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Should federal court or state court decide if Michigan constitution bars Detroit bankruptcy filing?

Posted Jul 24, 2013 11:55 AM CDT
By Martha Neil

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In the wake of a Michigan appellate court ruling Tuesday that put the brakes on a state court judge's orders barring Detroit from proceeding with a federal bankruptcy case, a lawyer for the city on Wednesday asked a federal bankruptcy judge to require those objecting to the filing to make their case in federal court rather than state court.

In addition to a standard 30-day litigation stay in the Chapter 9 case, Detroit asked U.S. Bankruptcy Court Judge Steven Rhodes to extend that stay to state-court suits filed by city workers, retirees and pension plans against the governor and other officials. The plaintiffs are arguing that the bankruptcy violates state constitutional provisions protecting benefits for public employees, Reuters reports. If granted, the motion would require the plaintiffs to make their case against the city's filing in federal bankruptcy court.

"We believe those decisions must be made and can only be made by this court in actions brought before this court," attorney Heather Lennox of Jones Day told the judge, speaking in a courtroom packed with reporters and observers.

Rhodes apparently agreed, ruling Wednesday afternoon that all issues concerning Detroit's bankruptcy case will be heard in bankruptcy court, the Chicago Tribune reports in an article that relied on information from wire services.

Attorney Sharon Levine of Lowenstein Sandler is one of the lawyers who argued against Lennox. Representing the city's largest public labor union, the American Federation of State, County and Municipal Employees Council 25, she urged Rhodes to let the state court determine the constitutionality of the bankruptcy case. Potentially losing their pensions—which average less than $19,000 annually—would eliminate both a fundamental right and a safety net for city workers, she said.

Jones Day was retained to represent Detroit by Kevyn Orr, the Reuters article notes. Orr is a former Jones Day bankruptcy lawyer who was hired by Michigan officials in March to serve as Detroit's emergency manager. In that role, he is one of the defendants in the state-court litigation over the constitutional provisions.

Whether a state or a federal court should decide the state constitutional issue about the legitimacy of the city's bankruptcy case is a complex question on which prior case law offers minimal guidance, the Associated Press reports.

"It's not just an issue of bankruptcy law and pension law, it's also an issue of federalism," said law professor Paul Secunda of Marquette University. "Can a federal bankruptcy court basically ignore a state constitutional provision and allow a city like Detroit to ignore its previous promises concerning public employee pensions?"

See also:

ABAJournal.com: "Detroit files for bankruptcy, the biggest US city ever to do so"

ABAJournal.com: "Appeals court puts brakes on state judge’s order derailing Detroit bankruptcy"

Huffington Post: "Steven Rhodes, Detroit Bankruptcy Judge, Has Strong Record, Known As A Stickler"

Salon: "There will be more Detroits: Your town could be next"

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