Bankruptcy Law

Detroit bankruptcy unconstitutional, judge rules in pension case

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Detroit’s bankruptcy filing this week violates the Michigan constitution and must be withdrawn, said a state court judge Friday, in response to emergency petitions from lawyers representing pensioners and two city pension funds.

The attorneys got an emergency hearing with Ingham County Circuit Judge Rosemarie Aquilina Thursday, the Detroit Free Press reports here. During the hearing the judge said she planned to issue an order blocking the bankruptcy filing. However Rick Snyder, the governor of Michigan, and Kevyn Orr, Detroit’s emergency manager, filed the bankruptcy petition five minutes before the Thursday hearing began.

Another hearing was held Friday. According to Aquilina’s Friday orders (PDF)—related to three separate lawsuits challenging the bankruptcy filing—the state constitution prohibits actions that lessen pension benefits for public employees. Snyder and Orr violated the constitution by proceeding with the bankruptcy filing, because they knew it would reduce pension benefits, Aquilina said.

“I have some very serious concerns because there was this rush to bankruptcy court that didn’t have to occur and shouldn’t have occurred,” Aquilina said Friday. “Plaintiffs shouldn’t have been blindsided, this process shouldn’t have been ignored.”

Schuette said he will seek emergency consideration by the Michigan Court of Appeals. The city filing seeks Chapter 9 protection, and it is reportedly the largest U.S. city ever to seek bankruptcy protection. Orr has said that said that the city owes as much as $20 billion, the newspaper reports in a separate article. He also said that the city tried to reach out-of-court-settlements, but could not get past opposition from unions, retirees and lenders.

John Pottow, a University of Michigan law professor, told the paper that the issue could work its way to the state supreme court, or it could be resolved quickly in bankruptcy court.

“There’s nothing that precludes a federal judge from adjudicating the constitutionality of the Michigan statute,” Pottow is quoted saying. “The bankruptcy judge can interpret Michigan law.”

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