Judge Rules Detroit Bankrupt - Unions React

Detroit Retirees Put on Notice in Bankruptcy Ruling

 By Steven Church & Steven Raphael - Dec 3, 2013 1:29 PM CT

Detroit can remain under bankruptcy court protection to shed debt and has the power to impose pension cuts on its employees, a judge said in a ruling that may have implications for distressed cities across the U.S.  
U.S. Bankruptcy Judge Steven Rhodes, in a decision announced today in Detroit, dismissed an argument by unions and pension systems that the bankruptcy, the largest ever for a municipality, should be thrown out because it violated state constitutional contract protections for retiree benefits. 

“The pension people around the country have positioned themselves around that argument,” said attorney Ken Klee, who represented Jefferson County, Alabama, in its bankruptcy. "They really put themselves in a box.”

Rhodes also found that the city was insolvent and had sought bankruptcy protection in good faith, two requirements of the law. Municipal unions had claimed the city always intended to file for bankruptcy and had refused to negotiate with creditors before filing. 

The decision means the city can keep enjoying the protections of Chapter 9 of the U.S. Bankruptcy code, which limits what creditors of municipalities, including bondholders and labor groups, can do to impede restructuring efforts.

Klee helped rewrite Chapter 9 in the 1970s while working as a lawyer for Congress. His client, Jefferson County, officially ended its bankruptcy today with the closing of a bond issue to raise money to pay creditors. Its $4.2 billion bankruptcy was the biggest ever by a U.S. municipality until Detroit filed on July 18, listing about $18 billion in debt.

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Detroit has said it doesn’t have the money to pay bondholders, retirees and employees everything it owes them while still providing basic city services, such as ambulances and streetlights.

“This once proud and prosperous city cannot pay its debts,” Rhodes said. Detroit “has the opportunity for a fresh start.”

With Rhodes’s ruling, the city can now focus on writing a plan to cut the debt. That will mean contending with creditors in court and in confidential mediation, said Dale Ginter, a bankruptcy lawyer who is not involved in the case.

“None of the constituents will regard such a plan as fair or equitable, but that’s not the standard,” said Ginter, who represented retired city workers in the bankruptcy of Vallejo, California. He made the comments in an interview before Rhodes issued his ruling.

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