DETROIT Oct 15 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
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.