By Nick Carey
DETROIT, July 19 Investors dumped Detroit's
municipal bonds a day after the city's historic bankruptcy
filing even as a ruling in state court raised questions about
whether the bankruptcy will stand up to court review.
Attempts by Michigan Governor Rick Snyder and Detroit's
Emergency Manager Kevyn Orr to put a positive spin on the filing
failed to reassure investors. Prices on some Detroit bonds
plunged and there were wider declines in the $3.7 trillion U.S.
municipal bond market.
The state court judge in Michigan's capital of Lansing
ordered Orr to withdraw the bankruptcy petition because the
state law that allowed Snyder to approve the bankruptcy violated
the Michigan Constitution. The governor lacks the power to
"diminish or impair pension benefits," according to the ruling
by Ingham County Circuit Court Judge Rosemarie Aquilina.
Michigan Attorney General Bill Schuette, acting on behalf of
Snyder, quickly filed an appeal with the state appeals court.
His office said motions seeking emergency consideration were
expected to be filed later on Friday.
Ken Klee, a bankruptcy lawyer at Klee, Tuchin, Bogdanoff &
Stern LLP, said the Judge Aquilina's orders could be coming too
late in the Detroit bankruptcy case.
"The state judge could not order Detroit to dismiss the case
or Kevyn Orr to dismiss it, because once it's filed the
automatic stay under the bankruptcy code kicks in, to protect
the city and its employees from lawsuits," he said.
Neither Snyder nor Orr could necessarily be compelled to
withdraw the city's petition at this juncture, he added.
Orr, who was appointed by Snyder in March to try to resolve
the city's financial crisis and tackle its $18.5 billion in
long-term debt, acknowledged that court battles over the need
for a bankruptcy filing could be protracted and difficult.
A first test in a Chapter 9 bankruptcy proceeding is whether
the city has explored other reasonable options before filing,
and the city will "have an eligibility fight, I suspect" over
the decision, Orr said.
In the bankruptcy filing, Orr stated he has set an objective
to conclude the bankruptcy process no later than September 2014.
"I've got 15 months left on my tenure," Orr said. "I
promised the governor that we were going to try and get this
done within the time frame provided by the statute."
On Friday, U.S. Bankruptcy Judge Steven Rhodes of the U.S.
District Court for the Eastern District of Michigan was assigned
to oversee the Detroit case, which involves thousands of
creditors. Bankruptcy experts expect the case could last years
and cost tens of millions of dollars.
Under the 2012 Michigan law that created the emergency
manager position, Orr's term is limited to 18 months, after
which he can be removed by a two-thirds vote of Detroit's city
Detroit, a former manufacturing powerhouse and cradle of the
U.S. automotive industry, has struggled for decades as companies
moved or closed, crime became rampant and its population
shriveled by about 25 percent in the past decade to 700,000.
The Chapter 9 filing by the home of Motown music is the largest
municipal bankruptcy in U.S. history.
Under the state law that created the emergency manager
position, Detroit could not file for bankruptcy without the
governor's approval. Lawsuits by pension funds and city workers,
filed earlier this month, had sought to prevent a filing. But
on Thursday, Orr filed the bankruptcy petition, with Snyder's
permission, just minutes before Judge Aquilina was set to rule
on a petition to stop the process.
In an interview with Reuters on Friday, Snyder side-stepped
the constitutional question.
"That's a matter in litigation and we have very good
attorneys who I'm sure are on top of that," he said
The governor has sought to paint the bankruptcy filing as a
positive move for the city and the state.
"We're the comeback state in Michigan, but to be a great
state we need...Detroit on the path to being a great city
again," Snyder, a Republican, said at a press conference.
Snyder acknowledged that the bankruptcy would be seen as a
new low point for the city, but said, "This is the day to
Orr addressed concerns that art works at the Detroit
Institute of Arts or other city assets would be auctioned off to
pay off creditors, who have been offered pennies on the dollar.
"Right now, there's nothing for sale," he said.
Vice President Joe Biden told reporters on Friday that White
House officials had been briefed on Detroit's situation, but
that it was unclear what help the administration could provide.
In the state court proceeding on Friday, Judge Aquilina said
she plans to keep the White House informed on matters affecting
pensions by sending her rulings in the state cases to President
Barack Obama, according to her law clerk, and attorney William
Wertheimer, who is representing retirees in a lawsuit.