October 16, 2013 / 7:41 PM / 6 years ago

Dept. of Justice defends constitutionality of Ch. 9 bankruptcy

DETROIT, Oct 16 (Reuters) - A U.S. Department of Justice attorney on Wednesday defended the legality of Chapter 9 municipal bankruptcy in the second day of hearings addressing legal issues surrounding Detroit’s bankruptcy case.

Municipal bankruptcy does not infringe on states’ rights because the state needs to authorize Chapter 9 filing by a local government, Matthew Troy, an attorney in the Justice Department’s Civil Division, told U.S. Bankruptcy Judge Steven Rhodes, who is overseeing the case.

“It’s the state’s decision,” Troy said.

A union attorney argued on Tuesday the bankruptcy process erodes states’ accountability under their constitutions by ceding their responsibility for financial management within their borders to the federal bankruptcy court. [ID: nL1N0I524L]

With Michigan Governor Rick Snyder’s permission, Detroit filed the largest municipal bankruptcy in U.S. history on July 18, and a trial to determine the city’s eligibility for bankruptcy protection is scheduled for next week. That trial will determine whether the city is insolvent and if it engaged in good-faith negotiations with its creditors or that those negotiations were not possible due to a huge number of creditors.

Detroit unions, retirees and other creditors have filed numerous objections to the bankruptcy filing and this week’s two-day hearing was meant to address their legal objections, including whether Chapter 9 itself is constitutional.

Unions and retirees are concerned that in bankruptcy their pension benefits will be cut, and they have argued that the state’s constitution protects pension benefits from being diminished.

Troy urged Rhodes not to make any decision regarding the constitutionality of Chapter 9 at this early stage in Detroit’s bankruptcy process.

“Do you really have to do this now?” Troy asked. “Should you make this reach in declaring that a statute, which has effectively been upheld for 75 years, is unconstitutional right now?”

Michigan Assistant Attorney General Margaret Nelson also spoke before the court on Wednesday, arguing that Michigan’s emergency manager law, which set out the process for Detroit to file for bankruptcy, is constitutional. She also said the city’s bankruptcy filing is in line with Michigan’s constitutional protections for public pension benefits because no benefits have been cut yet.

The 11 parties that offered legal objections to Detroit’s bankruptcy filing on Tuesday had their rebuttals, originally scheduled for Wednesday, postponed until Oct. 21.

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