By Bernie Woodall and Deepa Seetharaman
DETROIT, July 24 A showdown over the biggest
municipal bankruptcy filing in U.S. history begins in a federal
court on Wednesday morning as creditors challenge its legality.
Attorneys for Kevyn Orr, a corporate bankruptcy lawyer
tapped by Michigan officials in March as Detroit's emergency
manager, want U.S. Bankruptcy Judge Steven Rhodes to put on hold
a flurry of lawsuits claiming the Chapter 9 bankruptcy filing
violates the state constitution.
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 that 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
The federal court in Detroit is expecting an overflow crowd
of media, attorneys, labor union representatives and others
participating in or witnessing the unfolding of the historic
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 now. The city's revenue failed to keep pace with
spending, leading to years of budget deficits and a dependence
on borrowing to stay afloat.
Concerned that retirement benefits will be slashed, the
American Federation of State, County and Municipal Employees
Council 25, which represents about 70 percent of Detroit's
civilian workforce, on Monday filed an objection to pushing the
lawsuits aside. They said if they were stopped, Orr, Michigan's
governor and others would be able to continue to operate beyond
state constitutional authority.
In a June 14 proposal to creditors, Orr called for
"significant cuts in accrued, vested pension amounts for both
active and currently retired persons."
Bill Wertheimer, an attorney handling one of the retiree
lawsuits, said pension benefits "are sacrosanct under state
"The state has certain powers that the federal government
cannot superimpose itself on, unlike a normal bankruptcy," he
JUDGE SEEN HALTING LAWSUITS
Rhodes could rule immediately that all the litigation seeking
to derail Detroit's bankruptcy petition be put on hold,
according to legal experts.
Laura Bartell, a law professor at Wayne State University in
Detroit, said Judge Rhodes was not likely to permit interference
from Michigan judges.
"I personally think the argument that a bankruptcy filing
violates the Michigan Constitution is specious and will be
quickly dismissed by Rhodes," she said.
Ken Schneider, a bankruptcy attorney with Detroit-based
Schneider Miller PC, predicted the city's bankruptcy case will
proceed. "The federal constitution preempts state law," he said.
A 2012 Michigan law that governs emergency managers like Orr
who are selected by the state to run fiscally troubled local
governments gives the governor the final say on whether to file
Bankruptcy opponents could attempt to appeal to the federal
district court any order by Judge Rhodes enforcing the stay of
litigation against Detroit. But, because such an order would not
be considered a final judgment under bankruptcy laws, the
federal court could decline to hear the appeal.
In a declaratory judgment on Friday, state Judge Rosemarie
Aquilina ordered Orr to withdraw the bankruptcy petition, saying
the state law that allowed Snyder to approve the bankruptcy
filing violated the Michigan constitution. The governor cannot
take actions that would violate constitutional protections
covering retirement benefits for public workers, she said.
Aquilina's order was in response to a lawsuit filed this
month by a Detroit worker and retiree. Two other lawsuits are
also pending, one backed by the United Auto Workers union and
another filed by the city's general retirement system and police
and fire retirement system.
NEXT STEPS IN BANKRUPTCY
To remain in bankruptcy court, Detroit must prove that it is
insolvent and that it made a good faith effort to negotiate with
its creditors, including its employee pension funds, over the
city's 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.
Union officials on Monday contended some of the city's 48
bargaining units were shut out of pre-bankruptcy negotiations,
although Orr's spokesman said Orr was not obligated to engage in
collective bargaining negotiations with the unions under the
2012 state emergency manager law.
The arguments over eligibility could take a long time as the
unions challenge the legality of the filing. In the case of
Stockton, California's bankruptcy case, the eligibility
determination took a year.