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Federal judge sets first hearing in Detroit bankruptcy case
Mon, Jul 22 15:45 PM EDT
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By Bernie Woodall

DETROIT (Reuters) - A federal court judge has set the first hearing in Detroit's bankruptcy case for Wednesday to take up the city emergency manager's request to put state lawsuits challenging the bankruptcy filing on hold.

U.S. Bankruptcy Court Judge Steven Rhodes agreed on Monday to the expedited hearing requested by emergency manager Kevyn Orr in response to a Michigan court judge's order for Orr to withdraw the Chapter 9 bankruptcy filing on state constitutional grounds.

If Orr's request is granted, top Michigan state officials, Orr and others would also be protected from litigation regarding Thursday's bankruptcy petition.

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 about 25 percent in the past decade to 700,000. 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, Detroit retirees, workers and pension funds have been running to state court in Michigan's capital of Lansing in an effort to derail the biggest Chapter 9 municipal bankruptcy in U.S. history.

Pensioners could attempt to appeal to the federal district court any order by Judge Rhodes enforcing the stay of litigation against Detroit. But, because such an order would not be considered a final judgment under bankruptcy laws, the federal court could refuse to hear the appeal, said Stuart Gold, a Detroit-based bankruptcy lawyer at Gold Lange & Majoros PC.

Ahead of Wednesday's bankruptcy court hearing, the heads of two of the city's public labor unions - the United Auto Workers and American Federation of State, County and Municipal Employees Council 25 - scheduled a news conference for later on Monday to discuss alleged constitutional violations involving Detroit's bankruptcy petition.

Ingham County Circuit Court Judge Rosemarie Aquilina on Friday said the state law that allowed Michigan Governor Rick Snyder to approve the bankruptcy filing violated the Michigan Constitution. The governor cannot take actions that would violate constitutional protections for retirement benefits for public workers, she said.

Michigan Attorney General Bill Schuette, acting on behalf of Snyder, filed an appeal with the state appeals court asking for immediate consideration. But the appeals court has not yet taken any action on the matter.

Aquilina on Monday morning adjourned a hearing in another case brought by city pension plans with no action taken. The pension plans asked for the proceedings to be postponed one week to July 29. The pension funds had filed an objection to an expedited hearing in federal bankruptcy court, according to a court document.

Legal experts have said they expect the federal judge to put state litigation on hold, allowing those plaintiffs to use the federal court to argue why Detroit should not be allowed to file for bankruptcy.

Orr on Friday said he suspected the city will face an eligibility fight, which would also include whether or not the city made a good faith effort to negotiate with creditors over its more than $18 billion of debt.

Judge Rhodes also set an August 2 hearing in federal court on Orr's motion on procedural matters, including deadlines, schedules, the assumption of leases and contracts, and the appointment of a retired employees' committee.

The historic bankruptcy filing roiled the $3.7 trillion municipal bond market on Friday, sending prices lower and yields higher on some bonds. But the market, where states and cities like Michigan and Detroit borrow money, settled down and was mostly steady on Monday.

(Additional reporting by Karen Pierog, Jonathan Stempel and Nick Brown, writing by Karen Pierog; Editing by Dan Burns, Nick Zieminski and Tim Dobbyn)


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