Michigan court halts challenges to Detroit bankruptcy filing

The legal battle over Detroit’s historic bankruptcy filing took another twist Tuesday when Michigan’s appeals court halted all ongoing challenges to the constitutionality of the bankruptcy filing pending in state court.

The panel acted after Michigan Attorney General Bill Schuette asked the appeals court to quickly overturn the lower court rulings to halt the filing.

Detroit city workers, retirees and pension funds filed lawsuits in state court, concerned that the July 18 Chapter 9 bankruptcy filing by Detroit's state-appointed emergency manager will lead to retirement benefit cuts.

The appellate court asked for additional briefs before deciding their next step, according to Morgan Cole, a law clerk for Ingham County Circuit Judge Rosemarie Aquilina, who has scheduled a Monday hearing on those challenges.

Aquilina issued a declaratory judgment Friday ordering Kevyn Orr, Detroit's emergency manager, to withdraw the bankruptcy petition on state constitutional grounds.

“(Tuesday’s order) stops the state proceeding until (the appellate court) makes a decision whether to send it back to trial court, whether they’re going to keep it or whether they’re going to send it up to the Supreme Court of Michigan,” said Cole.

The main event in the legal challenge comes Wednesday morning, when a federal bankruptcy court judge in Michigan is expected to rule on whether U.S. law trumps the state’s constitutional protection against rescinding retired city workers’ pensions. Bond holders who have relied for centuries on a government’s “full faith and credit” to repay their investments will also be there to argue their case.

Appearing Wednesday before U.S. Bankruptcy Court Judge Steven Rhodes, opponents of the bankruptcy filing will argue that the question is solely a state matter, placing it outside the reach of federal courts, a doctrine known as “independent and adequate state grounds,” according to Cole.

“Generally, federal courts will deny discretion to review an issue it if it rests solely on state grounds,” she said.

But bankruptcy law experts say federal courts are empowered to interpret state constitutional issues. If Rhodes rules Wednesday that the filing is legal, that would end all challenges in state court.

Regardless of tomorrow’s ruling, bankruptcy law experts say, the case could involve multiple appeals to both state and federal courts – with little legal precedent to shape the outcome. Most of the several hundred cases that have been filed since the modern Chapter 9 code was amended in 1978 involve small municipal entities like water or sewer districts.

Reuters contributed to this report.

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