Bankruptcy

Unions, pension funds fight to kick Detroit out of bankruptcy court

All the big acronyms were at federal court today as labor unions, retirees, pension funds and others tried to convince a judge that Detroit is not eligible for Chapter 9 bankruptcy protection.

The UAW and AFSCME, the city’s largest union teamed with the city’s two pension funds and the city’s former top lawyer Krystal Crittendon to claim the city’s bankruptcy filing is unconstitutional and should be dismissed.

The hearing, which continues Wednesday, and an Oct. 23 mini-trial will determine whether the city’s bankruptcy case continues or ends prematurely. Since 1954, just 63 municipalities have filed for Chapter 9 bankruptcy, with 29 cases being dismissed for a variety of reasons, including failure to get proper state approval to file, said James Spiotto, a Chicago bankruptcy attorney whose firm has researched Chapter 9 filings.

Come back at 10 a.m. Thursday when the city’s bankruptcy team continues its oral arguments and justifying why the city should receive Chapter 9 bankruptcy relief.

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Federal law beats the state constitutional protections of retiree pensions “period, end of story,” the city’s top bankruptcy lawyer said Tuesday.

Attorney Bruce Bennett countered claims from retiree groups, pension funds and creditors who have objected to the city receiving Chapter 9 bankruptcy relief. Several creditors said the bankruptcy would slash vested retiree pensions, which are protected by the state constitution.

But federal law is supreme when there is a proper bankruptcy case in front of the court, Bennett told U.S. Bankruptcy Judge Steven Rhodes.

“Period,” Bennett said. “End of story.”

The city and creditors are involved in mediation in hopes of resolving disputes, including the treatment of the unfunded portion of the city’s pension obligations. Emergency Manager Kevyn Orr has pegged that figure at $3.5 billion, though city pension funds dispute that figure.

Bennett said it is too early to say how pensions will be treated if the city is eligible for bankruptcy relief.

“We just don’t know,” Bennett said.

The city’s top bankruptcy lawyer offered tough advice for creditors, residents and others who are upset about the Detroit Chapter 9 bankruptcy case.

“If you don’t like the powers the court has in Chapter 9, write your congressman,” attorney Bruce Bennett said Tuesday while responding to objections from retiree groups, pension funds and other creditors. “If you don’t like the way Detroit was managed…don’t let the people who used to be in office be in office again.

“If you don’t like the emergency manager and you don’t think he was qualified, write the governor or your state legislator,” Bennett continued.

The state constitutional protections of retiree pensions won’t mean much if Detroit reaches a point that it cannot pay any debts, the city’s top bankruptcy lawyer said Tuesday.

Attorney Bruce Bennett made the dire warning after listening to hours of objections from creditors, retiree groups and city pension funds. The creditors are fighting to kick Detroit out of bankruptcy court, arguing it would slash vested pension benefits, which are protected by state constitution.

The bankruptcy is essential, however, to reverse Detroit’s prolonged financial slide, Bennett said.

“What happens if a city can’t adjust its debts?” Bennett asked U.S. District Judge Steven Rhodes. “Most business owners and residents are smart enough and sophisticated enough to know it’s a problem to be residents of the highest tax jurisdiction in the state of Michigan. Where 42-65 cents of every dollar are spent on something other than services.

“That is not a stable situation,” Bennett continued, “and is not going to work out well.”

If the city is ineligible for bankruptcy relief, some city debts would continue to be paid in the short term while city revenue continues to decline, Bennett said.

“But debts of all kinds will not be paid,” long term, Bennett said, “and no provision of any constitution will change this.”

Bruce Bennett

Bruce Bennett

The city needs to make significant retiree pension cuts but does not want to eliminate pension benefits, said the city’s top bankruptcy lawyers.

Attorney Bruce Bennett of the Jones Day law firm tried to clarify the city’s goals while arguing the city is eligible for bankruptcy relief. He followed objections from 11 creditors, including retiree groups and city pension funds, who are trying to get Detroit kicked out of bankruptcy court.

“We never said our objective is to eliminate pensions,” Bennett told U.S. Bankruptcy Judge Steven Rhodes.

Any pension cuts would target the estimated $3.5 billion gap in pension funding, though the city’s two pension funds dispute Emergency Manager Kevyn Orr’s estimate.

Rhodes questioned the lawyer about whether the state is obliged to step in and guarantee public retiree pensions if a municipality can’t afford the costs.

“I don’t think the state has an obligation,” Bennett said.

The judge also asked whether the state will step in with a bailout.

“If we could get state money, that would be a great thing,” Bennett said. “Thus far, the state has been of the view that (Detroit) has to reorganize based on its own financial resources.”

The goal is to negotiate pension cuts with the pension funds and unions, Bennett said.

“We are participating in mediation to facilitate that goal,” Bennett said.

A lawyer for the United Auto Workers reminded Detroit’s bankruptcy judge that there is no safety net for city retiree pensions, unlike workers in the private sector.

There is no federal agency that backstops pensions for public-sector retirees, UAW lawyer Babette Ceccotti told U.S. Bankruptcy Judge Steven Rhodes.

UAW lawyer Babette Ceccotti

UAW lawyer Babette Ceccotti

The UAW wants Rhodes to kick the city out of bankruptcy court, arguing is is unconstitutional to slash constitutionally protected pension benefits.

“Remember, we are in the public sector, we are not in the private sector, where there is a federally established insurance program,” for pensions, Ceccotti said. “A federal agency provides a safety net.”

There is no safety net for public employees. For private-sector, pensions are backstopped by the Pension Benefit Guaranty Corp.

“We don’t have that,” safety net, Ceccotti said.

Michigan pensioners, instead, have the state constitution, which guarantees vested pension benefits, she said.

“That’s it,” Ceccotti said.

U.S. Bankruptcy Judge Steven Rhodes sparred with a pension fund lawyer over whether the state constitutional protection of retiree pensions can be violated in federal court.

“It’s impermeable,” pension fund lawyer Robert Gordon said about the state constitution.

Lawyer Robert Gordon

Lawyer Robert Gordon

“How can the state promise that, given that under the federal constitution, it can’t print money?” Rhodes said.

“It’s a matter of ensuring what dollars are available are devoted,” to pensions and other expenses, Gordon said.

“Suppose there’s not enough,” money to pay pensions, Rhodes countered.

“I don’t know the answer to that, your honor, but that’s not the issue today,” Gordon said.

What is the city supposed to do if there isn’t enough money to pay vested pension benefits? the judge asked.

“Every situation is different. Do you mean today, or over time?” Gordon asked.

U.S. Bankruptcy Judge Steven Rhodes is putting the will of the people and state constitutional protections of pension benefits in jeopardy while the bankruptcy case is pending, a pension fund lawyer said Tuesday.

Attorney Robert Gordon wants Rhodes to dismiss the city’s bankruptcy petition, arguing it is unconstitutional because it ultimately would slash vested retiree pension benefits.

The city has countered that pensions were not slashed when the city filed bankruptcy July 18. That would come after Rhodes decides if the city is eligible for bankruptcy relief and after the city files a plan to adjust its debts.

“The city has admitted its intent in the Chapter 9 case is to impair and diminish accured pension benefits,” Gordon told the judge. “There is absolutely nothing speculative about that.”

The judge questioned Gordon about what the pension funds would do if the court concludes the state is obliged to guarantee retiree pension payments.

Gordon would not say whether the pension funds would ask the state to guarantee pension payments for Detroit retirees if the bankruptcy case continues in federal court.

“You’re not prepared to say that you are not going to request that conclusion, are you?” Rhodes asked the lawyer.

“No, I will not say that,” Gordon said.

Gov. Rick Snyder delegated authority he did not possess to let Emergency Manager Kevyn Orr violate the state constitution protecting accrued pensions when he green-lighted the city’s bankruptcy filing in July.

“The governor is delegating authority he does not have,” Gordon said. “he would have to get a constitutional amendment.”

If Detroit gets bounced from bankruptcy court, city officials must continue to pay pensions or negotiate cuts with retirees, a lawyer said Tuesday.

“That process was shortcut here,” said lawyer Thomas Morris, who represents several retirees and active employees and who wants U.S. Bankruptcy Judge Steven Rhodes to dismiss the city’s bankruptcy petition.

If Rhodes concludes, perhaps later this month, that the city is eligible for Chapter 9 bankruptcy relief, the city would file a plan of adjustment that is expected to include pension cuts.

“If the city goes more with a plan that does not impair pensions, the question the court has is what happens then?” Morris told the judge. “The most retirees can ask for is: ‘don’t impair the pensions.’

“Will the state have to step in and help the retirees?” he added. “I don’t know.”

Gov. Rick Snyder violated state law by failing to place contingencies on the city’s bankruptcy filing that prohibits cuts to vested retiree pensions, a lawyer said Tuesday.

Lawyer Jerome Goldberg is objecting to the bankruptcy on behalf of retired Detroit Water and Sewerage Department worker David Sole.

“There is a strong policy purpose for protecting pension benefits and excluding them from being diminished or impaired (in) bankruptcy,” Goldberg wrote in a court filing. “Pensions are in fact deferred wages. They were earned and secured by the workers…before the bankruptcy petition was filed. In essence, they are simply unpaid wages which the retirees elected to defer so they can have an income for the last years of life.”

Goldberg followed several lawyers who allege the city’s bankruptcy filing violates state constitutional protections of vested pension benefits.

“If the court were to approve a plan that impairs pensions — again, not presuming at all that it will, but if it did — is that the city impairing pensions or is that the bankruptcy court impairing pensions?” U.S. Bankruptcy Judge Steven Rhodes asked the lawyer. “The law prohibits the city from doing it, but the question is whether it prohibits bankruptcy court from doing it.”

U.S. Bankruptcy Judge Steven Rhodes plays rhythm guitar in the cover band The Indubitable Equivalents.

U.S. Bankruptcy Judge Steven Rhodes plays rhythm guitar in the cover band The Indubitable Equivalents.

U.S. Bankruptcy Judge Steven Rhodes pressed a lawyer representing retirees to argue why the city’s Chapter 9 filing threatened vested public pensions.

“Because the filing itself didn’t result in anyone’s payments being reduced,” Rhodes told retirees lawyer Claude Montgomery.

Rhodes questioned whether the pension fight is premature and repeated the city’s main defense: That the filing itself did not slash any pensions, which are protected by the state constitution.

Claude Montgomery

Claude Montgomery

Any pension cuts would be proposed if Rhodes rules, perhaps later this month, that the city is eligible for Chapter 9 bankruptcy relief. Pension cuts are expected to be a main pillar of how the city adjusts as much as $18 billion in debt.

Emergency Manager Kevyn Orr proposed pension cuts in a plan shared with creditors June 14 — one month before the city filed bankruptcy.

“The mere threat of a filing is not hte harm all by itself, but it was preceded by an announced plan…and a series of other events and statements made, which evidence a desire to violate the state constitution,” Montgomery told the judge.

Montgomery called Rhodes the “gatekeeper” with the power to block Orr from slashing pensions.

“The harm is factual and imminent and you are at the gates,” Montgomery said.

The fight over whether Detroit’s bankruptcy filing is constitutional is as important a national issue as the battle over privacy rights that has raged since the Sept. 11 terrorist attacks, a union lawyer said Tuesday.

AFSCME lawyer Sharon Levine closed her objection to the city’s bankruptcy by making an impassioned speech to U.S. Bankruptcy Judge Steven Rhodes, whose rulings in the case could have far-reaching impact on vested pension benefits and the nation’s municipal bond market.

“We understand what is happening here is difficult. Detroit is in dire financial straits and it is not lost on us that the decisions you will make will have an impact on blighted cities throughout the United States,” Levine told the judge.

“We have been grappling since 9-11 on balancing between Homeland Security and individual privacy rights,” she added. “As a society, we’ve grappled where the First Amendment ends and where hate crimes begin. This is no less of a constitutional issue — the impact this will have on state sovereignty and the ability of citizens to hold its own municipal leaders accountable.”

She urged Rhodes to avoid making an easy, quick decision regarding Detriot’s eligibility for Chapter bankruptcy relief.

“Democracy is hard,” she told Rhodes.

AFSCME lawyer Sharon Levine

AFSCME lawyer Sharon Levine

Citizens are losing the ability to hold elected officials accountable by the city filing bankruptcy and turning over control to the federal government, a union lawyer said Tuesday.
And the city’s historic bankruptcy filing is unconstitutional because it would slash constitutionally protected pension benefits, said Sharon Levine, an attorney for the American Federation of State, County & Municipal Employees.
Levine was the first lawyer to object to the bankruptcy filing during a hearing today in federal court. In all, 11 groups will address U.S. Bankruptcy Judge Steven Rhodes in hopes of proving Detroit is ineligible for bankruptcy relief.
“States are ceding accountability for their own financial management,” Levine told the judge. “By turning it over to the federal government and hiding behind the bankruptcy process, we lose that accountability which is a cornerstone of the state constitution.”

Now that Detroit retirees fear that Emergency Manager Kevyn Orr’s new health care cuts will leave them penniless, sick and undergoing surgery from a shady doctor in a parking-garage basement — like Brody in “Homeland” — attention today turns to the fight over pensions.

A host of unions and retiree groups will argue today that the city’s historic bankruptcy filing violates constitutional protections of vested pension benefits. The city counters that the filing itself has not impacted pensions.

Those cuts are expected to be proposed after U.S. Bankruptcy Judge Steven Rhodes decides whether the city is eligible for bankruptcy relief.

Strap in for what likely will be two long days.

The city gets 2 1/2 hours to deliver an opening argument and the Michigan Attorney General’s Office gets one hour.

Here is today’s proposed lineup:

10 a.m. to noon:

1. American Federation of State, County & Municipal Employees (35 minutes)

2. Detroit Retirees Committee (35 minutes)

3. Retired Detroit Police Members Association (10 minutes)

4. City retiree David Sole (10 minutes)

5. Former Detroit Corporation Counsel Krystal Crittendon (five minutes)

6. Retiree Association parties (five minutes)

7. Center for Community Justice and Advocacy (five minutes)

1:30 p.m. to 3 p.m.

1. Detroit pension funds (35 minutes)

2. UAW (35 minutes)

3. Detroit retirees/employees (five minutes)

4. Detroit public safety unions (10 minutes)

Robert Snell
Robert Snell is the Detroit News federal courts reporter. He can be reached at rsnell@detnews.com or (313) 222-2028.