Bloomberg News

Detroit Retirees, Unions Say Bankruptcy Law Unconstitutional (1)

September 11, 2013

Detroit’s retired workers joined city unions in attacking the city’s record-setting $18 billion bankruptcy, claiming the law that lets cities seek court protection from creditors violates the U.S. Constitution.

A court-approved committee for retired workers filed papers in U.S. Bankruptcy Court in Detroit last night saying Emergency Manager Kevyn Orr filed the case in July with the intention of cutting pensions for retired city workers.

Those workers aren’t eligible for federal Social Security benefits, “rendering their entire economic existence dependent upon retirement compensation promised by the city,” the committee said in its objection.

In an effort to have the case thrown out at a hearing next month, the retirees and unions plan to question Michigan Governor Rick Snyder under oath about his role in authorizing the bankruptcy. The groups point to a line in the Michigan Constitution that says public worker pensions are a contractual right that cannot be undone.

They argue that Chapter 9 of the U.S. Bankruptcy Code cannot overrule a state constitution. The groups asked U.S. Bankruptcy Judge Steven Rhodes to find either that the filing doesn’t meet the tests set out in Chapter 9, or that Chapter 9 itself violates the U.S. Constitution because it interferes with “Michigan’s sovereignty and the right of the people of Michigan to define and control the acts of their elected and appointed officials.”

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In business cases, federal courts have routinely upheld the power of bankruptcy judges to impair or cancel contractual rights, even those protected by state laws.

Next month, Rhodes will hold two hearings to give major creditors, including the unions and retirees, the chance to argue that Detroit should be thrown out of bankruptcy.

Under Chapter 9, cities and counties must prove they are eligible to stay in bankruptcy after filing for court protection, unlike companies and individuals.

The city must show that it can’t pay its bills as they come due, intends to file a plan to adjust its debts, and either tried to negotiate with creditors or was unable to do so before the filing.

The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporters on this story: Steven Church in U.S. Bankruptcy Court in Detroit at schurch3@bloomberg.net; Sophia Pearson in Philadelphia at spearson3@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net


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