Detroit Bankruptcy Protections Affirmed, Snyder Shielded

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Protesters hold a sign in front of the Theodore Levin U.S. Courthouse in Detroit, Michigan, during the city's first court hearing after filing the biggest U.S. municipal bankruptcy, on July 24, 2013. Close

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Protesters hold a sign in front of the Theodore Levin U.S. Courthouse in Detroit, Michigan, during the city's first court hearing after filing the biggest U.S. municipal bankruptcy, on July 24, 2013.

Detroit can enjoy the protections of bankruptcy, including immunity from lawsuits related to the case, a federal judge ruled, extending that shield to Michigan Governor Rick Snyder.

U.S. Bankruptcy Judge Steven Rhodes in Detroit today blocked lawsuits by public employee groups and pension funds who alleged the state overreached in seeking court protection from creditors. Such claims must be heard in bankruptcy court, Rhodes said. His ruling gives the city the opportunity it said it needs to address $18 billion in debt without disruptions.

“State court proceedings may well have an impact on the bankruptcy case here and administration of this case or the debtor’s assets,” he said.

Detroit filed for bankruptcy protection July 18. Kevyn Orr, the city’s emergency manager, said that six decades of economic decline had left Detroit unable to both pay creditors, including retired city workers, in full and provide residents necessary services.

Bond prices after the ruling indicated that investors are still debating the debt’s fate in bankruptcy. Detroit general-obligation bonds maturing April 2028 traded after the ruling at 81.7 cents on the dollar, the lowest this year, data compiled by Bloomberg show. Other Detroit general-obligation bonds maturing April 2015 traded as high as 93 cents on the dollar, the highest since March 18.

Photographer: Jeff Kowalsky/Bloomberg

Heather Lennox, a partner with Jones Day law firm representing the city of Detroit, right, walks outside the Theodore Levin U.S. Courthouse in Detroit, Michigan, on July 24, 2013. Close

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Heather Lennox, a partner with Jones Day law firm representing the city of Detroit, right, walks outside the Theodore Levin U.S. Courthouse in Detroit, Michigan, on July 24, 2013.

Chapter 9

Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities, typically prevents creditors from taking actions against the debtor that might interfere with reorganization.

As public workers protested outside the courthouse, Detroit’s attorneys today argued that halting current and future lawsuits against the city, its officials and the Republican governor will provide needed breathing room to reorganize operations and debts.

City unions and pension officials claim Snyder, 54, violated Michigan’s constitution by authorizing Orr to file for bankruptcy. Pension funds for retired city workers sued in state court to have the filing declared illegal.

Suing Snyder over his decision is a “backdoor way” to disrupt the Chapter 9 case, Heather Lennox, a lawyer for the city, said in court today.

‘Constitutional Rights’

Barring lawsuits against Snyder related to the bankruptcy would be unfair to Michigan’s citizens, said Sharon Levine, an attorney for the American Federation of State, County & Municipal Employees, part of the AFL-CIO.

“We’re taking away very fundamental constitutional rights,” Levine said.

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Members of the Detroit Fire Department hold signs while protesting in front of the Theodore Levin U.S. Courthouse in Detroit, Michigan, on July 24, 2013. Close

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Photographer: Jeff Kowalsky/Bloomberg

Members of the Detroit Fire Department hold signs while protesting in front of the Theodore Levin U.S. Courthouse in Detroit, Michigan, on July 24, 2013.

Rhodes said that granting the stay on litigation “assists the court in making the bankruptcy process more efficient and gives the court control over all of the issues that will have to be resolved through the course of the bankruptcy.”

Today’s hearing was held in Detroit’s 80-year-old federal district courthouse rather than the bankruptcy court to accommodate the crowds of lawyers, spectators and reporters the case has drawn. Two protesters outside held a yellow banner that said “Cancel Detroit’s Debt.”

Mary Jo Vorkamp, a 43-year-old librarian, said pensions should take priority over bondholders.

“The investors knew there was risk involved,” Vorkamp said while holding her 3-year-old son and a sign that read “Save my mommy’s pensions.”

26 Years

Vorkamp said she has worked in the library for 26 years.

“Our pensions are a contract that was enshrined in the constitution -- or at least I thought it was,” she said.

The General Retirement System and the Police and Fire Retirement System of the City of Detroit sued Snyder and Orr on July 17, contending that the state constitution bars any government in the state from reducing pension benefits. The suit was filed on behalf of the retirement plans and more than 32,000 active and retired Detroit employees.

In Chapter 9, a city gains court protection first and later must convince a judge that the filing was proper. To be eligible, a municipality must show that it can’t pay its debts, wants to implement a plan to adjust its debts and has negotiated in good faith with creditors when possible.

Eligibility Schedule

Under a schedule proposed by Orr, creditors would have until the end of August to object to eligibility. The two sides would exchange information and interview witnesses for the next couple of months and submit their final written arguments in early November. The eligibility hearing would happen sometime after that.

It took Stockton, California, several months to prove it was eligible to remain in bankruptcy, while San Bernardino, California, won’t face a hearing on the issue until next month, about a year after it sought court protection.

Michael Artz, a lawyer for the American Federation of State, County & Municipal Employees, said outside court after the hearing that while the question of the constitutionality of the Chapter 9 filing should have remained in state court, the union “will fight whatever court we’re in.”

The bankruptcy came amid negotiations between Orr and creditors including bondholders, public workers and retirees. Before the filing, Orr proposed canceling about $2 billion in bond debt and reducing $3.5 billion in unfunded pension liabilities. Those debts would be replaced with about $2 billion in new notes, forcing bondholders and the pension systems to accept less than what they are owed.

Mediator Proposal

Rhodes may name a fellow jurist to oversee mediation efforts between the city and creditors. In an agenda posted yesterday for an Aug. 2 hearing, Rhodes included a proposal to appoint Gerald Rosen to mediate. As chief judge of the U.S. District Court in Detroit, Rosen, 61, oversees Rhodes and the other bankruptcy judges in the district.

Sivad Johnson, a 42-year-old firefighter, said he felt betrayed when he heard his pension might be at risk after 19 years of service.

Johnson said he will be eligible for a pension of about $2,000 a month after 20 years on the job, meaning he could soon retire. He said that while he may have planned to retire at a younger age than many workers, he was told during his first day of training that being a firefighter would take 10 years off his life. He said he feels the effects of the job every day.

“This is about our future,” Johnson, who has a wife and two children, said outside the courtroom. “I’m banking on having that pension. I want to be able to retire, not work until I’m dead.”

The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporters on this story: Steven Church in federal court in Detroit at schurch3@bloomberg.net; Erik Larson in federal court in Detroit at elarson4@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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