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Detroit raced to file bankruptcy ahead of move to block it

A vacant, boarded up house is seen in the once thriving Brush Park neighbourhood with the downtown Detroit skyline behind it in Detroit, Mic
A vacant, boarded up house is seen in the once thriving Brush Park neighbourhood with the downtown Detroit skyline behind it in Detroit, Mic

By Deepa Seetharaman and Karen Pierog

DETROIT (Reuters) - Detroit's historic municipal bankruptcy filing on Thursday came less than 10 minutes before lawyers for the city's pension funds and retirees had rushed to another court to try to block it.

The bare bones bankruptcy petition, which came at 4:06:22 p.m., blindsided everyone in the room, according to two lawyers who were in state court in Lansing, Michigan, at the time. Even the lawyer representing the governor and the judge were caught unaware.

"I think everybody was surprised," said Bill Wertheimer, an attorney for a group of current and retired Detroit city workers who filed a lawsuit early this month to try to block any bankruptcy.

"The attorney general, he claimed to know nothing about it, like he was deaf, dumb and blind," said Wertheimer, who is paid by the United Auto Workers. "The judge was clearly taken aback."

The largest-ever municipal bankruptcy in U.S. history puts at risk the future of retiree pension and health benefits for thousands of city workers.

Although city retirement benefits are enshrined in Michigan's constitution, Kevyn Orr, the city's state-appointed emergency manager, outlined a plan for creditors that would include significant cuts in pension payments.

In a bid to safeguard the benefits of Detroit retirees, workers and pension funds filed lawsuits challenging the authority of Republican Governor Rick Snyder to authorize a bankruptcy proceeding.

Even after the bankruptcy filing had popped up on a federal court website, Ingham County Circuit Court Judge Rosemarie Aquilina still issued a temporary restraining order on any further action by Snyder and Orr in the bankruptcy case pending a hearing, according to a copy of the order obtained by Reuters.

That hearing could come as soon as Friday, according to Aquilina's law clerk.

In the hours following the bankruptcy filing, officials for the UAW and other unions said Snyder and Orr had falsely conveyed the impression a filing would not come soon. UAW general counsel Michael Nicholson said papers filed in Ingham court earlier in the week suggested bankruptcy was not imminent.

In that filing on Monday, the state had said an effort to prevent a bankruptcy filing was "premature, overbroad and constitutionally infirm." The state added that concerns a bankruptcy could wipe out their pensions were "not ripe" and based on events "that may or may not occur."

"The bottom line is the governor is being duplicitous," Nicholson said. "You can prove that by looking at what they filed at court."

Orr disagreed with the assessment, telling reporters during a press conference Thursday that he had negotiated "in good faith."

"Quite frankly, I've bent over backward in the past three plus months to, as I said initially in this very room (on my) first day, to offer an olive branch, to reach out to constituencies," Orr told reporters Thursday.

Under a 2012 Michigan law, the governor must approve a Chapter 9 municipal bankruptcy filing for a local government if that move is recommended by the state-appointed emergency manager running that government.

A hearing had been scheduled on Monday in Ingham County Circuit Court on the city workers' and retirees' challenge.

But attorneys for the Detroit's pension funds caught wind of a possible bankruptcy filing and on Wednesday sued Snyder and Orr to prevent them from filing for bankruptcy protection. They asked Judge Aquilina for an emergency hearing Thursday afternoon, Nicholson said.

The judge granted the order barring Snyder from authorizing or supporting the bankruptcy -- but it came minutes after the bankruptcy was filed.

"At the same time, we have Detroit having filed for bankruptcy," Wertheimer said. "Almost simultaneously we have a state court judge issuing an order telling the governor not to authorize the bankruptcy and not to do anything to support anything that is filed."

The state court order may be too late, according to W. Clark Watson, an attorney at Balch & Bingham LLP, who co-wrote a municipal bankruptcy guide for public finance attorneys.

"I think that a state court order enjoining the proceedings in a federal bankruptcy court would be extraordinary, at best," Watson said, adding that federal bankruptcy would trump state law.

He added that Detroit's Thursday filing likely came down to "a race to the courthouse" as the city initially filed only a petition that lacked the reams of documents that usually accompany a filing on the day it reaches court.

"That is not necessarily any disadvantage to the city; just not the orderly process that its lawyers would have otherwise preferred," Watson said.

(Additional reporting by Joseph Lichterman in Detroit and Jonathan Stemple in New York; Editing by Ken Wills)

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