CHICAGO - The judge overseeing Detroit's historic municipal bankruptcy ruled Monday that creditors can appeal directly to the U.S. Court of Appeals for the Sixth Circuit his recent rulings that the city is eligible for Chapter 9 and that pensions are not automatically protected in bankruptcy.

U.S. Bankruptcy Court Judge Steven Rhodes during a hearing said he would certify a direct appeal, allowing creditors to bypass the district court level. He did not rule immediately about whether he supported an expedited appeal process. Rhodes ruled the city eligible for bankruptcy Dec. 3.

Detroit's attorneys had argued that the appeal being pursued by creditors including the city's pension systems, unions, and retirees but no bondholders or insurers, should be delayed until after the city files its plan of adjustment. Detroit Emergency Manager Kevyn Orr has said the city hopes to file the plan in January. The appeal process could delay the plan, market participants believe.

Pension fund lawyers countered that the case stands to impact municipal bankruptcies elsewhere and in a filing Sunday submitted in support of their argument a Dec. 13 order entered by the Central District of California. It certified a direct appeal to the Ninth Circuit Court of appeals the California Public Employees' Retirement System's appeal of San Bernardino's Chapter 9 eligibility.

In another filing, lawyers for the police and fire retiree associations argued for the direct appeal: "The court's eligibility ruling is of exceptional public importance."

The filing contends Rhodes pension ruling "is in conflict with the opinion of the Michigan Attorney General with regard to the protection afforded by the Pensions Clause of the Michigan Constitution, presents significant questions of federal and state constitutional law for which there is no controlling Sixth Circuit authority, and certification would materially advance the progress of this case."

The case ultimately could land before the U.S. Supreme Court.

Though the city sought to stave off the appeal, it did not block the request to bypass the district court. "The city is committed to proceeding as rapidly as possible and moving onto a plan of adjustment that has broad support....anything that detracts from that is not something we support," city lawyer Corinne Ball said.

A pension fund attorney argued the appeal was not directed at slowing down the confirmation process and that the two could run in tandem.

Rhodes' eligibility and pension rulings earlier this month paved the way for the city to restructure its $18.5 billion of debt to give Detroit what Orr and Gov. Rick Snyder call a fresh start.

Rhodes surprised many by weighing in one of the most controversial questions in the case so far and which has reverberated across the country.

Rhodes ruled that Chapter 9 allows the city to cut its pensions, despite state constitutional protections. He had been expected to consider the question later in the case. Michigan's constitutional protection of pensions does not apply in federal court, the judge ruled, saying they are contractual in nature. He added that his pension decision does not mean he will necessarily confirm a plan that impairs the benefits.

Hearings begin Tuesday on two central issues followed by bondholders on the city's proposed settlement with its interest-rate swap counterparties as well as its effort to close a $350 million debtor-in-possession financing with Barclays. Bond insurers and holders of the city's pension certificates are fighting both proposals, arguing they're too favorable to the counterparties and Barclays and could diminish creditors' recoveries.

The swaps settlement and the DIP financing are closely linked. The city is required under the terms of the DIP to settle with the swap counterparties, UBS AG and Bank of America Merrill Lynch. More than half of the proceeds from the DIP loan will be used for the swap termination payment.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.