Attorneys 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 the matter is being taken up by state courts in Michigan.
"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.
Rhodes said it's clear that Orr, the state-appointed emergency manager, has the authority under state law to act as the official representative for Detroit in bankruptcy and that matters of the city's eligibility to enter bankruptcy should be decided in Rhodes' 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 hoped for a different outcome.
"I'm mad!" said Belinda Myers-Florence, 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 by the state's constitution.
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 for bankruptcy last Thursday.
His rulings put a stop to an Ingham County Circuit Court ruling that Detroit shouldn't proceed with bankruptcy until state courts decide whether the filing violates Michigan's constitutional protections of public pensions. And, his ruling extends the protection the city has from legal action by others to Gov. Rick Snyder, who is specifically named in one of those lawsuits.
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, spokesman for Orr. "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 can still 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 on to those promises and said they will consider appealing Rhodes' rulings.
"All options are on the table right now," said Michael Artz, in-house counsel for the city's largest union, the American Federation of State, County and Municipal Employees. "Nothing the judge said today erases the fact that Gov. Snyder's authorization of this bankruptcy is unconstitutional."
Said Robert Gordon, an attorney for Clark Hill who represents the Police and Fire Retirement System, "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 the courthouse all day.
"Am I mad? Absolutely," said firefighter Darrell Freeman, who said he fears 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 the MGM Grand Detroit and member of Unite Here, also is worried about pensions. She said 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 said she remains optimistic, despite the 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 her temporary restraining order against moving forward with the bankruptcy.
Heather Lennox, an attorney with Jones Day, said the city was merely asking the court for the normal protections that are provided during any bankruptcy case.
Lennox said three lawsuits filed against the city in Ingham County would jeopardize the ability of the city to restructure its debts through bankruptcy.
"Having widespread litigation ... can only confuse the parties, confuse the case and create serious barriers to efficient administration of this case," she said.
Now, creditors who seek to deny Detroit's ability to restructure its debts under bankruptcy court protection must file new arguments and argue their case before Rhodes, who will determine whether 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.
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