July 31, 2014 at 7:34 pm

Creditor groups ask federal court to delay action on Detroit bankruptcy appeals

Five major Detroit creditor groups representing pensioners joined the city and State of Michigan on Thursday in asking a federal court to delay action on appeals or risk jeopardizing the bankruptcy “grand bargain.”

The creditors, city and state sent a joint letter to the Sixth Circuit Court of Appeals’ clerk hoping to stave off a hearing and decision on appeals over Detroit’s bankruptcy eligibility and power to cut pensions.

The coalition of attorneys asked for a delay of the appeals proceedings pending the outcome of a crucial trial next month over the city’s plan to shed $7 billion in debt.

In a move lawyers involved in the case described as unusual, a three-judge appellate panel had given unions, retiree groups and the city’s pension funds a 48-hour ultimatum to decide by Thursday whether to pursue their appeal at an Aug. 7 hearing or have them dismissed.

Five of the seven groups with appeals forged an alliance with the city and state Thursday and asked the appellate judges to put a hold on their appeals pending the outcome of a trial over Detroit’s debt-cutting plan slated to begin Aug. 21.

The creditor groups, which include AFSCME Council 25 and the city’s two pension funds, told the Court of Appeals clerk “any action by this court” before the trial “would jeopardize both the city’s expeditious emergence from bankruptcy and over $800 million of critical funding commitments.”

The state of Michigan, philanthropic foundations and private companies have pledged the equivalent of $816 million over 20 years to boost city pensions in exchange for shielding city-purchased art at the Detroit Institute of Arts from being sold.

The so-called “grand bargain” was forged under the understanding that retiree groups, unions and pension funds would end their appeals at the Sixth Circuit over Detroit’s Chapter 9 bankruptcy eligibility and ability to reduce pensions.

The Court of Appeals panel had planned to hold a hearing Wednesday in Cincinnati to consider legal and constitutional issues at the heart of Detroit’s bankruptcy, including whether Michigan's constitutional protection of pensions applies in federal bankruptcy court.

On Tuesday, the presiding judge on the panel told city creditors in a letter that further delay of a decision over the appeals before the trial starts is not an option.

“We are concerned that any action taken by the Sixth Circuit could destabilize the delicate balance of settlements that are embodied in the current plan,” Robert Gordon, attorney for Detroit’s pension funds, said Thursday.

Two creditor groups with pending appeals at the Sixth Circuit did not sign onto the joint letter Thursday: The United Auto Workers and the Retried Detroit Police Members Association.

A UAW attorney declined comment late Thursday. An attorney for the police members group could not be reached for comment.

But the UAW sent its own letter to the appeals court clerk Thursday that also asked for continued postponement of oral arguments. The union, which represents city paralegals and library workers who are part of the general pension system, said it is still trying to reach a settlement for its members with Detroit’s legal team through bankruptcy mediation.

The settling creditors’ efforts to push off the appeals comes as Detroit’s fiercest financial creditor is gearing up for challenging the legality of the grand bargain at next month’s trial.

An attorney for Syncora Guarantee Inc. said Thursday the direction of the retiree and labor groups’ appeals isn’t changing the bond insurer’s legal strategy of arguing the city’s plan unfairly benefits pensioners to the detriment of financial creditors.

“It’s irrelevant to us,” Syncora attorney James Sprayregen told The Detroit News. “We’re hurtling toward the trial, barring some peace breaking out, which is what we’re hoping for in Detroit.”

Syncora insured a pension-related debt Detroit is now trying to get wiped out completely. The insurance giant faces multi-million dollar losses if the city can convince Rhodes that they can legally discriminate against Syncora in favor of pensioners and other creditors.

“We’d love to settle this still and our door’s wide open for a settlement,” Sprayregen said.

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