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Federal Judge Halts All Lawsuits Challenging Detroit Bankruptcy

CHICAGO - The federal judge overseeing Detroit’s Chapter 9 filing ruled Wednesday in favor of the city’s request that it be protected from lawsuits while in bankruptcy.

U.S. Bankruptcy Judge Steven Rhodes extended the protection to state officials, including Michigan Gov. Rick Snyder, treasurer Andy Dillon, and members of the state emergency loan board.

The ruling marks a victory for Detroit emergency manager Kevyn Orr and Snyder, who had requested the automatic stay amid a rising tide of lawsuits challenging the city’s July 18 filing. In early reactions, Orr said he was “pleased” with the judge’s decision and Snyder said it was “excellent.”

It clears the way for the city to proceed with its historic bankruptcy petition and sets aside a move by a state court to block the bankruptcy.

“My orders enhance the likelihood of a Chapter 9 reorganization, speed the bankruptcy case and cuts costs to taxpayers,” Rhodes said during a closely watched decision following the case’s first hearing Wednesday morning.

The General Retirement System and the Police and Fire Retirement System of the city of Detroit sued Snyder and Orr last week, arguing that a bankruptcy filing is invalid because it would violate a state constitutional ban on impairing worker benefits.

An Ingham County judge agreed, and ordered Detroit and Snyder to withdraw the Chapter 9 petition.

During the two-hour Wednesday morning hearing, attorneys debated whether a federal or state court has authority over the lawsuits. Creditor attorneys argued that the bankruptcy filing was invalid under Michigan law, as ruled by the state court, while city attorneys argued that a federal bankruptcy court has jurisdiction and should decide the lawsuits as part of Detroit’s larger eligibility test.

“Having widespread litigation in various state tribunals can only confuse the parties and confuse the case and create serious barriers to efficient administration of this case,” Jones Day attorney Heather Lennox, representing the city, argued at the hearing.

Allowing the lawsuits to go forward would cause “irreparable harm” to the city, Lennox said.

Rhodes agreed.

All issues related to the historic case “must be decided by the bankruptcy court exclusively,” Rhodes ruled, adding “there is no case law that holds otherwise.”

Nothing in the 10th Amendment bars federal jurisdiction in the case, the judge said. The amendment to the U.S. Constitution provides that the states have powers not delegated to the Federal government.

Granting the automatic stay will not harm the creditors but denying it would cause “substantial prejudice” to the city. Granting the stay, Rhodes said, is in the public’s best interest because it will speed up the case and make it less costly.

Rhodes added that the court would allow the city’s creditors to seek relief from the automatic stay on a case by case basis. Creditors can appeal to the U.S. District Court in Detroit.

Groups of Detroit fire fighters in red shirts and union members walked out during Rhodes’ ruling, according to local media reports. AFSCME, which represents the city’s largest union, put out a statement later saying that Snyder and Orr remain in violation of the state constitution. “The court missed an important opportunity to stop Gov. Snyder and Kevyn Orr’s constitutional breach now by deferring the argument to a future date,” the union said. “But the fight does not end here.”

A status conference hearing is set for Aug. 2.

Detroit filed for Chapter 9 bankruptcy protection July 18. Orr says the city has $18 billion of debt that it cannot service while providing services to residents. The case is 13-bk-53846, filed in the U.S. Bankruptcy Court in the Eastern District of Michigan.

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