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Judge Rules Detroit’s Bankruptcy Illegal, Leaving Process In Limbo

By Alan Pyke  

"Judge Rules Detroit’s Bankruptcy Illegal, Leaving Process In Limbo"

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Detroit emergency manager Kevyn Orr and Gov. Rick Snyder (R-MI) (Credit: AP)

Detroit’s bankruptcy filing is unconstitutional and must be rescinded, Judge Rosemarie Aquilina ruled on Friday. Thursday’s filing was supposed to set into motion proceedings that would allow the city’s unelected emergency manager Kevyn Orr to break pension contracts with 30,000 city workers and retirees, but Aquilina ruled Friday afternoon it violates the Michigan Constitution.

Part of her reasoning comes from claims by the pension fund’s lawyers that attorneys for the state had tricked them into delaying a hearing that would have blocked the filing, and then filed for bankruptcy during the delay in another court. “I have some very serious concerns because there was this rush to bankruptcy court that didn’t have to occur and shouldn’t have occurred,” the judge said. According to the Detroit Free Press, Gov. Rick Snyder (R) may refuse to comply with Aquilina’s order, and the immediate consequences of the ruling are murky.

The city is unable to pay nearly $20 billion in outstanding debts, most of which is owed to investors who hold the city’s bonds and to city workers. Bankruptcy proceedings will determine which groups of creditors get paid and which do not, pitting retirees against hedge funds and other financial players. The Free Press published a list Friday morning of the city’s 20 largest unsecured creditors – those to whom Detroit owes money but who hold no assets or collateral from the city – which showed that U.S. Bank is owed approximately $1.9 billion through various bonds. The city’s general retirement fund is owed over $2 billion, and the retirement fund specific to police and firefighters is owed $1.4 billion. Bond market analysts have questioned the validity of emergency manager Orr’s estimates of pension debt, and warned that the city’s pre-bankruptcy proposals for resolving its debts seemed designed to curtail retiree’s legal rights.

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