(Adds that no filings came from bond holders, provides
additional objection from unions)
By Joseph Lichterman and Bernie Woodall
DETROIT Aug 20 Public labor unions took aim at
Detroit's historic bankruptcy filing on Monday, asking a U.S.
court to toss the city's bid for protection from its creditors
because it is constitutionally flawed on both the state and
A union that represents public-sector workers even took the
unusual step of arguing that Chapter 9 of the federal bankruptcy
code, under which municipalities seek protection from their
creditors, violates the U.S. Constitution.
But as a midnight deadline for filing objections to the
bankruptcy passed, Detroit's bondholders were conspicuously
absent from the long list of unions, pension funds and
individual creditors lining up to argue against bankruptcy.
Unions representing the city's firefighters and police
alleged that state-appointed emergency manager Kevyn Orr had
failed to negotiate in good faith, stating "there were no
Under U.S. bankruptcy code, Detroit must prove it is
insolvent and has negotiated with creditors in good faith, or
there were too many creditors to make negotiations feasible, in
order to be certified by a federal judge for a bankruptcy
For his part, Michigan Attorney General Bill Schuette said
in a filing that even if the bankruptcy case continues, the city
cannot be allowed to ignore state constitutional protections for
retirement benefits earned by its employees.
Schuette's filing does not ask the judge to prevent
Detroit's bankruptcy from proceeding.
Unions and the city's two public pension funds made similar
arguments in their filings, claiming a bankruptcy filing will
lead to an unconstitutional reduction in retirement benefits.
The American Federation of State, County and Municipal
Employees Council 25, in its filing with the U.S. Bankruptcy
Court in Detroit, argued that Chapter 9 encroaches on states'
The union made more conventional legal arguments as well.
It argued that Detroit, which last month filed for what
would rank as the largest-ever U.S. municipal bankruptcy, has
not proven it is insolvent and has not negotiated in good faith
with its creditors.
AFSCME also said Michigan's emergency manager law, which
enabled Detroit to file for bankruptcy on July 18, violates the
state constitution because the law does not explicitly protect
retirement benefits for public workers.
The United Auto Workers, whose members work for the city,
also filed an objection early Monday evening, claiming that Gov.
Rick Snyder violated Michigan's constitution when he permitted
Detroit's emergency manager Kevyn Orr to file for bankruptcy.
A June 14 "Proposal to Creditors" made roughly a month
before the bankruptcy filing "serves as the vehicle of Governor
Snyder and EM Orr to use federal bankruptcy law to impair
pensions protected from impairment" by the Michigan
constitution, the UAW said in its objection.
AFSCME's arguments were adopted by two other city unions
-SEIU Local 517 and International Union of Operating Engineers
Local 324 - in separate filings.
Municipal bankruptcy experts said the U.S. Supreme Court
settled Chapter 9's constitutionality in 1938.
Jim Spiotto, an attorney at Chapman and Cutler, said as long
as a state allows a local government to file for bankruptcy, as
in Detroit's case, states' rights are not at issue.
"I'm sure somebody at the bankruptcy court level brought it
up before, but I don't think (the argument) lasted very long,"
An AFSCME spokesman did not return messages seeking comment
on the federal constitutional argument.
Schuette, the Michigan attorney general, said in his filing
that Detroit is bankrupt, and the governor was authorized to
allow the city's bankruptcy petition.
"However, throughout this bankruptcy process, protections
enshrined in the Michigan Constitution by the citizens of our
state must be honored, respected and followed," Schuette said,
pointing to a constitutional prohibition against diminishing or
impairing accrued retirement benefits for public workers.
He added unaccrued benefits can still be part of
Prior to the 11:59 p.m. Eastern Daylight Time deadline set
for Monday night by U.S. Judge Steven Rhodes, who is overseeing
Detroit's case, objections had been expected by bondholders and
Members of both groups have challenged an agreement the city
reached with counter parties to interest-rate swaps that would
enable the city to unwind its swaps contracts at a discounted
No explanation was immediately available for why no
objection was filed by bondholders and bond insurers. Bond
insurers, which step in and make debt payments on the city's
behalf when it cannot meet its obligations, are particularly at
risk after Orr in June announced plans to default on Detroit
debt he considers unsecured.
In a court filing earlier this month, Detroit released a
list of creditors, including current, former and retired
workers, that filled 3,504 pages. An initial filing in the case
by Orr said that "further negotiations with all of the city's
various stakeholders is impracticable."
Orr's filing included a litany of Detroit's financial woes,
including more than $18 billion in debt and other obligations,
with nearly $12 billion of that amount considered unsecured.
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 surged and its
population fell from a peak of 1.8 million in the 1950s to
around 700,000 currently. The city's revenue fell short of
spending, while its budgets and borrowing ballooned.
Orr will respond "specifically and completely" to the
objections in court, said his spokesman, Bill Nowling.
"Mr. Orr believes he has surpassed the legal standard of
negotiating in good faith with creditors and stakeholders,"
Nowling said. "He submitted a proposed restructuring plan to
creditors on June 14."
About 50 individuals filed objections at the federal court
in Detroit on Monday morning. The group was organized by the
Detroit chapter of the National Action Network, a national civil
rights organization founded by Rev. Al Sharpton.
The group's objection cites potential constitutional
problems with a Michigan law that allowed for the bankruptcy
filing and claims that the judge did not allow enough time for
Rev. Charles Williams II, the chapter's president, said many
residents, himself included, received notice only last week that
they were parties of interest who could object to the filing.
"The process hasn't been as clear and transparent as it
should have," Williams said. "Many Detroit residents received
letters giving them the opportunity to file for an objection and
they didn't even know they received it. They weren't properly
Rhodes has scheduled Oct. 23 for the start of a hearing to
determine if Detroit is eligible to file for bankruptcy under
Chapter 9. If Detroit is deemed eligible for municipal
bankruptcy, it would be the biggest such case in U.S. history.
Detroit's largest unsecured creditors are its two pension
funds, which have claims totaling $3.74 billion in estimated
unfunded liabilities, according to a court filing by the city.
The remainder of the city's top 20 creditors include
bondholders of $1.47 billion of certificates of participation
that Detroit sold for its pension funds and hundreds of million
dollars of general obligation bonds.
The Detroit Institute of Arts said on Monday it will not
file an objection to the bankruptcy. The DIA has become
embroiled in the city's case because its assets, which include
works by Van Gogh and Matisse, could be sold to pay Detroit's
debt. However, Orr has said he hopes he does not have to sell
Rhodes on Monday appointed Chicago attorney Robert Fishman
as the fee examiner in the case. [ID: nL1N0G11XY]
(Additional reporting by Karen Pierog, Nicholas Brown and Deepa
Seetharaman; Editing by Dan Grebler and Elizabeth Piper)