Fight over Detroit bankruptcy begins in federal court

Wed Jul 24, 2013 6:59am EDT
 
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By Bernie Woodall and Deepa Seetharaman

DETROIT (Reuters) - A showdown over the biggest municipal bankruptcy filing in U.S. history begins in a federal court on Wednesday morning as creditors challenge its legality.

Attorneys for Kevyn Orr, a corporate bankruptcy lawyer tapped by Michigan officials in March as Detroit's emergency manager, want U.S. Bankruptcy Judge Steven Rhodes to put on hold a flurry of lawsuits claiming the Chapter 9 bankruptcy filing violates the state constitution.

Rhodes agreed on Monday to an expedited hearing requested by Orr that seeks to extend Chapter 9's automatic stay of litigation to lawsuits filed against Governor Rick Snyder, Michigan Treasurer Andy Dillon, and Orr by Detroit workers, retirees and pension funds that are pending in state court in Michigan's capital city of Lansing.

Those lawsuits were halted by a Michigan Appeals Court panel on Tuesday in response to State Attorney General Bill Schuette's request to stop proceedings while he seeks to overturn orders issued by a lower court judge hearing the cases. One of those orders directs Orr to withdraw the bankruptcy petition on state constitutional grounds.

The federal court in Detroit is expecting an overflow crowd of media, attorneys, labor union representatives and others participating in or witnessing the unfolding of the historic drama.

Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime became rampant and its population shriveled by almost two thirds since the 1950s to about 700,000 now. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.

Concerned that retirement benefits will be slashed, the American Federation of State, County and Municipal Employees Council 25, which represents about 70 percent of Detroit's civilian workforce, on Monday filed an objection to pushing the lawsuits aside. They said if they were stopped, Orr, Michigan's governor and others would be able to continue to operate beyond state constitutional authority.

In a June 14 proposal to creditors, Orr called for "significant cuts in accrued, vested pension amounts for both active and currently retired persons."   Continued...

 
A vacant blighted home is seen next to a well-kept occupied home on West Grand Boulevard in Detroit, Michigan July 23, 2013. REUTERS/ Rebecca Cook