UPDATE 1-Lawyers square off in first battle over Detroit bankruptcy bid
* Opening salvos of biggest U.S. muni bankruptcy case
* Hearing will address motion to stay all related litigation
* Court officials open overflow rooms to accommodate crowds
* City must still prove that it is insolvent
By Bernie Woodall and Joseph Lichterman
DETROIT, July 24 (Reuters) - Lawyers for the city of Detroit on Wednesday asked a U.S. bankruptcy judge to set aside all other lawsuits seeking to block the city's petition for bankruptcy protection, arguing that federal bankruptcy court is the only venue to debate the matter.
In oral pleadings that marked the opening salvos of the biggest municipal bankruptcy filing in U.S. history, attorney Heather Lennox asked U.S. Bankruptcy Court Judge Steven Rhodes to force the city employees, retirees and pension plans that object to the Chapter 9 filing as violating the state constitution to make their case only in his court.
"We believe those decisions must be made and can only be made by this court in actions brought before this court," said Lennox, an attorney for the law firm Jones Day, which has been hired by the city. Kevyn Orr, a corporate bankruptcy lawyer tapped by Michigan officials in March as Detroit's emergency manager, also worked for Jones Day before joining the city.
Rhodes began the proceedings on Wednesday by saying the hearing would address two issues: a motion to stay all related litigation and a motion to extend that stay to lawsuits filed against the governor, state treasurer and Orr.
Attorneys for the workers, retirees, city unions and pension plans were expected to follow Lennox in presenting arguments to Rhodes.
The case has attracted massive U.S. media interest, with people lining up to gain entrance to the federal courthouse in downtown Detroit on Wednesday morning, forcing court officials to open overflow rooms to accommodate the crowd. Meanwhile, city firefighters, worried that bankruptcy, filed July 18, will lead to stinging cuts in their retirement benefits, protested outside.
Rhodes agreed on Monday to an expedited hearing requested by Orr that seeks to extend Chapter 9's automatic stay of litigation to lawsuits filed against Governor Rick Snyder, Michigan Treasurer Andy Dillon, and Orr by Detroit workers, retirees and pension funds. Those lawsuits are pending in state court in Michigan's capital city of Lansing.
Those lawsuits were halted by a Michigan Appeals Court panel on Tuesday in response to State Attorney General Bill Schuette's request to stop proceedings while he seeks to overturn orders issued by a lower court judge hearing the cases. One of those orders directs Orr to withdraw the bankruptcy petition on state constitutional grounds.
Ironically, Wednesday's launch of the historic bankruptcy began exactly 312 years after Detroit was founded in 1701 by French soldier Antoine de la Mothe Cadillac.
Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime became rampant and its population shriveled by almost two-thirds since the 1950s to about 700,000 at present. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.
If Rhodes allows Detroit's bankruptcy petition to proceed without interference from the state courts, the city still must prove that it is insolvent and that it made a good-faith effort to negotiate with creditors, including its employee pension funds. Detroit has more than $18 billion of debt and unfunded liabilities. That includes $5.7 billion in liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability.
In a June 14 proposal to creditors, Orr called for "significant cuts in accrued, vested pension amounts for both active and currently retired persons."
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