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Detroit unions challenge city's bankruptcy petition

The Detroit skyline is seen from Grand River on Thursday, July 18, 2013, in Detroit.
The Detroit skyline is seen from Grand River on Thursday, July 18, 2013, in Detroit.Carlos Osorio / AP

Detroit's unions filed a challenge on Monday to the city's historic bankruptcy filing, contending that the city has not met key requirements to seek protection from its creditors.

The American Federation of State, County and Municipal Employees Council 25 and other unions said Detroit has not proven it is insolvent and has not negotiated in good faith with its creditors. In a filing with the U.S. Bankruptcy Court in Detroit, the unions also contended that Chapter 9 of the federal bankruptcy code, which governs municipal bankruptcies, violates the U.S. Constitution by encroaching on states' rights.

The unions' objection also said Michigan's emergency manager law, which enabled Detroit to file for bankruptcy on July 18, violates the state constitution because the law does not explicitly protect retirement benefits for public workers. 

The unions had until the end of the day Monday to file objections in U.S. Bankruptcy Court. 

For Detroit's Chapter 9 municipal bankruptcy to proceed, Judge Steven Rhodes must first find that the city has proven it is insolvent and negotiated in good faith with its creditors, or that there were too many creditors to make negotiations feasible. 

In a court filing earlier this month, Detroit released a list of creditors, including current, former and retired workers, that filled 3,504 pages. Another filing by Kevyn Orr, Detroit's state-appointed emergency manager, said that "further negotiations with all of the city's various stakeholders is impracticable." 

Orr's filing included a litany of Detroit's financial woes, including more than $18 billion in debt and other obligations with nearly $12 billion of that amount considered unsecured. 

Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime surged and its population fell from a peak of 1.8 million in the 1950s to around 700,000 currently. The city's revenue fell short of spending, while its budgets and borrowing ballooned. 

Rhodes has scheduled October 23 for the start of a hearing to determine if Detroit is eligible to file for bankruptcy under Chapter 9. If Detroit is deemed eligible for municipal bankruptcy, it would be the biggest such case in U.S. history. 

Detroit's largest unsecured creditors are its two pension funds, which have claims totaling $3.74 billion in estimated unfunded liabilities, according to a court filing by the city. 

The remainder of the city's top 20 creditors include bondholders of $1.47 billion of certificates of participation (COPs) that Detroit sold for its pension funds and hundreds of million dollars of general obligation bonds. 

Detroit's retirement systems said last week they would cite a prohibition in the Michigan Constitution against impairing vested retirement benefits for public workers. 

The constitutional arguments noted appear similar to those made in lawsuits filed in state court aimed at derailing the bankruptcy. In a hearing on July 24, Rhodes suspended those lawsuits and required all bankruptcy-related litigation to be heard in his court. 

Bond insurers, who guarantee payment of much of the city's debt, as well as bondholders that include mutual funds are likely to argue that Detroit's voter-approved unlimited-tax general obligation bonds also have constitutional and statutory protections in Michigan. 

While Orr has expressed a desire for the city to emerge from bankruptcy by September 2014, a lengthy eligibility fight could extend the time frame. 

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