but the bottom line is this: The Detroit International Bridge Co. (DIBC) is not a “federal instrumentality,” according to the 6th U.S. Circuit Court of Appeals in Commodities Export Co. v. Detroit Int’l Bridge Co.

In so ruling, the federal appeals court said a contrary holding by a unanimous Michigan Supreme Court, City of Detroit v. Ambassador Bridge Co., 748 N.W.2d 221, 223 (Mich. 2008), is owed “no deference.”

The ruling has its genesis in the mid-1990s, when DIBC and the Michigan Department of Transportation began working on a project to make the Ambassador Bridge easier to get to from the interstate freeways (MDOT’s job) and to beef up the bridge’s infrastructure (DIBC’s job).

DIBC received federal approval to build new toll plazas, a duty-free gas station and a weight station for trucks. But the city of Detroit balked at granting DIBC the necessary zoning variances. DIBC plowed ahead with construction. Detroit sued. The case made it to the MSC, which ruled in Ambassador Bridge Co. that DIBC was a “a federal instrumentality for the limited purpose of facilitating traffic over the Ambassador Bridge,” and thus immune from Detroit’s zoning ordinances.

Commodities Export Co. sued the federal government and Detroit about a year later, complaining that DIBC, flexing its federal instrumentality muscle, unilaterally condemned and closed the only road providing access to Commodities Export’s property. Commodities Export said Detroit failed to protect Commodities from DIBC’s actions and that the federal government failed to rein in its federal instrumentality, DIBC.

DIBC intervened in the suit. The federal government then filed a cross-claim against DIBC, alleging that contrary to DIBC’s representations and the MSC’s decision in Ambassador Bridge Co., DIBC “’is not a federal instrumentality, of any kind, or any other type of arm, appendage, servant, or agent whatsoever of the United States,’ and thus its ‘representations that it is any kind of federal instrumentality are contrary to federal law.’”

The federal government argued that as a result, it could not be held liable for any claim by Commodities’ Export for an unlawful, uncompensated taking of its property.

The federal district court sided with the federal government. The 6th Circuit affirmed.

The 6th Circuit cut through a thicket of jurisdictional arguments, abstention claims, and assertions that the MSC’s decision had preclusive effect. The federal appeals court determined there were no barriers to declaring that Ambassador Bridge Co. “is at most non-binding, persuasive authority, which we are free to follow or to reject[.]”

The 6th Circuit chose “reject.”

“[T]he Bridge Company bears none of the hallmarks of a federal instrumentality. It is a private, for-profit corporation, created by private individuals, not by the United States. … The government, moreover, does not control the Bridge Company’s day-to-day operations. … Nor does it even have a significant financial stake in the Bridge Company’s success.”

The 6th Circuit continued, “The Bridge Company, moreover, is a frequent adversary of the United States in litigation, and the Supreme Court has twice held that the Bridge Company is not immune from state taxation, which, of course, it would be if it were a federal instrumentality.”

The DIBC is viewed as all sorts of things, depending on who is doing the looking. But after today’s 6th Circuit decision, DIBC can’t be seen as an extension of the federal government.

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Eyes on Detroit

As Michigan news junkies closely follow the news surrounding Detroit, and whether or not the city will enter into a consent agreement with the state [Update: it did], or whether Gov. Rick Snyder will appoint an emergency financial manager (EFM), one word that has come up from time to time is: bankruptcy.

That’s a big can of worms. What would happen if the city went into Chapter 9 bankruptcy?

Well, the thing is, it can’t, said Butzel Long attorney Max Newman.

“In order to file Chapter 9 the city would need permission from the state. And there’s no basis in law for the state to give that permission,” Newman said. “The state would have to pass legislation to allow it.”

But that doesn’t mean that he would rule it out. That’s because, he said, if the Michigan Supreme Court finds the state’s EFM law to be unconstitutional, one way or the other, legislators are going to have to drop everything (probably interrupting their summer break) and quickly rework the EFM law, or draft legislation to allow the state to authorize the city’s bankruptcy.

There wouldn’t be much difference between the two, Newman said. Neither option brings in any money to the financially troubled city.

“The biggest difference would be that the emergency financial manager statute gives the manager the power to open collective bargaining agreements without court supervision. In a Chapter 9, court supervision would be required,” he said. “As long as the city has a revenue stream, either one could be useful.”

That’s one of the reasons Detroit can’t do what other communities have done when they’ve entered Chapter 9 — cut deeply into even essential services, namely the police department. One example is the city of Vallejo, Calif., which laid off nearly half its police department while it worked through a bankruptcy. But if Detroit does that, Newman noted that it would be mighty difficult, if not impossible, to attract businesses and residents that are sorely needed to build up the city’s tax base.

Whether by emergency manager, consent agreement or bankruptcy, the city is going to have to get its biggest creditors — the unions and bond holders — to the table.

“They’re going to have to restructure their bond debts and union contracts no matter what,” Newman said. “If they can’t do that, the problem is way beyond any emergency financial manager or Chapter 9 issues.”

In any event, eyes are on the city of Detroit because there has been nothing like it before. The wealthy county of Orange County, Calif., went bankrupt, but that was different, Newman said, because it was the result of malfeasance on the part of the treasurer. The revenue stream necessary for working through the bankruptcy was solid. And the bankruptcy in Harrisburg, Pa., is different because, although the city is much like Detroit in that its troubles stemmed from a decline in manufacturing, its nowhere near the size of Michigan’s largest city.

“There has never been anything exactly like this. In the history of Chapter 9, there hasn’t been anything like Detroit,” Newman said.