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Michigan Wins Delay of Detroit Bankruptcy Challenge

July 23 (Bloomberg) -- Michigan officials won a postponement of a state judge’s ruling that Detroit’s bankruptcy filing in federal court violated the state’s constitution, pending a consideration of Michigan’s appeal.

Detroit filed for Chapter 9 bankruptcy July 18, the biggest bid for court protection by a U.S. city. Michigan Circuit Court Judge Rosemarie E. Aquilina in Lansing ruled minutes after the filing that Governor Rick Snyder couldn’t authorize further actions that would impair or diminish public pension benefits, citing the Michigan constitution.

The next day, Aquilina further ordered Snyder to direct Detroit emergency manager Kevyn Orr to immediately withdraw the bankruptcy petition. State officials appealed the orders and the Michigan Court of Appeals granted their motion for immediate consideration today.

“The circuit court’s July 18, 2013, and July 19, 2013, temporary restraining orders and all further proceedings are stayed pending resolution of this appeal or further order of this court,” a three-judge panel said in today’s ruling.

An initial hearing in the bankruptcy case is scheduled for tomorrow in U.S. Bankruptcy Court in Detroit. Traditionally, a bankruptcy filing stops litigation against a debtor or attempts to seek payment, and a federal judge wouldn’t be required to defer to a state court ruling.

Three Lawsuits

Aquilina’s orders came in response to three lawsuits in Michigan state court seeking a finding that a bankruptcy filing would conflict with the state’s constitutional protection of public retirees’ rights.

The General Retirement System and the Police and Fire Retirement System of the City of Detroit sued Snyder and Orr July 17, contending that Article IX, section 24, of the Michigan constitution bars any government in the state from reducing pension benefits.

The suit was filed on behalf of the plans and more than 32,000 active and retired Detroit employees. Two similar lawsuits were filed by individual retirees in the same court earlier this month against Snyder and Michigan Treasurer Andy Dillon.

Under the U.S. Bankruptcy Code, the city and its officials are entitled to halt most court proceedings against them during the bankruptcy case. U.S. Bankruptcy Judge Steven W. Rhodes in Detroit yesterday agreed to consider the city’s request to extend the protection to unspecified “state entities.”

Ronald King, attorney for the Detroit pension funds, and attorney John Canzano, who filed another of the challenges, didn’t immediately return calls for comment on the ruling.

The challenges include General Retirement System of Detroit v. Emergency Manager of Detroit, 317284, Court of Appeals, State of Michigan. The bankruptcy case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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