Freezes all litigation
Federal Judge Halts Legal Challenges in Detroit Bankruptcy Case
A federal bankruptcy judge on Wednesday cleared the way for Detroit’s case to go forward without legal challenges.
The decision by Judge Steven Rhodes of the United States Bankruptcy Court freezes all litigation against the city, its emergency manager and Gov. Rick Snyder of Michigan during Detroit’s bankruptcy process.
Judge Rhodes said challenges to the city’s Chapter 9 filing, including protests by retired city employees about potential pension cuts, would be addressed in coming hearings. The federal bankruptcy court has “exclusive jurisdiction” over the case, he said.
It was a dramatic beginning to the largest municipal bankruptcy case in American history. As protesters circled the courthouse downtown, the judge heard arguments about whether Mr. Snyder had overstepped his authority in forcing the city into bankruptcy.
He was attempting to resolve a legal muddle that began almost immediately after Detroit filed for bankruptcy last Thursday.
The next day, Judge Rosemarie Aquilina of Ingham County Circuit Court ruled that the filing violated the Michigan Constitution, which protects the pensions of retired public employees. The city, led by the state-appointed emergency financial manager, Kevyn D. Orr, is expected to seek reductions in pensions in bankruptcy as part of its broader efforts to reduce Detroit’s estimated $18 billion in debt.
Judge Aquilina’s ruling was appealed by the state attorney general to the Michigan Court of Appeals, which on Tuesday issued a stay of her order pending an appellate decision.
But on Wednesday, in the first hearing in the case, Judge Rhodes settled the matter by approving a motion by Mr. Orr to freeze all litigation against the city during its bankruptcy. The judge said that concentrating all legal issues in federal court increased the chances that Detroit could reorganize its debts and emerge from bankruptcy in better financial shape.
"My orders enhance the likelihood of Chapter 9 reorganization, speeds the bankruptcy case and cuts costs to taxpayers," he said.
The judge also extended protection from litigation to Mr. Orr, Governor Snyder and other state officials directly involved in the bankruptcy.
Mr. Orr attended the court arguments, but was not present when the judge made his decision. Afterward, a spokesman for the emergency manager, William Nowling, said he was pleased with the court’s action. "This clears the way so we can proceed in an orderly fashion with bankruptcy proceedings and restructuring Detroit," Mr. Nowling said.
Lawyers representing retired police officers, firefighters and other city employees declined to say whether they would appeal the ruling by Judge Rhodes.
Union officials gathered outside the courthouse said they expected to raise the pension issues and the constitutional questions at future hearings on whether Detroit has met all legal requirements for a bankruptcy filing.
"We are going to fight this all the way," said Edward McNeil, an official with the American Federation of State, County and Municipal Employees. "We don’t believe the city should even be in bankruptcy court."
Both Mr. Snyder and Mr. Orr have said that a bankruptcy filing was the only option to reverse Detroit’s long decline, improve city services and settle its crushing debt load. But city workers, retirees, bondholders and other creditors have accused Mr. Orr of failing to negotiate deals on outstanding debts that could have averted the filing.
Judge Rhodes made it clear on Wednesday that he had not ruled on whether the filing violated the state’s Constitution, or whether pensions should be protected.
"All of the issues in which the court is not ruling are fully preserved," he said.
Those issues and others will be part of what is likely to be a protracted legal battle over the city’s eligibility to file for bankruptcy. Hearings will begin later this summer, and will include testimony by Mr. Orr on the dismal condition of Detroit’s finances.
Mr. Nowling said the eligibility hearings were the first critical step in Mr. Orr’s road map for the city’s recovery. "One thing that was clear was that Judge Rhodes wanted an efficient and speedy process, and we think that’s essential for turning the city around," he said.
The bankruptcy filing has riveted the attention of the city and surrounding region, and spurred a small but loud group of protesters to form outside the courthouse on Wednesday.
About two dozen men in red T-shirts representing the Detroit Fire Department chanted "Help us help you" as they marched down Lafayette Boulevard.
Darryl Brown, a firefighter who went on disability last year, criticized Mr. Snyder and other state officials for targeting retiree pensions. "They can’t touch it; it’s protected by the Constitution," Mr. Brown said. “But they’re still doing everything they can to figure out how to get at it."
A Detroit police officer, Rodney Fresh, said he feared the bankruptcy would gut what was left of the city’s dwindling middle-class population.
He accused Mr. Snyder of failing to consider the hardship the bankruptcy would cause retirees. "I want him to look at the situation and just be fair," Mr. Fresh said. "He’s looking at everything from his point of view."
(Published by The New York Times – July 24, 2013)