A federal judge on Wednesday swept aside lawsuits
challenging Detroit's bankruptcy, settling the first major dispute in
the scramble to get a leg up just days after the largest filing by a
local government in U.S. history.
After two hours of arguments,
U.S. Bankruptcy Judge Steven Rhodes made clear he's in charge. He
granted Detroit's request to put a permanent freeze on three lawsuits
filed in Ingham County, including another judge's extraordinary decision
that Gov. Rick Snyder trampled the Michigan Constitution and acted
illegally in approving the Chapter 9 filing.
That ruling and others had threatened to derail the bankruptcy.
about Detroit's eligibility to turn itself around through bankruptcy
"are within this court's exclusive jurisdiction," Rhodes said.
said nothing in federal law or the U.S. Constitution gives a state
court a dual role. It was a victory for Detroit, which had warned that
it would be "irreparably harmed" if it had to deal with lawsuits in
state courts while trying to restructure $18 billion in debt with
thousands of creditors.
"Widespread litigation ... can only
confuse the parties, confuse the case and create serious barriers,"
attorney Heather Lennox told the judge.
Creditors "will have their day in court" -- bankruptcy court, she said.
courtroom was jammed with lawyers representing creditors as well as
rank-and-file city employees and retirees eager to know the outcome.
Some wore T-shirts that said, "Detroit vs. Everybody."
emergency manager Kevyn Orr, who recommended bankruptcy, sat in the
front row for part of the hearing. Outside the courthouse, protesters
held a banner with a message for Wall Street: "Cancel Detroit's debt.
The banks owe us."
Detroit has about 21,000 retirees -- police,
firefighters, City Hall clerks, trash haulers, bus drivers -- who are
owed money and fear their income is at risk in a bankruptcy. Orr has
said the city has underfunded obligations of about $3.5 billion for
pensions and $5.7 billion for retiree health coverage.
Michigan Constitution states that public pensions "shall not be
diminished or impaired." An Ingham County judge cited that provision
last week when she ordered Snyder and other officials to take no further
action in the Detroit bankruptcy.
Sharon Levine, an attorney
for a union that represents city workers, urged the bankruptcy judge to
let those lawsuits run their course. She said there's no federal
insurance for public pensions once they're broken, unlike pensions at
"Our members who participate at most are at or below $19,000 a year. There is no safety net," Levine said.
Rhodes ruled in favor of Detroit, he said opponents will have
opportunities to make the same arguments in his court in the future. He
has many critical issues ahead, including whether Detroit really is
broke and entitled to greatly reduce or wipe out debts. The process
could last a year or more.
Michael Nicholson, general counsel for the United Auto Workers, was disappointed with Rhodes' decision.
courts have the power to decide what the state constitution means,"
Nicholson said outside court. "In our view, retirees' rights are a
matter of Michigan constitutional rights."
Snyder signed off on
Detroit's bankruptcy on July 18, calling it the only practical choice
for a city whose population has plummeted to 700,000 from 1.8 million
decades ago. Detroit's long-term debt has become an urban millstone.
The governor called Rhodes' decision "excellent" and said it allows one place to settle the city's finances.
March, Snyder appointed Orr, a bankruptcy expert, as Detroit's
emergency manager. Orr had sweeping powers to reshape city finances but
recommended bankruptcy after failing to reach any significant deals with
creditors, including Wall Street bankers and Detroit pension funds.
Many of those creditors, however, accused him of being inflexible and
believe bankruptcy always was the plan.
Detroit has more than
double the population of Stockton, Calif., which had been the largest
U.S. city to file for bankruptcy before Detroit trumped it last week.
Detroit fire Lt. James Edwards, 43, attended the court hearing Wednesday with some anxiety.
seems as though we're going to end up being the patsy for a lot of bad
decisions that have been made over the years," said the 18-year
department veteran, referring to his future pension. "You base your life
decisions on promises made to you when you came on the job."
Myers-Florence, 59, said her pension is her only income after working
nearly 36 years for Detroit, from bus driver to social services. She
can't believe she may lose money because of the bankruptcy.
"It's going to have to hit me in the face," she said. "I just can't believe that they can go that way."