DETROIT — A federal judge agreed with Detroit on Wednesday and stopped any lawsuits challenging the city’s bankruptcy, declaring his courtroom the exclusive venue for legal action in the largest filing by a local government in U.S. history.
The decision by U.S. Bankruptcy Judge Steven Rhodes was a major victory for Detroit, especially after an Ingham County judge last week said Gov. Rick Snyder ignored the Michigan Constitution and acted illegally in approving the Chapter 9 filing. That ruling and others had threatened to derail the case.
Retirees had sued, claiming the bankruptcy threatened their pensions that are protected by the constitution.
“If these actions are not stopped, the city would be irreparably harmed. … These litigants will have due process. They will have their day in court,” Detroit attorney Heather Lennox said during two hours of arguments by the city, pension funds and unions.
Rhodes said there’s nothing in federal law or the U.S. Constitution that gives a state court a shared role in a bankruptcy.
Questions about Detroit’s eligibility to overhaul itself through bankruptcy “are within this court’s exclusive jurisdiction,” he said.
Michael Nicholson, general counsel for the United Auto Workers, said he plans to review the judge’s order with his colleagues and decide whether to appeal, but he says the rulings raise “serious issues about the relationship of state and federal government.” He added the issue is bigger than creditors; it’s about states’ rights.
“State courts have the power to decide what the state constitution means,” Nicholson said. “In our view, retirees’ rights are a matter of Michigan constitutional rights.”
The courtroom was jammed with lawyers representing some of the thousands of creditors as well as rank-and-file city employees and retirees eager to know the outcome. Some wore T-shirts that said, “Detroit vs. Everybody.”
Detroit emergency manager Kevyn Orr, who recommended bankruptcy, sat in the front row for part of the hearing. Outside the courthouse, protesters held a banner with a message for Wall Street: “Cancel Detroit’s debt. The banks owe us.”
Detroit has about 21,000 retired workers who are owed benefits — including former officer workers at City Hall, police, paramedics, sanitation crews, firefighters and bus drivers — with underfunded obligations of about $3.5 billion for pensions and $5.7 billion for retiree health coverage.
There are three lawsuits in state courts challenging the bankruptcy. They mostly focus on a provision in the Michigan Constitution that says public pensions “shall not be diminished or impaired.” Pensions have not been frozen or reduced in the bankruptcy so far, but officials say there are shortfalls in the funds and that payouts could be at risk.
Sharon Levine, an attorney for a union that represents city workers, urged Rhodes to let those lawsuits run their course. She said there’s no federal insurance for public pensions once they’re broken, unlike pensions at private employers.