As expected, Judge Steven Rhodes gave the green light for bankruptcy in Detroit. The decision seemed more of a formality to those watching the $18 billion train wreck — there was little question of the outcome from the day Emergency Manager Kevyn Orr, a bankruptcy expert, was tapped for the position. Detroit’s destiny was foretold by Gov. Snyder’s selection.
Judge Rhodes postponed the historic ruling for about an hour, from 9 am to 10 am, to allow the large crowd to get settled in the courtroom.
Of the city’s massive debt, $5.7 billion is unfunded healthcare benefits, and $3.5 billion is owed to 23,000 pensioners, who on average receive less than $20,000 a year. Unions argued stridently against chapter 9 protection for the city, claiming Orr did not negotiate in good faith as is required by federal law prior to the July 2013 filing. Michigan’s Constitution protects public sector pensions, but those advocating for bankruptcy assert that federal law trumps any constitutional protections. Gongwer News Service reported via mobile from the courtroom:
Judge Steven Rhodes says the Michigan Constitution’s prohibition on impairing pensions does not apply in federal bankruptcy court in Detroit case, but also says that does not necessarily mean he would approve a plan that cuts them.
Gongwer followed-up with a tweet:
Many hope that healthcare benefits will be partially covered by Expanded Medicaid, but the state legislature has yet to implement that program. Everyday that goes by with no action from GOP lawmakers digs a deeper hole for the once great city, along with its 700,000 residents — not fiscally responsible at all.
Also at risk are the treasures held in trust at the Detroit Institute of Arts. Creditors, including unions, are eager to get their hands on those assets to help settle the city’s debt. Orr recently ordered the collection appraised by Christies, but creditors have since petitioned for the court to form a ten-member panel of creditors to review the process.
Today’s ruling answered only the question of Detroit’s eligibility to proceed with bankruptcy. The nuts and bolts of the case have yet to be worked-out. And that will get even messier.
Unions are predicted to appeal today’s decision, and have asked the court to allow their appeal to proceed without delay to the U.S. 6th Circuit Court of Appeals, bypassing the District Court step.
Orr had said that if Judge Rhodes ruled against bankruptcy, there would be an “Armageddon-like scenario” with creditors filing a tsunami of lawsuits, but chapter 9 will not in any way squelch the battles. The court may be challenged on the constitutional issues surrounding pension protections, and the question of the DIA treasures has yet to be litigated. Attorney General Bill Schuette was pretty clear that the art is off-limits, but even Gov. Snyder indicated that he’s not so sure on that question.
Almost lost in the fury of contentious debate among Detroit’s creditors is the fact that the city must still somehow keep the lights on (literally) and pay its 9,700 workers. With a projected negative cash-flow of $198.5 million FY 2014, that’s a tall order.
The legal ugliness is just revving-up for the Motor City.
Amy Kerr Hardin