Judge rules Detroit eligible for Chapter 9 bankruptcy

By Steve Thorpe Legal News U.S. Bankruptcy Judge Steven Rhodes told a packed courtroom Tuesday that Detroit is eligible to shed billions in debt in the largest public bankruptcy in U.S. history. The decision now shifts the case toward how the city will accomplish that task. Rhodes turned away objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve the $18 billion in liabilities. Law Professor Curt Benson has watched the long-running drama and says he is not surprised at the result thus far. "The city is insolvent and I think everyone knows that's been true for a long time," he says. "I think that the pension funds and their attorneys were speaking more out of their justifiable anger and frustration, but to argue that the city was not insolvent was a losing argument. The facts are the facts." Benson is a professor at the Grand Rapids campus of Thomas M. Cooley Law School where he teaches Evidence and Civil Procedure. He hosts a regional syndicated radio program, The Lawyers, where he interviews professors, judges, lawyers and lawmakers on legal issues. Benson is also a frequent public speaker on recent developments in the law, legal history and preventing violence in schools. The issue for Rhodes, who presided over a nine-day trial, was whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss and collapse of the middle class. Minutes after the ruling, a lawyer for the city's largest union, said she would pursue an appeal at the 6th U.S. Circuit Court of Appeals in Cincinnati. City officials got "absolutely everything" in Rhodes' decision, she told reporters. "It's a huge loss for the city of Detroit," said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half the city's workers. Benson says that there will be those who will be happy or unhappy with the result of the ruling and the ongoing Chapter 9 bankruptcy. "The happiest will be Gov. Snyder, because he has won everything he's asked for," he says. "And I think your ordinary Detroit resident, one who doesn't work for the city or have a city pension, has cause to be happy. Ultimately, when Detroit emerges from this, it will be a stronger city. Police response times should improve, fire department equipment will work, streetlights will come on, so your average Detroiter will have every reason to be encouraged by this ruling." Benson believes that the major losers in the action are probably those who have worked for the city. "In contrast, if you are a retired city worker and you had planned on your pension money and suddenly that's being drawn into question, you have every reason to be extremely nervous, upset and frustrated." Although most observers might think that financial institutions would be unhappy to get back a fraction of their investment, Benson believes that most will actually welcome the bankruptcy. "We shouldn't stereotype the possible reactions of financial institutions," he says. "They want stability and don't like chaos." Since the city was insolvent and had no realistic ability to pay the money back anyway, short of bankruptcy, it would've been a "financial free for all," Benson said. "If you were an investor in the City of Detroit, your only option would've been to file suit in state court. Well, great, there are already 500 lawsuits pending against the city. If you get a judgment, they can't pay the judgment. What are you going to do ... start garnishing bank accounts, try to seize assets? That's extremely difficult. They (the financial institutions) would be in worse shape without the bankruptcy than with the bankruptcy." Opponents want to go directly to a federal appeals court in Cincinnati, bypassing the usual procedure of having a U.S. District Court judge hear the case. Rhodes talked about various constitutional issues, many more than would be expected in a bankruptcy case. Benson says that's not surprising considering the nature of the situation. "It's extremely uncommon for a bankruptcy judge to be confronted with genuine constitutional issues," he says. "This situation, however, is different. First of all, it's a municipal bankruptcy under Chapter 9, which has not been as tested as Chapter 11 and Chapter 7. Number two, there's a juxtaposition of the emergency manager law, which some people believe is unconstitutional, affecting the actions of the emergency manager and calling into question what he has done. Rarely do bankruptcy judges have to grapple with emergency manager laws. And Chapter 9 makes reference to state law and, of course, the Michigan Constitution says you cannot "impair" a pension. The question becomes, if you impair a pension through bankruptcy law, does that violate the Michigan Constitution?" Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. But by July, Orr and Gov. Rick Snyder decided bankruptcy was Detroit's best option. Detroit, a manufacturing hub that offered good-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million since then. Tax revenue in a city that is larger in square miles than Manhattan, Boston and San Francisco combined can't reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat. Donors have written checks for new police cars and ambulances. A new agency has been created to revive tens of thousands of streetlights that are dim or simply broken after years of vandalism and mismanagement. While downtown and Midtown are experiencing a rebirth, even apartments with few vacancies, many traditional neighborhoods are scarred with blight and burned-out bungalows. Besides financial challenges, Detroit has an unflattering reputation as a dangerous place. In early November, five people were killed in two unrelated shootings just a few days apart. Police Chief James Craig, who arrived last summer, said he was almost carjacked in an unmarked car. The case occurs at a time of a historic political transition. Former hospital executive Mike Duggan takes over as mayor in January, the third mayor since Kwame Kilpatrick quit in a scandal in 2008 and the first white mayor in largely black Detroit since the 1970s. Orr, the emergency manager, is in charge at least through next fall, although he's expected to give Duggan more of a role at city hall than the current mayor, Dave Bing, who has little influence in daily operations. Whatever else happens, the goal of the bankruptcy is to create a result that allows a new framework that will work for the city. "The fact is that the City of Detroit is not going to go away," Benson says. "That's what makes a municipal bankruptcy different from any other bankruptcy. Corporations go out of business every day. Individuals can simply liquidate all their debts and get a fresh start. But a city is a city ... it has to continue to exist." ---------------- The Associated Press's Ed White contributed to this report. Published: Wed, Dec 4, 2013

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