Legality of Detroit bankruptcy argued in court

DETROIT Tue Oct 15, 2013 3:44pm EDT

DETROIT Oct 15 (Reuters) - A lawyer representing Detroit's largest public union argued on Tuesday that Chapter 9 municipal bankruptcy is unconstitutional because it impairs states' rights to manage their own finances.

"States are ceding accountability for their own financial management," attorney Sharon Levine, representing Council 25 of the American Federation of State, County and Municipal Employees, said in a hearing before U.S. Bankruptcy Judge Steven Rhodes. "By turning it over to the federal government and hiding behind the bankruptcy process, we lose that accountability which is a cornerstone of the state constitution."

Levine argued that it should be left to the states to restructure municipal debt because Chapter 9 unfairly requires a municipality to settle debts in federal bankruptcy court without full consent from all its creditors.

Tuesday marked the start of a two-day hearing that will address the thorny legal issues surrounding Detroit's July 18 bankruptcy filing, the biggest in U.S. history.

Attorneys representing unions, retirees and other creditors also argued that Michigan's constitution protects public pensions from being cut. But Rhodes questioned whether the city's eligibility for bankruptcy should hinge on a plan of action it might take at a later date.

Attorney Claude Montgomery, representing a committee of Detroit retirees, said Detroit Emergency Manager Kevyn Orr already indicated in a June proposal to creditors that he plans to slash pension benefits to help deal with Detroit's $11.9 billion in unsecured debt and other obligations. Orr deemed some of the city's outstanding bonds, along with the city's pension and retiree health care obligations, as unsecured debt that would be paid at just pennies on the dollar.

"The only way that the emergency manager in his own mind can do that is to have access to the bankruptcy court because he believes bankruptcy law will trump the state constitution," Montgomery said, suggesting the city could reapply for bankruptcy protection with stipulations that protect pensions.

Rhodes raised the question of whether the state constitution prevents the bankruptcy court from impairing pension benefits.

"The law prohibits the city from doing it, but the question is whether it prohibits bankruptcy court from doing it," Rhodes said.

Arguments objecting to the underlying facts in the case, such as whether the city negotiated with creditors in good faith, will be heard next week as part of a trial to determine the city's eligibility to receive bankruptcy protection.

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