Bankruptcy

Eligibility fight continues in Detroit bankruptcy case

Detroit’s bankruptcy lawyers continued trying to convince U.S. Bankruptcy Judge Steven Rhodes that the city is eligible for bankruptcy relief during a 10 a.m. hearing in federal court.

Rhodes ended today’s hearing prematurely to give creditors more time to prepare rebuttal arguments. The hearing will continue at 1 p.m. Monday.

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U.S. Bankruptcy Judge Steven Rhodes gave creditors five days to rebut arguments that Detroit is eligible for Chapter 9 bankruptcy relief.

Rhodes initially set rebuttal arguments for today but creditors, including Detroit retirees, unions and pension funds, asked for more time because the city’s lawyers raised new issues during oral arguments yesterday.

Rhodes offered lawyers to make rebuttal arguments later today, Friday or early Monday.

“I’ll have to take a red eye,” said Bruce Bennett, the city’s top bankruptcy lawyer.

So Rhodes set rebuttal arguments for 1 p.m. Monday.

Detroit’s bankruptcy judge doesn’t have to rule right now whether Chapter 9 bankruptcy law is unconstitutional, a federal lawyer said today.

U.S. Department of Justice attorney Matthew Troy wants Judge Steven Rhodes to rule on the constitutionality issue after he decides whether Detroit is eligible for bankruptcy relief.

About one dozen objectors urged the judge Tuesday to kick Detroit out of bankruptcy court and have argued the filing is unconstitutional.

“Do you really have to do this now?” Troy asked the judge. “Should you make this reach in declaring that a statute, which has effectively been upheld for 75 years, is unconstitutional right now, at this state of the proceeding? We don’t think you have to.”

U.S. Bankruptcy Steven Rhodes grilled a state lawyer over the controversial emergency manager law, which was created after voters repealed the old law.

“What’s the point of giving people the power of referendum to reject a statute if the constitution is read to give the legislature the power to re-enact word for word the same statute voters just rejected?”

Rhodes asked Assistant state Attorney General Margaret Nelson. “What’s the point?”

“That becomes a political issue,” Nelson said. “Do voters want to keep those legislators in office?”

“Why put the people to that?” Rhodes asked. “The people spoke.”

She disagreed the new EM law is identical to the law repealed by voters.

“Where is the substance of that right of referendum that the constitution gives the people if the legislature has the authority to thumb its nose like that?” Rhodes asked. “Why put the people through that?”

“It does beg the question,” Nelson said. “It becomes a matter of political will.”

“The public already expressed its will,” Rhodes said. “Why do it two, three or an infinite number of times?”

The emergency manager bill was rushed through the House and Senate over vehement objections from Democrats who said the chambers’ Republican majorities have ignored the will of the people.

A state lawyer dismissed an argument made by failed mayoral candidate Krystal Crittendon on Tuesday that Emergency Manager Kevyn Orr’s appointment was improper and not valid.

Krystal Crittendon

Krystal Crittendon

Crittendon’s argument, if successful, would undo any actions taken by Orr, including the city’s July 18 bankruptcy filing.

Today, Assistant state Attorney General Margaret Nelson said the Michigan Court of Appeals concluded in November 2012 that the state law enabling Orr’s appointment is legit.

“I brought a copy of the order for Mr. Crittendon,” Nelson told U.S. Bankruptcy Judge Steven Rhodes, “but she is not here today.”

U.S. Bankruptcy Judge Steven Rhodes touched on a thorny issue that has outraged opponents of Detroit’s bankruptcy.

“Doesn’t the imposition of an emergency manager change (Detroit’s) form of government by abrogating the powers of City Council and the mayor?” Rhodes asked Assistant Michigan Attorney General Margaret Nelson.

“Absolutely,” said Nelson, who is defending the controversial state emergency manager law. “It’s a temporary situation. This isn’t the state dictating how the city will operate forever. There are limits.”

The state EM law is not unconstitutional delegation of authority, Nelson added.

“It’s not delegating legislative power to the EM,” Nelson said. “It allows the EM to simply executive the same executive powers that the elected officials of the community would have,” she said.

The state emergency manager law is constitutional and Gov. Rick Snyder’s authorization of the historic Detroit bankruptcy case did not hurt retiree pensions, a state lawyer said today.

Assistant state Attorney General Margaret Nelson said the governor merely authorized the July 18 bankruptcy filing and the move did not impair Detroit retiree pension benefits.

“By the governor authorizing the bankruptcy filing, it does not cause an actual diminishment of benefits,” Nelson told U.S. Bankruptcy Judge Steven Rhodes.

Cuts are coming, however, but only if Rhodes finds Detroit is eligible for bankruptcy relief.

The cuts, needed to cope with an estimated $3.5 billion shortfall in the city’s two pension funds, would be outlined in a plan of adjustment the city would file after becoming eligible for Chapter 9 relief.

An assistant state Attorney General today continued the attack against opponents of the city’s Chapter 9 case in federal court and defended the state emergency manager law.

Assistant state Attorney General Margaret Nelson is fighting arguments that Gov. Rick Snyder’s authorization of the July 18 bankruptcy filling violates constitutional protections of retiree pensions, among other issues.

She follows the city’s top bankruptcy lawyer Bruce Bennett, who argued the bankruptcy is constitutional and came after the city tried unsuccessfully to negotiate in good faith with creditors, including pension funds, unions and retiree groups. The city and Attorney General’s Office is trying to convince U.S.  Bankruptcy Judge Steven Rhodes that the city is eligible for bankruptcy relief, which would help Detroit restructure $18 billion in debt.

 

Emergency Manager Kevyn Orr and Gov. Rick Snyder, who have spent a lot of time lately with their hand on the Bible and answering bankruptcy questions, get to turn the cameras on Detroit police and fire officials later this week.

Eleven police and fire officials will face questions from city lawyers under oath Thursday in Southfield, including Detroit Fire Fighters Association President Daniel McNamara and Mark Diaz, president of the Detroit Police Officers Association and a trustee on the city’s Police & Fire pension fund.

The city is trying to prove it negotiated in good faith with creditors before filing bankruptcy July 18 and the depositions could help Detroit’s bankruptcy lawyers prove the city is eligible for bankruptcy relief.

On Friday, seven officials who represent retired police and fire personnel, will sit for depositions ahead of a mini-trial next week that will largely determine whether the city is eligible for Chapter 9 bankruptcy relief.

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