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Judge rules Detroit eligible for bankruptcy claim

Herb Boyd | 12/5/2013, 2:22 p.m.

After several months spent milling over the issue, Judge Steven W. Rhodes ruled Tuesday that Detroit is insolvent and thereby eligible for bankruptcy.

The ruling was not good news for the financially strapped city, once the economic engine of the nation. The unions, as well as a number of creditors, can be expected to appeal the decision.

“This once proud and prosperous city can’t pay its debts,” Rhodes said in a statement to the press. “It’s insolvent. It’s eligible for bankruptcy. But it also has an opportunity for a fresh start.”

The next action after the ruling, according to those familiar with the case, will be for the city to file a “plan of adjustment.”

The adjustment will possibly include ways in which the city can pay some of its debts and restore some of its services, including the sorely hampered transportation system, street lighting and other municipal services. Most critical is the extent to which the ruling will impact pensions.

Rhodes’ decision firmly rejected the objections from unions, pension funds and retirees, all of whom are connected to the city’s $18 billion debt, and $3.5 billion is tied up in unfunded pension obligations. “Time is of the essence, and we will continue to move forward as quickly and efficiently as possible,” said Kevyn Orr, the city’s emergency manager, addressing the need to hurry along the plan to get the city from under court protection.

Detroit will become the largest city in the nation to file for bankruptcy, and the Chapter 9 bankruptcy differs from others because it applies mainly to municipalities. According to Orr, Detroit’s debts and problems made it “impracticable” for the emergency manager to negotiate with creditors before filing a Chapter 9 bankruptcy.

Lawyers representing the unions and retirees charged that the request for bankruptcy came before every effort was expended to settle with creditors. Another sticking point was the constitutionality of bankruptcy and its impact on public employee pensions, which the judge concluded were not protected in a federal Chapter 9 bankruptcy, despite the fact that the Michigan Constitution protects them.

“Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” the judge told the press. Federal law, he said, “trumps the state law—making the pensions of 23,000 workers fair game for the city to include in its plan of adjustment.”

Detroit Mayor-elect Mike Duggan told the press that the judge’s ruling was one no one wanted to see, but one that the city needed to move forward. “We need to make sure the retirees are treated fairly on the pensions they earned,” he said, “and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve.”