Detroit’s bid to win federal bankruptcy court protection from its nearly 100,000 creditors enters a critical phase today with the start of what could be weeks of hearings.
In the nearly three months since Detroit filed the largest municipal bankruptcy in U.S. history, most court hearings have centered around legal maneuvering by the city and its creditors in preparation for an eligibility trial scheduled to begin Oct. 23.
U.S. Bankruptcy Judge Steven Rhodes, who has to determine whether Detroit is eligible for bankruptcy before the city can begin shedding billions in debts, first will hold two days of hearings starting today on legal issues surrounding the filing.
Retiree groups and labor unions have argued that Emergency Manager Kevyn Orr’s July 18 bankruptcy petition runs afoul of the state and federal constitutions.
Specifically, retirees and unions have argued the law allowing Detroit to file for bankruptcy — Public Act 436 — violates the Michigan’s constitutional protection of contractual pensions because it could lead to benefits being cut.
Michigan Attorney General Bill Schuette’s office, defending Gov. Rick Snyder’s authorization for Orr to declare bankruptcy, has come to the city’s defense in arguing that simply being eligible for bankruptcy doesn’t “impair a single contract.”
Separately, Schuette has supported the city’s eligibility for bankruptcy, but has vowed to fight any attempt by Orr to cut pensions. Orr has said retirement checks may have to be cut in order to reduce an estimated $3.5 billion in unfunded liability in the city’s two pension funds.
The judge has already signaled in past hearings the pension issue will be litigated after eligibility and some bankruptcy experts have dismissed the retirees’ arguments.
“It’s not an eligibility issue,” said Laura Bartell, a bankruptcy law professor at Wayne State University. “This idea that ‘well, he said he’s going to cut the pensions, they’re not eligible for bankruptcy,’ that’s silly.”
The Office Committee of Retirees, a nine-member panel created by the court to represent more than 20,000 retirees, and former city corporation counsel Krystal Crittendon also have claimed Rhodes doesn’t have the authority to rule on the constitutionality of the state emergency manager law.
Detroit’s attorneys have attempted to beat back the claims in court filings, pointing to the nation’s handful of other municipal bankruptcies that have been successfully litigated and resolved.
City attorney Bruce Bennett said in a court filing last month that objectors have attempted to “invent additional requirements not found in the Michigan Constitution” designed to derail the city’s “overwhelming need for debt relief.”
Because of the complexity of the case and volumes of potential evidence and expert testimony, Rhodes has scheduled additional trial dates through the first week in November, if necessary.
During oral arguments today and Wednesday, Rhodes has given objecting parties 3½ hours to share among their attorneys for opening arguments.
The city’s attorneys will have the same amount of time to make their arguments.
Both sides will have an hour to offer rebuttals, the judge said in a court order.