July 24 (Bloomberg) -- Detroit’s first court hearing after filing the biggest U.S. municipal bankruptcy may determine whether Michigan Governor Rick Snyder can be insulated from lawsuits related to the case.
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. Kevyn Orr, the Detroit emergency manager, is scheduled to ask U.S. Bankruptcy Judge Steven Rhodes today to extend that immunity to Snyder.
Public workers and retirees claim the bankruptcy threatens their pension benefits with illegal cuts, and a union opposing immunity said in a court filing that protecting the Republican governor, who appointed Orr and authorized the July 18 bankruptcy, would be an “improper, unprecedented” move.
Immunity would allow Snyder “to engage in conduct which is unconstitutional under the Michigan Constitution, unauthorized or, at a minimum, outside the scope of Chapter 9,” the AFL-CIO, the union for thousands of current and former city workers, said in court papers.
The $18 billion bankruptcy filing came amid negotiations between Orr and creditors including bondholders, public workers and retirees. Orr said that six decades of economic decline had left Detroit unable to both pay creditors in full and provide residents necessary services.
Today’s hearing in Detroit is to confirm immunity for the city, as well as extend it to state entities, employees, and agents and representatives of the debtor, including the 54-year-old governor.
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.
Two similar cases were filed earlier in the month against Snyder and Michigan Treasurer Andy Dillon. Just minutes before a state-court hearing that may have halted the city’s plans, Detroit filed its bankruptcy petition.
Larry Dubin, a professor at the University of Detroit Mercy School of Law, said Snyder’s role is probably less important than it was before the Chapter 9 filing.
“Governor Snyder was very important in setting the groundwork necessary for this bankruptcy,” he said. Now Orr and his advisers will handle the day-to-day management of the case. Snyder “will not be the driving force,” Dubin said.
Extending the so-called automatic stay to the governor would prevent creditors, including the pension plans, from filing disruptive lawsuits, Orr said in court papers.
Creditors want to sue Snyder “for the sole and inappropriate purpose of attempting to improve their bargaining positions with respect to their claims and otherwise denying the city the protections of the Chapter 9 stay,” he said.
Before the bankruptcy, 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.
City workers, other than police and firefighters, argue that their pensions and benefits are being unfairly targeted for cuts after they have already made concessions. Those employees saw pension benefit cuts of 40 percent last year, the AFL-CIO said in its court filing.
The average pension for employees other than police and firefighters was set at slightly less than $18,000 a year, according to a June 30, 2012, valuation report cited in the AFL-CIO filing. The average annual pay for such employees is $41,385, the union said.
The three lawsuits are pending in state court in Ingham County, Michigan. Circuit Judge Rosemarie Aquilina in Lansing ruled on the first two, finding Detroit’s Chapter 9 filing violated the state’s constitution, which says public pension benefits are a contractual obligation that can’t be diminished or impaired.
In asking Rhodes to delay hearings in the bankruptcy, pension officials cited a July 19 ruling by Aquilina criticizing Snyder for “overreaching” when he authorized Orr to rush the city into bankruptcy.
Rhodes on July 22 rejected the request to delay the bankruptcy case, and Aquilina’s ruling was put on hold yesterday pending consideration by Michigan’s court of appeals.
Attorney Dale Ginter, who represented retired city workers in the 2008 bankruptcy of Vallejo, California, said the immunity motion may stumble at first on technical grounds -- the city may need to re-file its request in the form of a lawsuit -- before finally being granted.
“They may well lose that motion, but ultimately I think the city will be able to protect the governor,” Ginter said.
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
To contact the editor responsible for this story: Andrew Dunn at firstname.lastname@example.org