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Detroit Judge Questions Bankruptcy Critics’ Pension Claim

Oct. 16 (Bloomberg) -- A federal judge questioned whether pension rights for Detroit’s municipal workers can be guaranteed by Michigan’s constitution, as claimed by current and retired employees seeking to have the city’s $18 billion bankruptcy case thrown out.

U.S. Bankruptcy Judge Steven Rhodes pressed lawyers yesterday in a Detroit court to explain why Michigan municipal pension commitments can never be revised and to say whether that position means the state must guarantee payments.

Rhodes challenged unions and a city pension system on their claims that the state constitution bars any cuts to municipal retiree payments, in or out of bankruptcy. Even proposing the cuts makes a city ineligible for bankruptcy protection, they have said.

“Is there any other constitutional right, state or federal that is that absolute?” Rhodes asked an attorney for a pension system that opposes the bankruptcy. “Even freedom of the press isn’t that absolute, is it?”

Union lawyers and a committee representing retired workers made legal arguments yesterday in Detroit to have the city’s filing under Chapter 9 of the U.S. Bankruptcy Code rejected.

The hearing will continue Oct. 21, when opponents of the bankruptcy will respond to the arguments made by city attorney Bruce Bennett.

Third Phase

Next week, attorneys for city workers and retirees will return to court for the third phase of the fight over eligibility. In that phase, opponents may call witnesses to testify about whether the bankruptcy was filed in good faith.

To remain in bankruptcy, the city must show that it either tried to negotiate with creditors, or that talks were impractical, that it intends to develop a plan to adjust its debt and that it was authorized by the state to file the case.

Detroit filed the biggest bid for court protection by a U.S. city amid negotiations between the emergency manager, bondholders, public workers and retirees. Kevyn Orr, the city’s state-appointed emergency manager, said six decades of economic decline had left Detroit unable to fully pay creditors, including retired workers, and still provide necessary services.

U.S. Constitution

In court papers, critics said that the city presented creditors with a “take it or leave it” debt-adjustment plan and that the Bankruptcy Code violates the U.S. Constitution by usurping rights that belong to the states.

Detroit’s case will have “implications for blighted cities throughout the United States,” Sharon Levine, a union attorney, said at the start of yesterday’s hearing.

Retirees and current workers have pointed to a section of Michigan’s constitution that protects pensions as a contractual right.

“What do I do if bondholders come back and say the constitution protects them?” Rhodes asked Claude Montgomery, an attorney for a committee of retirees.

Montgomery said protections for pensions are different from bondholder guarantees. Later in the hearing, Robert Gordon, an attorney for the pension system, said Michigan’s constitutional protection for pensions is “absolute.”

‘Print Money’

“How can the state promise that when, under the federal constitution, the state can’t print money?” the judge asked. “If you demonstrate there is a constitutional right there, what’s it worth if the entity that has the obligation doesn’t have the means?”

Union lawyers also attacked Orr’s decision to file for bankruptcy. Because Orr has said he may try to reduce pensions, the filing violates Michigan’s constitution, they argued.

Republican Governor Rick Snyder, who appointed Orr, has argued that the bankruptcy filing was proper. The U.S. Justice Department, citing decades of legal decisions, filed a brief last week saying Chapter 9 is constitutional.

Rhodes asked Bennett, of Jones Day, whether the only way for Michigan lawmakers to protect municipal pensions was to bar its cities from filing for bankruptcy.

“Yes, your honor that’s exactly what they would have to do,” Bennett said.

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

To contact the reporter on this story: Steven Church in U.S. bankruptcy court in Detroit at schurch3@bloomberg.net.

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

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