In a recent exchange of the Bankruptcy Court for the Eastern District of Michigan, Judge Steven Rhodes stated that allowing Detroit Pensions special protections would violate the bankruptcy code.
This statement shows Judge Rhodes’ main intent during the course of the Detroit bankruptcy filing – maintain the integrity of the bankruptcy code and follow it to the letter.
Bankruptcy courts usually do not let policy come in the way of their decision making, and it appears it will not in this case either.
Southeast Michigan is full of discussion over what should or should not take place in Detroit’s bankruptcy filing, but sound reasoning based on the law will make sure that any divisiveness remains at the outskirts. By taking policy out of the discussion, it reduces emotions that divide.
Oct 21 (Reuters) – The federal judge overseeing Detroit’s bankruptcy filing called the city’s pension funds “unsecured creditors” and stated that any special protections for them would violate federal bankruptcy law.
The statement by U.S. Bankruptcy Judge Steven Rhodes, in an exchange with an attorney representing Detroit’s two pension funds, came in the closing session of a three-day hearing examining legal issues in the bankruptcy case.
The judge will hold a trial, starting Wednesday, to determine if Detroit is eligible for protection under Chapter 9 of the U.S. Bankruptcy Code while it tries to restructure $18.5 billion in debt and other liabilities including pension funds the city says are underfunded by $3.5 billion. The city filed the largest municipal bankruptcy in U.S. history on July 18.
Robert Gordon, the pension funds’ attorney, argued that the city should not be eligible for bankruptcy protection because Michigan’s constitution protects pensions from impairment and the city did stipulate in its filing that pensions could not be cut.
Rhodes said the U.S. Bankruptcy Code would not afford special protection to pensions because, “It gives a priority to one unsecured creditor over all the others. Or one group of unsecured creditors, over all the others.”
Rhodes did not issue an opinion on the pension matter, but he did pose tough questions to attorneys representing Detroit’s unions, retirees and pension funds as they disputed the legal arguments the city’s attorneys made last week.
At the trial beginning Wednesday, the city must show it is insolvent and negotiated in good faith with its creditors.
Detroit’s other creditors would not tolerate special treatment for the pension funds, said Bruce Bennett, the city’s lawyer. He added that conversely, unions and others opposing cuts in pension benefits would object if bondholders got preferential treatment.
Bennett also argued that the federal bankruptcy court can impair contracts and pensions despite state constitutional protections.
“You can say pensions cannot be impaired, but the reality is, at the end of the day, there isn’t enough money to pay them,” Bennett said.
Rhodes is expected to make a formal ruling on the question after the eligibility trial is completed.
EMERGENCY MANAGER LAW
Rhodes also said he wants to hear arguments during the trial later this week on why a spending provision was added to Michigan’s emergency manager law.
Reuters: http://www.reuters.com/article/2013/10/21/usa-detroit-bankruptcy-idUSL1N0IB1HY20131021
