Detroit bankruptcy challenged on constitutional grounds

Tue Aug 20, 2013 2:02am EDT
 
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By Joseph Lichterman and Bernie Woodall

DETROIT (Reuters) - Public labor unions took aim at Detroit's historic bankruptcy filing on Monday, asking a U.S. court to toss the city's bid for protection from its creditors because it is constitutionally flawed on both the state and federal levels.

A union that represents public-sector workers even took the unusual step of arguing that Chapter 9 of the federal bankruptcy code, under which municipalities seek protection from their creditors, violates the U.S. Constitution.

But as a midnight deadline for filing objections to the bankruptcy passed, Detroit's bondholders were conspicuously absent from the long list of unions, pension funds and individual creditors lining up to argue against bankruptcy.

Unions representing the city's firefighters and police alleged that state-appointed emergency manager Kevyn Orr had failed to negotiate in good faith, stating "there were no negotiations."

Under U.S. bankruptcy code, Detroit must prove it is insolvent and has negotiated with creditors in good faith, or there were too many creditors to make negotiations feasible, in order to be certified by a federal judge for a bankruptcy proceeding.

For his part, Michigan Attorney General Bill Schuette said in a filing that even if the bankruptcy case continues, the city cannot be allowed to ignore state constitutional protections for retirement benefits earned by its employees.

Schuette's filing does not ask the judge to prevent Detroit's bankruptcy from proceeding.

Unions and the city's two public pension funds made similar arguments in their filings, claiming a bankruptcy filing will lead to an unconstitutional reduction in retirement benefits.   Continued...

 
The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city on Grand River Avenue in Detroit, Michigan July 26, 2013. REUTERS/Rebecca Cook