Federal court asked to suspend Detroit bankruptcy appeals

July 31 Thu Jul 31, 2014 7:42pm EDT

July 31 (Reuters) - A federal court was asked on Thursday to suspend seven pending appeals over Detroit's eligibility for bankruptcy until the city concludes a confirmation process for its plan to adjust $18 billion of debt.

Attorneys for the city, Michigan, Detroit pension funds, unions and others that filed five of the appeals said moving forward with the cases now would "significantly undermine" settlements and mediation and could delay the city's exit from the biggest municipal bankruptcy in U.S. history. But they also declined to dismiss their cases at this point.

"Holding the appeals in abeyance also ensures that this court will not unnecessarily decide important state and federal constitutional issues," the attorneys said in a letter to the 6th Circuit Court of Appeals in Cincinnati.

They added that the federal appeals court would retain jurisdiction after the plan confirmation process to review a December ruling by U.S. Bankruptcy Judge Steven Rhodes that found Detroit was broke and eligible for Chapter 9 municipal bankruptcy.

Parties in the remaining two appeals asked the court separately to suspend their cases, according to the letter.

The appeals court had initially scheduled oral arguments for July 30 for the seven cases. But those proceedings were eventually canceled at the request of the city and the appealing parties due to actual or pending settlements. In the wake of the cancellation, the appealing parties were given a Thursday deadline to inform the court if they wanted to dismiss their cases.

The appeals took issue with Rhodes' contention that pensions could be cut as part of the city's restructuring efforts despite protections in the Michigan Constitution against impairing public worker pensions. They also argued against the legality of a Michigan law that enabled Detroit's state-appointed emergency manager to file the bankruptcy case in July 2013 with the governor's permission.

Since that December ruling, Detroit has reached settlements with most of its major creditors. Active and retired city workers overwhelmingly voted to accept the city's debt adjustment plan, which calls for cuts to retiree pensions and health care.

The pension cuts would be mitigated by the so-called grand bargain, which taps into $466 million pledged by foundations and the Detroit Institute of Arts and $195 million in state money.

The attorneys in their letter warned the appeals court that the money could be jeopardized if the court should rule at this juncture in the bankruptcy. Rhodes has set an Aug. 21 start date for the confirmation hearing, which will determine if the plan is fair and feasible.

Meanwhile, the appeals would remain alive should the current plan change or fail to be confirmed.

"In the event the bankruptcy court confirms a plan that does not reflect the settlements and grand bargain, keeping these fully-briefed appeals in place ensures that the court promptly could hear oral argument and decide the eligibility issues," the letter said.

(Reporting By Karen Pierog; Editing by Cynthia Osterman)

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