August 27, 2013 / 2:20 PM / 6 years ago

Judge speeds hearing on Detroit bankruptcy eligibility

DETROIT (Reuters) - The federal judge overseeing Detroit’s bankruptcy filing is accelerating the already hurried process of determining whether the city is eligible for protection from its creditors.

A 'Welcome to Detroit' border sign is seen as traffic enters Detroit, Michigan August 3, 2013. Picture taken August 3, 2013. REUTERS/Rebecca Cook

Judge Steven Rhodes ordered late Monday that initial oral arguments in the case begin on September 18, well ahead of the October 23 date he originally scheduled for the start of the trial on the issue of eligibility.

Detroit filed the largest municipal bankruptcy in U.S. history on July 18. Kevyn Orr, Detroit’s state-appointed emergency manager, has said he wants the city to be out of bankruptcy court by the time his term as emergency manager is scheduled to end in the fall of 2014.

Monday’s order was the latest sign that Rhodes wants to set an aggressive timetable to move the city through bankruptcy court.

“A prompt oral argument on these legal issues will promote just, speedy and efficient determination of the city’s eligibility to be a debtor” under the bankruptcy code, Rhodes wrote on Monday.

Rhodes also said he would delay hearing objections to the bankruptcy that center on potential cuts to retiree pensions, which unions and retiree groups argue are protected by the Michigan state constitution.

The judge wrote in his order that he “appreciates the extraordinary importance of the pension rights,” but he will not consider arguments about potential cuts to pensions until after he decides whether the city is eligible for bankruptcy.

The eligibility argument will center on whether Detroit is insolvent, whether the city negotiated in good faith with its creditors, or whether there were too many creditors to make negotiations feasible.

The bankruptcy code requires only that Detroit’s emergency manager, Kevyn Orr, prove that the city is insolvent, Rhodes wrote, adding that the city does not need to “prove that any particular plan that it might later propose is confirmable.”

Bill Nowling, Orr’s spokesman, said Tuesday that delaying a decision on the pension funds until the city has filed a restructuring plan with the court was appropriate.

“We think the judge is absolutely right to say that that’s a plan of adjustment issue and should be litigated during that phase of the proceedings.”

Laura Bartell, a law professor and bankruptcy expert at Wayne State University in Detroit, said the judge’s decision to postpone discussion of the pension issues was “logical.”

In a June 14 report to the city’s creditors, Orr said unsecured creditors, including pension funds, will receive a pro rata share of $2 billion of notes the city would issue and pay off as its financial circumstances improve.

City workers and retirees would also face changes to their pensions and health care coverage “consistent with available funding,” Orr said at the time, which was before the city filed for bankruptcy.

Creditors filed 109 objections to the city’s bankruptcy before the deadline last week. In their objections, unions and the city’s two public pension funds made similar arguments, claiming a bankruptcy filing will lead to an unconstitutional reduction in retirement benefits.

The September 18 hearing will be used to hear arguments on legal issues in the case raised by city labor unions and others, including the constitutionality of Chapter 9 municipal bankruptcy and of the Michigan law that allowed the city to file for bankruptcy.

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’ rights.

AFSCME, as well as the United Auto Workers and the city’s two retirement systems, also claimed that the state law Gov. Rick Snyder used to appoint Orr violated the state constitution.

AFSCME’s Ed McNeil, the chief negotiator for a coalition of 33 unions that represent most of the service workers for the city, said in a statement that the union is concerned about the hasty schedule.

McNeil added that “the order does not prohibit us from making constitutional arguments or arguments about the pensions at the September 18 hearing.”

Arguments objecting to the underlying facts in the case, such as whether the city negotiated with creditors in good faith, will be heard on October 23, as originally planned.

AFSCME and the organizations representing retired Detroit police officers and firefighters also argued that Detroit has not proven it is insolvent and has not negotiated in good faith with its creditors.

Additional reporting by Bernie Woodall; Editing by Karen Pierog, John Wallace and Dan Grebler

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