Bankruptcy Judge to Hear Detroit Bankruptcy Case, Blocking Pension Funds' Move to Stop Filing

PHOTO: Detroit Fire DepartmentPlayJeff Kowalsky/Bloomberg/Getty Images
WATCH City of Detroit Files for Bankruptcy

U.S. Bankruptcy Judge Steven Rhodes ruled that his federal court will hear Detroit's bankruptcy case, creating an obstacle to the pensioners who challenged the constitutionality of last week's historic $18 billion bankruptcy filing.

Michael Nicholson, general counsel for the United Auto Workers, said the union will decide if it will appeal. Two city pension funds had an emergency hearing on Thursday, saying the state constitution protected the pension benefits.

Judge Rhodes said questions about the city's eligibility to overhaul itself through bankruptcy "are within this court's exclusive jurisdiction." A status conference is scheduled for Aug. 2 for further scheduling and to address the status of negotiations between the city and its creditors.

Last week, circuit judge Rosemarie Aquilina said Michigan Gov. Rick Snyder andDetroit's bankruptcy filing violated the state constitution by threatening the pension benefits for the city's retirees.

Detroit became the biggest American city to file for bankruptcy after its emergency manager filed for Chapter 9 protection on July 18 with more than $18 billion in accrued obligations. In the filing with the U.S. Bankruptcy Court in the Eastern District of Michigan, state-appointed emergency manager Kevyn Orr indicated that the city's estimated number of creditors was "over 100,000." Orr, who was hired in March to assist with the city's budget, had tried to convince creditors to accept pennies on the dollar to deal with its financial problems.

Michael S. Leib, an attorney with Maddin, Hauser, Wartell, Roth & Heller, P.C., in Southfield, Mich., who is not involved in the bankruptcy case, expects the court also will actively promote settlement.

Leib said Judge Rhodes "took firm control of the Chapter 9 petition and determined he had exclusive jurisdiction" to rule on whether the city is eligible to be a Chapter 9 debtor.

"He also, predictably, and, in my judgment, properly, ruled that the automatic stay should be extended to the governor, the treasurer and the loan review board as appropriate to promote the efficiency of the bankruptcy process and avoid multiple litigation cases," he said.

If the bankruptcy filing is approved, Detroit's assets could be liquidated to meet creditor payments.

Richard Ciccarone, managing director of McDonnell Investment Management, which is not involved in Detroit's bankruptcy case, said the constitutionality of state-protected pensions will be a recurring issue.

"The showdown in court of state versus federal jurisdiction will take a new twist on the standing of those contracts: whether the claims of the retirement protections have the same standing as other creditors, particularly secured bondholders," Ciccarone said.

In light of claims that slowed service from paramedics and police has put the city at risk, the health and welfare of Detroit's citizens will be another critical issue before the bankruptcy court.

"There are real questions of whether public safety has been compromised to a point that it has created an even more intense question mark," he said.

Lee Saunders, president of the American Federation of State, County and Municipal Employees (AFSCME), said in a written statement, "Today's bankruptcy court ruling did not give Orr and Snyder the full victory they wanted. This bankruptcy not only tramples on the Michigan legal process but sets the stage for a destructive and damaging proceeding that will only serve to drive Detroit into further peril. The fight is not over and we will continue to stand up for Detroit's workers every step of the way."

AFSCME has 1.6 million members, with more than 5,000 in Detroit. Saunders said Detroit's average public service pension is about $19,000 a year.