Detroit Bankruptcy Should Be Dismissed, Union Tells Court

Detroit’s $18 billion bankruptcy should be dismissed because it violates the Michigan and U.S. constitutions, according to a public-employee union, the first of the city’s biggest creditors to seek a quick end to the case.

The American Federation of State, County and Municipal Employees, which filed written arguments today, will be followed by other major creditors who have pledged to fight the bankruptcy. Today is the deadline to challenge the city’s eligibility for court protection. U.S. Bankruptcy Judge Steven Rhodes in Detroit has scheduled a trial on the question for October.

The union expanded on the claims made in court last month by its lead lawyer, Sharon Levine, with the New Jersey law firm Lowenstein Sandler LLP.

Detroit “hastily commenced this unconstitutional, unlawfully authorized Chapter 9 proceeding seeking the haven of bankruptcy to illegally attempt to slash pension and other post-employment benefit obligations and cram such reductions down the throats of current and former city employees, such as the AFSCME Detroit Employees,” the union said.

The city filed the biggest ever U.S. municipal bankruptcy in July after the state-appointed emergency manager, Kevyn Orr, said six decades of economic decline left Detroit unable to pay creditors, including retired city workers, in full and provide residents necessary services.

State’s Comments

Michigan Attorney General Bill Schuette and the Detroit Institute of Arts, said today they won’t challenge the city’s eligibility to be in bankruptcy. Schuette said his office will seek to protect vested pensions from any cuts should that issue come up later in the case.

The Detroit Institute of Arts, which has an art collection worth billions, said it supports Orr’s efforts to restructure the city and its debt. The DIA has said it would oppose any effort to try to sell its collection to help pay creditors.

In its first two court hearings, lawyers for police, fire and general-city workers said they were planning to challenge the city’s right to be in bankruptcy. Other creditors, including National Public Finance Guarantee Corp., a unit of bond insurer MBIA Inc., did not file objections to the plan. Lawyers for National Public Finance asked about the process, known in court as discovery, which the objectors will use to collect documents and interview witnesses to support their positions.

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

A recent U.S. Supreme Court ruling shows that Chapter 9 of the federal bankruptcy code violates the U.S. Constitution, the union claimed.

The union claims the city hasn’t proved it is insolvent, hasn’t tried to negotiate with creditors and hasn’t been authorized for bankruptcy under Michigan law.

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

(Corrects to show MBIA unit’s inquiry in eighth paragraph of story published Aug. 19.)
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