Judge: Detroit bankruptcy to proceed; city's health at risk

Brent Snavely and Matt Helms | Detroit Free Press

Show Caption Hide Caption Detroit bankruptcy hearing in federal court A hearing was held July 24, 2013, at Theodore Levin U.S. Court House concerning the city of Detroit bankruptcy case. A small group of protesters marched in front of the building.

Retirees sued%2C saying Michigan constitution protects their pensions

The judge%27s decision is seen as a victory for Detroit emergency manager Kevyn Orr

Detroit is largest municipality in U.S. history to file Chapter 9 bankruptcy

DETROIT — Lawyers for Detroit won a clean sweep in federal court Wednesday that should allow the city's bankruptcy filing to move forward in federal court without getting bogged down in lawsuits filed in state court.

U.S. Bankruptcy Judge Steven Rhodes dealt back-to-back wins for emergency manager Kevyn Orr in rulings shortly after a two-hour hearing in a courthouse packed with about 175 lawyers, journalists, city workers and retirees.

Saying the city would suffer irreparable harm if delays to its bankruptcy were upheld, Rhodes denied attempts by lawyers for pension funds, unions and other creditors to halt Detroit's Chapter 9 filing while state courts in Michigan take up the matter.

Orr, the state-appointed emergency manager, has the authority under state law to act as the official representative for Detroit in bankruptcy, Rhodes said. And matters of the city's eligibility to enter bankruptcy should be decided in his courtroom, not in state courts.

Rhodes' rulings — the first in Detroit's historic bankruptcy case that is now a week old — drew protests outside the court and gasps within the courtroom from union members and retirees who had hoped for a different outcome.

"Dammit, I'm mad!" said Belinda Myers, a city of Detroit retiree who attended the hearing. "I worked in the city for 35 years, and now you're gonna tell me I don't have a pension?"

Detroit's two pension funds, unions, and other creditors tried to argue that the city's bankruptcy case should not have been filed because the state cannot authorize a bankruptcy filing since it is sworn to uphold pension benefits, which are protected in the state's constitution.

But Rhodes said Detroit and its residents would suffer irreparable harm if the city's effort to restructure under bankruptcy protection were stymied.

"In the context of a Chapter 9 case, and especially this Chapter 9 case, that is probably the most important factor of all," Rhodes said.

The city, which has been borrowing money to repay its debts, has about $18 billion in debt and became the largest municipality in U.S. history to file bankruptcy July 18.

Rhodes' rulings put a stop to an earlier Ingham County Circuit Court ruling saying Detroit should not proceed with bankruptcy until state courts decide whether the filing violates Michigan's constitutional protections of public pensions and protects Michigan Gov. Rick Snyder, who is specifically named in one of those lawsuits.

"The court has the authority to extend the scope of the stay when necessary and appropriate," Rhodes said. "There is of course the added danger of inconsistent results as well," Rhodes said.

In short, Rhodes gave the emergency manager and the state what it wanted: The pending lawsuits in Ingham County won't stop the bankruptcy from moving forward.

"It's an important step to know that now we can start to litigate this issue so we can start to move forward," said Bill Nowling, Orr's spokesman. "That's not going to happen for a couple of months yet in court, but this is an important step that we bring everything in one court and increase the efficiency of the process."

However, Rhodes spent an unusual amount of time making it clear that all of the objections that creditors have are yet to be decided and still can be argued in his court.

"The court is making no ruling whatsoever on whether the city is eligible to be a debtor under Chapter 9" or on whether Snyder was right to file for bankruptcy given Michigan's constitutional protections for pension benefits, Rhodes said.

Unions and Detroit's pension funds latched onto those promises and also said they would consider appealing his ruling.

"All options are on the table right now," said Michael Artz, in-house counsel for AFSCME. "Nothing the judge said today erases the fact that Gov. Snyder's authorization of this bankruptcy is unconstitutional."

Said Robert Gordon, a lawyer who represents the Police and Fire Retirement System of the City of Detroit: "We think it important to emphasize that there has been no ruling on whether the state's authorization of a Chapter 9 filing was or was not valid. That remains an open and viable issue."

Rhodes' ruling angered retirees, union leaders and others who attended the hearing and protested outside of the courthouse all day.

"Am I mad? Absolutely," said firefighter Darrell Freeman, a Detroit fire captain who fears that his family's financial health is in jeopardy. "For us to face not having a pension or a reduced pension? We depend on that for our families. What do we do if our pensions are taken away?"

Freeman is one of 20,000 retirees and about 9,500 current Detroit employees paying into the systems. Snyder and Orr have said that pension payments will be protected for six months, but that "adjustments" will have to be made after that to deal with a reported $3.5 billion unfunded liability in the pension system.

Janee Ayers, 31, a cashier at MGM and member of Unite Here, also is worried about pensions. She believes Detroit's financial troubles could have been solved without bankruptcy and that Michigan as a whole stands to lose from the bankruptcy.

"What happens to Detroit happens to all of us," said Ayers, who remains optimistic despite Wednesday's ruling.

Ed McNeil, special assistant to AFSCME Council 25 President Al Garrett, accused Snyder and state Attorney General Bill Schuette of trying to evade lower courts by seeking favorable federal court rulings instead of addressing questions raised by pension funds and workers and retirees who sued in Ingham County to halt the bankruptcy.

The Michigan Court of Appeals has yet to rule on the state's appeal of Ingham County Judge Rosemarie Aquilina's ruling that the bankruptcy must be halted. But the court did put in place a stay in Aquilina's orders in three cases involving the pension systems and on her temporary restraining order against moving forward with the bankruptcy.

Now, creditors who seek to deny Detroit's ability to restructure its debts under bankruptcy court protection must file anew and argue their case before Rhodes, who will determine whether or not the city is eligible under bankruptcy code.

At the next bankruptcy hearing, set for Aug. 2, Rhodes intends to set a deadline for creditors to file those objections.