Detroit Bankruptcy To Move Forward, Federal Judge Rules

The Detroit bankruptcy case will proceed in federal court, a US bankruptcy judge has ruled.

The decision puts all state court challenges filed by public sector unions against the city’s bankruptcy filing on hold.

One state court judge had ruled last Friday the bankruptcy violated Michigan’s constitution, a determination that had been stayed by an appeals court, but now that ruling has been set aside, and all the legal issues will be consolidated in one federal court venue.

US Bankruptcy Judge Steven Rhodes ruled that instead of various lawsuits scattered piecemeal in courts throughout Michigan “challenges to the city’s Chapter 9 filing, including protests by retired city employees about potential pension cuts, would be addressed in coming hearings. The federal bankruptcy court has ‘exclusive jurisdiction’ over the case, he said… The judge said that concentrating all legal issues in federal court increased the chances that Detroit could reorganize its debts and emerge from bankruptcy in better financial shape,” the New York Times reports.

Detroit owes a staggering $18 billion in debt and unfunded liabilities. A significant part of its debt load is made up of health and pension obligations to present and former public sector workers. The city has been undermined by among other things widespread joblessness, rampant violent crime, political corruption, a massive number of abandoned homes and buildings, and a shrinking population.

The judge’s ruling also freezes any lawsuits that the unions or other adverse parties might file against Gov. Rick Snyder, State Treasurer Andy Dillon, and Detroit’s state-appointed emergency manager Kevyn Orr who filed for Chapter 9 bankruptcy reorganization.

Detroit is largest municipality in U.S. history to file for bankruptcy protection.

The bankruptcy judge actually has not yet decided if the city is eligible for file bankruptcy under Michigan’s constitution or any other legal provision; that determination will come later, but within the confines of federal court. “Rhodes spent an unusual amount of time making it clear that all of the objections that creditors have are yet to be decided and can still be argued in his court,” the Detroit Free Press reports.

The unions are nonetheless considering an appeal of the bankruptcy court’s action.