Judge Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan is currently holding hearings regarding the City of Detroit’s eligibility in bankruptcy.
Again pension attorneys have requested the court to deny Detroit’s bankruptcy filing using the Michigan Constitution.
As discussed on this website earlier this year, the federal constitution grants to the federal congress the authority to draft bankruptcy laws. By using the Michigan Constitution, creditors seek to supersede the constitutional grant regarding bankruptcy. It will be interesting to see how Judge Rhodes resolves the conflict between federal statute and the state constitution when the federal constitution designates the authority to the federal congress.
Detroit creditors today argued that the U.S. Constitution and the Michigan Constitution should block the city’s Chapter 9 bankruptcy.
Judge Steven Rhodes this morning launched two days of hearings to consider legal arguments from creditors who have objected to the city’s bankruptcy eligibility. The city filed the largest municipal bankruptcy petition in U.S. history on July 18.
The hearings will help Rhodes decide whether Detroit meets the specific legal criteria for Chapter 9, which requires cities to be insolvent, negotiate in good faith with their creditors and secure state authorization.
Sharon Levine, an attorney for AFSCME, the city’s largest employee union, attacked the constitutionality of Chapter 9 bankruptcy. She said the law allows the U.S. government to infringe on state rights and gives “political cover” to Detroit emergency manager Kevyn Orr to pursue pension cuts.
“I’d ask your honor to come back with me to elementary and high school when we first talked about what the Constitution means,” Levine said. “By turning over Chapter 9 to the federal government and being able to hide behind the bankruptcy process, we lose that accountability that’s a cornerstone of what our constitution requires of us.”
The state has the right to manage its financial rights to protect citizens from the actions of overbearing government decisions, many of them at the local level, as well as any “unholy alliances” between levels of government, Levine argued in her 35-minute time slot to open what is expected to be two days of hearings this week. She also argued the framers of the constitution never envisioned a federal or national bankruptcy law.
Levine expressed sympathy for the judge’s need to grapple with the needs of citizens, a financially strapped city and the knowledge his decision “has implications for blighted cities across the states.”
“Democracy is hard,” Levine said in asking that her arguments be given the same weight as the stories of Detroiters the judge heard in a previous hearing.
Claude Montgomery, attorney for Detroit’s retiree committee, which has objected to the city’s filing, said the bankruptcy must be rejected before Orr is allowed to enact pension cuts.
“We think you don’t actually have to wait until the harm has befallen you if the threat is imminent,” Montgomery said.
Rhodes responded: “Of course, if eligibility is denied, the city is also denied the right to deal with its other debt, isn’t it?”
Montgomery told Rhodes the city is welcome to reapply for bankruptcy without violating the Michigan Constitution’s protection of public pensions.
Montgomery and other creditors have argued that the city’s bankruptcy should not proceed because of the Michigan Constitution, which protects public pensions as a “contractual obligation.” Federal law allows contracts to be severed in bankruptcy.
Detroit Free Press: http://www.freep.com/article/20131015/NEWS01/310150035/bankruptcy-hearing-Judge-Rhodes
