A Michigan judge declared that Detroit's Chapter 9 bankruptcy filing
violated the state's constitution and ordered Gov. Rick Snyder to
withdraw it, and the state countered, asking the Michigan Court of Appeals to set aside the ruling.
In Lansing today, Ingham County Circuit Court Judge Rosemarie E. Aquilina criticized Snyder for rushing the filing into court Thursday before she could rule on a bid by city workers and their pension funds to consider an emergency request to block the filing.
"I'm finding the actions that were taken in filing bankruptcy as overreaching and unconstitutional," she said.
She ordered the governor to direct Detroit Emergency Manager Kevyn Orr to immediately withdraw the bankruptcy petition. She also said he cannot authorize further filings that would impair or diminish public pension benefits.
Attorney General Bill Schuette applied for permission to appeal the decisions. He also filed a motion to suspend Aquilina’s rulings pending appeal, Joy Yearout, a spokeswoman for the attorney general, said in an emailed statement.
Kenneth Klee, the bankruptcy lawyer who spearheaded the bankruptcy restructuring of Jefferson County, Ala., said a state judge can’t force Detroit out of federal bankruptcy, even if Snyder agrees to try to withdraw the petition.
Once Detroit city filed the bankruptcy petition, it came under federal jurisdiction and the case cannot be withdrawn, even by Snyder, said Klee, of Klee Tuchin Bogdanoff & Stern LLP in Los Angeles. A federal judge would have to agree to dismiss the case, according to Klee.
“If the governor changes his mind, it doesn’t matter,” he said. “Not only can’t she do that, but her order may be in contempt of a federal court, and a federal judge can put her in jail.”
Current and retired city workers had asked the Ingham court to issue a temporary restraining order to keep the city of Detroit from filing for bankruptcy. The bankruptcy petition was filed minutes before Aquilina was able to rule.
"The plaintiffs should not have been blindsided in this court," said William Wertheimer, a lawyer representing some of the plaintiffs.
Brian Devlin, a Michigan assistant attorney general, argued that no harm has been done to the plaintiffs.
Aquilina said harm was "imminent."
"You understand bankruptcy court," she said. "That's why you ran there yesterday, not slowly, but in your running shoes."
Devlin and Thomas Quasarano, also a Michigan assistant attorney general, declined to comment following the hearing, referring questions to the media office. A media representative for the Michigan attorney general's office wasn't immediately available to comment.
City pension plans sued Snyder and Orr on Thursday, contending a bankruptcy filing would conflict with a provision of the Michigan Constitution that bars any government in the state from reducing pension benefits. Two similar lawsuits were filed in the same state court earlier this month on behalf of individual retirees and current workers.
The retirement systems sought an emergency restraining order Thursday to stop the bankruptcy. The city filed for bankruptcy moments before Aquilina could rule. Aquilina said she otherwise would have issued an order temporarily blocking the bankruptcy, said attorney John Canzano, a lawyer for one current Detroit employee and one retiree.
Wertheimer, of Bingham Farms-based Law Office of William A. Wertheimer, representing five pension participants, said he expects the state will appeal Aquilina's ruling to the Michigan Court of Appeals, and that the unions will likely challenge Orr's authority to file a petition under the provisions of Chapter 9 – but that will likely proceed through a different attorney.
"The governor is on notice now about what the judge has done, and we're hoping he will do the right thing and reconsider the authorization in light of the order," Wertheimer said.
The retirees and workers will seek a declaration on whether the constitution can be applied to block reductions in pension benefits, Canzano said in an interview with Bloomberg. They may also seek to get the bankruptcy filing withdrawn, he said.
Federal bankruptcy petitions normally freeze any litigation affecting assets of the petitioner. The federal judge in charge of the case will have to decide whether to honor the limits of the state constitution or the county court ruling.
The city employee pension plans said in a joint statement that they were "dismayed" by the bankruptcy.
"We are surprised and disappointed that the emergency manager would file a Chapter 9 petition before he has had substantial negotiations with the retirement systems and other significant creditor constituencies," Robert Gordon, an attorney for the plans, said in the statement.
Orr said Thursday that he "bent over backward" in talks with creditors.
Crain's Detroit Business reporter Chad Halcom contributed to this report.
In Lansing today, Ingham County Circuit Court Judge Rosemarie E. Aquilina criticized Snyder for rushing the filing into court Thursday before she could rule on a bid by city workers and their pension funds to consider an emergency request to block the filing.
"I'm finding the actions that were taken in filing bankruptcy as overreaching and unconstitutional," she said.
She ordered the governor to direct Detroit Emergency Manager Kevyn Orr to immediately withdraw the bankruptcy petition. She also said he cannot authorize further filings that would impair or diminish public pension benefits.
Attorney General Bill Schuette applied for permission to appeal the decisions. He also filed a motion to suspend Aquilina’s rulings pending appeal, Joy Yearout, a spokeswoman for the attorney general, said in an emailed statement.
Kenneth Klee, the bankruptcy lawyer who spearheaded the bankruptcy restructuring of Jefferson County, Ala., said a state judge can’t force Detroit out of federal bankruptcy, even if Snyder agrees to try to withdraw the petition.
Once Detroit city filed the bankruptcy petition, it came under federal jurisdiction and the case cannot be withdrawn, even by Snyder, said Klee, of Klee Tuchin Bogdanoff & Stern LLP in Los Angeles. A federal judge would have to agree to dismiss the case, according to Klee.
“If the governor changes his mind, it doesn’t matter,” he said. “Not only can’t she do that, but her order may be in contempt of a federal court, and a federal judge can put her in jail.”
Current and retired city workers had asked the Ingham court to issue a temporary restraining order to keep the city of Detroit from filing for bankruptcy. The bankruptcy petition was filed minutes before Aquilina was able to rule.
"The plaintiffs should not have been blindsided in this court," said William Wertheimer, a lawyer representing some of the plaintiffs.
Brian Devlin, a Michigan assistant attorney general, argued that no harm has been done to the plaintiffs.
Aquilina said harm was "imminent."
"You understand bankruptcy court," she said. "That's why you ran there yesterday, not slowly, but in your running shoes."
Devlin and Thomas Quasarano, also a Michigan assistant attorney general, declined to comment following the hearing, referring questions to the media office. A media representative for the Michigan attorney general's office wasn't immediately available to comment.
City pension plans sued Snyder and Orr on Thursday, contending a bankruptcy filing would conflict with a provision of the Michigan Constitution that bars any government in the state from reducing pension benefits. Two similar lawsuits were filed in the same state court earlier this month on behalf of individual retirees and current workers.
The retirement systems sought an emergency restraining order Thursday to stop the bankruptcy. The city filed for bankruptcy moments before Aquilina could rule. Aquilina said she otherwise would have issued an order temporarily blocking the bankruptcy, said attorney John Canzano, a lawyer for one current Detroit employee and one retiree.
Wertheimer, of Bingham Farms-based Law Office of William A. Wertheimer, representing five pension participants, said he expects the state will appeal Aquilina's ruling to the Michigan Court of Appeals, and that the unions will likely challenge Orr's authority to file a petition under the provisions of Chapter 9 – but that will likely proceed through a different attorney.
"The governor is on notice now about what the judge has done, and we're hoping he will do the right thing and reconsider the authorization in light of the order," Wertheimer said.
The retirees and workers will seek a declaration on whether the constitution can be applied to block reductions in pension benefits, Canzano said in an interview with Bloomberg. They may also seek to get the bankruptcy filing withdrawn, he said.
Federal bankruptcy petitions normally freeze any litigation affecting assets of the petitioner. The federal judge in charge of the case will have to decide whether to honor the limits of the state constitution or the county court ruling.
The city employee pension plans said in a joint statement that they were "dismayed" by the bankruptcy.
"We are surprised and disappointed that the emergency manager would file a Chapter 9 petition before he has had substantial negotiations with the retirement systems and other significant creditor constituencies," Robert Gordon, an attorney for the plans, said in the statement.
Orr said Thursday that he "bent over backward" in talks with creditors.
Crain's Detroit Business reporter Chad Halcom contributed to this report.
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