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Detroit bankruptcy case heads to Wednesday hearing on challenges

A sculptor of a giant fist in honor of American boxer and heavy weight champion Joe Louis sits at the intersection of Woodward and Jefferson
A sculptor of a giant fist in honor of American boxer and heavy weight champion Joe Louis sits at the intersection of Woodward and Jefferson

By Bernie Woodall

DETROIT (Reuters) - Labor unions trying to stop Detroit from cutting pensions filed a new challenge to the city in bankruptcy court as the federal judge overseeing the case said he would hear arguments on Wednesday.

U.S. Bankruptcy Court Judge Steven Rhodes agreed on Monday to a request by Detroit Emergency Manager Kevyn Orr to fast track a hearing on whether other courts can hear lawsuits against Detroit, while it seeks federal bankruptcy court protection.

Concerned that retirement benefits will be slashed, Detroit retirees, workers and pension funds have filed three lawsuits, including one backed by the United Auto Workers union, in state court in an effort to derail the biggest Chapter 9 municipal bankruptcy in U.S. history.

A Michigan court judge, for instance, has ordered Orr to withdraw the July 18 bankruptcy filing.

The American Federation of State, County and Municipal Employees Council 25, which represents about 70 percent of Detroit's civilian workforce, on Monday argued if the other lawsuits were stopped, Orr, Michigan's governor and others would be able to continue to operate beyond state constitutional authority.

However, many legal experts said they expect Judge Rhodes to put the other cases on hold.

"Federal bankruptcy law generally trumps state law," and is designed to do so, said Stuart Gold, a Detroit-based bankruptcy lawyer at Gold Lange & Majoros PC.

UNIONS: WE NEVER SAT DOWN WITH ORR

If Orr's request to put those lawsuits on hold is granted, top Michigan state officials, Orr and others would also be protected from litigation regarding last Thursday's bankruptcy petition.

Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime became rampant and its population shriveled by about 25 percent in the past decade to 700,000. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.

To remain in bankruptcy court, Detroit must prove that it is insolvent and that it made a good faith effort to negotiate with its creditors, including its employee pension funds, over the city's more than $18 billion of debt, which includes $5.7 billion in unfunded liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability.

Orr told National Public Radio on Monday that the city is broke. "It doesn't matter what I say, it doesn't matter what we look back on, there's just no money," he said.

AFSCME leaders on Monday said that Orr had rebuffed efforts by unions to discuss the issues.

"Not once, did (Orr's) representatives sit down and seek to negotiate a solution with our union," Steven Kreisberg, national director for collective bargaining for AFSCME, told a news conference.

"Our members and our retirees were never given the opportunity to address the serious issues of the type of cutback that the emergency manager is seeking," he said.

Orr has not specified how much pensions or retiree health care will have to be cut, although his June 14 proposal to creditors called for "significant cuts in accrued, vested pension amounts for both active and currently retired persons."

Orr spokesman Bill Nowling said the unions were never promised negotiations. "We will meet with the unions if they ever put a counterproposal on the table."

Under Michigan's emergency manager law the city was not obligated to negotiate in collective bargaining with the unions, Nowling said. "It's a mischaracterization to say they were promised negotiations."

Pensioners could attempt to appeal to the federal district court any order by Judge Rhodes enforcing the stay of litigation against Detroit. But, because such an order would not be considered a final judgment under bankruptcy laws, the federal court could refuse to hear the appeal, Gold said.

In a declaratory judgment on Friday, Ingham County Circuit Court Judge Rosemarie Aquilina said the state law that allowed Michigan Governor Rick Snyder to approve the bankruptcy filing violated the Michigan Constitution. The governor cannot take actions that would violate constitutional protections for retirement benefits for public workers, she said.

Aquilina on Monday morning adjourned a hearing in another case brought by city pension plans with no action taken. The pension plans asked for the proceedings to be postponed one week to July 29.

The historic bankruptcy filing roiled the $3.7 trillion municipal bond market on Friday, sending prices lower and yields higher on some bonds. But the market, where states and cities like Michigan and Detroit borrow money, settled down and prices barely budged on Monday.

(Additional reporting by Karen Pierog, Jonathan Stempel, Nick Brown and Deepa Seetharaman, writing by Karen Pierog; Editing by Dan Burns, Nick Zieminski and Tim Dobbyn)

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