Detroit bankruptcy court judge to decide pension case

Kathleen Gray and Brent Snavely | Detroit Free Press

DETROIT -- The contentious dispute between the city of Detroit and the city's pension funds will be decided by U.S. Bankruptcy Court Judge Steven Rhodes in a federal courtroom and not in state court in Ingham County, Rhodes has declared.

In an order filed Monday, Rhodes said he will hold a hearing Wednesday to consider the city's request to put all lawsuits filed before the city filed for bankruptcy protection on hold.

The decision by Rhodes means that the first hearing of Detroit's bankruptcy case could prove to be a crucial moment in the city's effort to restructure under court protection.

Detroit's $18.5 billion bankruptcy, filed Thursday, is the largest city filing in U.S. history.

The Police and Fire Retirement System and the General Retirement System and its 20,000 retirees filed a lawsuit in Ingham County, Mich., court last week that argues that Detroit's bankruptcy filing must be withdrawn because it violates the Michigan Constitution's protection of public employees' pensions.

Michigan Gov. Rick Snyder and Detroit emergency manager Kevyn Orr have said that pension payments will continue unchanged for the next six months, but that adjustments will have to be made after that to deal with unfunded liabilities in the funds.

If Rhodes rules in Detroit's favor, it would put an automatic stay in the Ingham County case.

"The (bankruptcy) court finds that the court has jurisdiction over this matter," Rhodes said in his order.

That ruling conflicts directly with Ingham County Circuit Judge Rosemarie Aquilina, who said earlier Monday that despite the state's desire to move the case to federal court, she believes it should be heard in state court.

"This is a very important issue," she said. "I understand that there may be this question of moving it to federal court. ... But these are state issues. We're dealing with the state constitution and an emergency manager who is a product of the state legislation."

Aquilina ruled last week that the bankruptcy filing was void because it violated the state constitution's provision prohibiting tampering or diminishing pension benefits.

"As you all know, my decision last week was because there's been a violation of constitution. I don't believe the constitution should be made of Swiss cheese," she said.

Her ruling is being challenged by Michigan Attorney General Bill Schuette, who claims that federal bankruptcy law supersedes state law. He's asked the state Court of Appeals to overturn her ruling. The Court of Appeals has given the lawyers for the pension funds until Wednesday to respond to the motion.

Aquilina adjourned Monday morning's hearing in her courtroom on the constitutionality of the bankruptcy filing until next Monday.

Ronald King, attorney for the pension systems, said his case does not enjoin the city from proceeding in bankruptcy.

"But you have to respect the constitutional provision in Michigan that protects accrued pension benefits," he said.

Rhodes also scheduled a separate hearing for Aug. 2 to consider other issues, including setting a deadline for any objections to Detroit's eligibility for bankruptcy protection and the city's request for the appointment of a committee to represent retirees.

Lawyers for the Michigan chapter of the AFL-CIO also filed an objection Monday seeking to block Detroit from entering Chapter 9 bankruptcy. The union, which said it represents the interests of several thousand retired and current city employees, argued that the city's bankruptcy filing is unconstitutional under Michigan and U.S. law.

A coalition of labor leaders and elected officials denounced Detroit's bankruptcy Monday afternoon as both unnecessary and a way for Snyder to put outsiders in charge of Detroit.

"Bankruptcy's not the solution," said Al Garrett, Council 25 president of the American Federation of State, County and Municipal Employees. "It has been the plan of this administration because there's been a decision made that the people running Detroit, the people who live in Detroit, ought not have a say in the destiny of what the city of Detroit is."

Garrett said Snyder broke his oath to uphold the state constitution by approving a bankruptcy that seeks to cut Detroit's active and retired workers' constitutionally protected pension benefits.

"That's outrageous," said UAW President Bob King.

Contributing: Nathan Bomey and Joe Guillen, Detroit Free Press.