CHICAGO — After three hours of public comment, Detroit City Council members Tuesday rejected a contract with well-known Michigan public finance firm Miller, Canfield, Paddock and Stone PLC that the state had said must be approved before it would release badly needed funds from a state-controlled escrow account.

The $300,000 contract would have made Miller Canfield the city’s outside legal firm for three years, chiefly to handle lawsuits tied to the city’s financial stability agreement with the state.

The contract was a key part of a so-called memorandum of understanding signed last week by state Treasurer Andy Dillon and Detroit Mayor Dave Bing.

The state said the city must approve the contract and meet other measures, such as the hiring of a restructuring firm, before it would release $30 million of bond proceeds from the escrow fund. If the council had approved the contract, the state was to release the $10 million of the funds Tuesday. Another $20 million was to be released Dec. 14.

Bing said the rejection could lead to another cash crisis for the city.

“The council’s rejection of the Miller Canfield contract means the city will not receive the first $10 million scheduled for release today,” Bing said in a statement released after the council’s vote. “As a result, it will be more difficult for the city to maintain its liquidity until the receipt of property tax revenues beginning in January. Today’s vote is one more example of how City Council has stalled our efforts to bring financial stability to the city of Detroit.”

Hundreds of Detroit residents lined up outside council chambers Tuesday morning urging the council to reject the legal contract as well as other measures and a plan to overhaul the city’s water department. Many residents, wearing large ‘No to Miller Canfield’ buttons, said the contract represented a conflict because the firm helped the state write the recently overturned emergency management law and the financial stability agreement.

City corporation counsel Krystal Crittendon told council members that she did not approve the contract and that the council’s approval would therefore be a violation of city charter. “That is a conflict that I would never ever approve or recommend that [the contract] be approved,” Crittendon said.

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