Battling Court Cases to Determine If Detroit Bankruptcy Filing Can Proceed

photo credit: chuckh6

After a state judge ruled last week that Detroit’s bankruptcy filing violated the Michigan Constitution, a battle has ensued over whether federal laws trump the state’s laws, which prohibit tampering with pension benefits.

A hearing will be held July 29 to determine whether Detroit’s bankruptcy filing violates the state constitution. The state wants the case to be moved to federal court, but Judge Rosemarie Aquilina of Ingham County Circuit Court refuses to budge. She said yesterday that she believes the case should be heard in state court.

“This is a very important issue,” she said. “I understand that there may be this question of moving it to federal court. … But these are state issues. We’re dealing with the state constitution and an emergency manager who is a product of the state legislation.”

But federal Judge Steven Rhodes of United States Bankruptcy Court ruled that he would hold a hearing tomorrow to determine whether a lawsuit by retired public employees can block the bankruptcy filing. So just a week after Michigan Gov. Rick Snyder announced that Detroit would go the bankruptcy route, the largest municipality in U.S. history to do so, the arduous legal wrangling has already begun. 

The filing begins a long, painful odyssey for the city, which in the 1950s was the fourth-largest in the country with nearly 2 million inhabitants, but which has seen its population plummet to 700,000.  Middle-class residents — black and white —escaped to the suburbs to flee the city’s rising crime and deteriorating basic services.

One of the populations with the most at stake are retirees, whose pensions may be on the line now.

The city’s state-appointed emergency manager, Kevyn D. Orr, had filed a motion asking that the city be protected from litigation as it proceeds with the bankruptcy filing.

But Aquilina stepped in last week and said the bankruptcy filing violated the state constitution.

“As you all know, my decision last week was because there’s been a violation of constitution. I don’t believe the constitution should be made of swiss cheese,” she said.

Orr plans to make “significant” cuts to the pensions of the city’s 21,000 retirees and believes that U.S. bankruptcy law, which allows contracts to be slashed, will take precedent.

The lawsuit filed by the pension boards for city employees and the police and fire department employees are to protect their pensions. According to bankruptcy experts, while retiree pensions likely won’t be completely wiped out, the monthly payments could be reduced.

But Ronald King, lawyer for the pension systems, said his lawsuit doesn’t stop the city from proceeding in bankruptcy.

“But you have to respect the constitutional provision in Michigan that protects accrued pension benefits,” he said.

In an interview on National Public Radio, Orr said the rumors that retirees would be wiped out is false.

“We’re just talking about adjusting them to today’s realities,” said Orr.

Asked by NPR host Robert Siegel what percentage of their pensions they would receive, Orr refused to give a number. Siegel wondered why the city would renege on contracts it had made with its workers, who didn’t cause the city’s financial mess.

“Workers are caught with that reality, but also they voted for the leadership of some of their pensions,” said Orr. Essentially, he said, “the birds have come home to roost.”

“So you’re saying the residents of Detroit should be held accountable for the people they elected all those years?” Siegel asked.

“No I don’t want to be quite that harsh in my assumption,” Orr responded. “I’m just saying there were many indicators and warning signs that could have been corrected over a number of years and I don’t want to blame the victim. But I want to say, it doesn’t matter what happened in the past. A retrospective, looking behind us, isn’t productive, what matters is where we are now.”

“There is no money,” Orr said. “It doesn’t matter what I say, it doesn’t matter what we look back on, there’s just no money.”

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