CHICAGO – A court hearing is set Wednesday morning on a lawsuit filed by Detroit’s top lawyer challenging the two-month old consent agreement with Michigan designed to stabilize Detroit’s finances.

Mayor Dave Bing ordered the city’s corporation counsel Krystal Crittendon in a letter dated Monday to drop the litigation. He has warned that the city is poised to miss a $34.2 million bond payment due Friday unless the litigation is dropped.

Fitch Ratings responded by slapping the beleaguered city with a downgrade to CCC Tuesday over the threat posed to the bond payment.

In Bing’s letter – which was obtained and published by local Detroit media outlets Tuesday -- Bing challenges Crittendon’s authority to take such a legal step on her own. “By taking this action, you have exceeded your authority under the charter and have put the city’s financial at substantial risk of serious financial consequences,” the letter reads.

It argues that her action violates the city charter which requires that she prosecute all actions or proceedings to which the city has a legal interest in “when directed to do so by the mayor.” Bing also informs the corporation counsel that he has consulted with outside legal experts on the matter.

The mayor hired Miller, Canfield, Paddock and Stone PLC to intervene on his behalf, according to published reports. A hearing is set for Wednesday morning before an Ingham County judge on Crittendon’s lawsuit which seeks a declaratory judgment against the state.

Crittendon recently filed the lawsuit in the state court of claims arguing that the consent decree signed in April between the state and the city was invalid because the state owes the city money.

Crittendon defended the legality of her position in a staff notice dated June 10. In the letter, the corporation counsel claims she was required to take action to enforce a charter provision that prevents the city from entering into a contract with an entity in default with the city.

It reads that the corporation counsel “shall take all reasonable actions to secure compliance, including, but not limited to, judicial action” with charter provisions.

The mess prompted Fitch on Tuesday to downgrade $511 million of unlimited tax general obligation bonds to CCC from B, about $453 million of limited tax GOs to CC from B-minus; and $1.5 billion of pension obligation certificates of participation issued through the Detroit Retirement Systems Funding Trust to CC from B. The pension debt is on Rating Watch Negative.

“Yesterday, the city stated the possibility that it would not make a debt service payment due on June 15 on its pension COPs,” Fitch wrote in its Tuesday report, adding that it “believes there are actions available to both the city and the state of Michigan that would insure the payment is made but that the current level of uncertainty so close to a bond repayment date is consistent with a higher probability of default than the prior B-category ratings implied.”

In addition to the near-term debt service payment, the litigation threatens the city’s much-needed refinancing of bond anticipation notes issued by the Michigan Finance Authority to avoid depletion of general fund cash balances.

“Fitch’s belief that the inability to refinance increases the prospects of a cash crisis is supported by the city CFO’s assertion that cash will be depleted once the next payroll is met,” Fitch wrote.

The city’s top officials said the government would run out of cash by June 15 and be operating at a $67 million deficit by next week if a standoff between the state and the city’s corporation counsel is not resolved.

Michigan Treasury officials last week told Detroit that the state would not release roughly $35 million held in escrow from a recent privately placed bond sale unless Crittendon dropped the challenge to the consent decree.

The state also said it would not allow the city to complete a planned $137 million bond deal set for next week that would pay off an $80 million note private placement and raise badly needed new money for the cash-strapped city, and that Detroit would lose all its state revenue aid through December so that the state could intercept it to pay off the privately placed debt.

Michigan officials argue that Crittendon’s lawsuit destabilizes all contracts between the city and the state, including bond financings. Bing wants the suit dropped, but he alone can’t force the dismissal under the city’s charter. The mayor said he spent the weekend negotiating with both state officials and Crittendon, but without resolution.

Detroit chief financial officer Jack Martin said unless Michigan releases $35 million from the escrow account — which it has said it will not do — then the city can’t make the Friday payment on its pension certificates of participation.

Last week state officials told Martin that they believe the city charter allows Bing to order Crittendon to drop the suit, but city officials said that is no longer true under a recent expansion of the legal department’s powers aimed at giving city attorneys more independence from the executive and legislative branches.

Michael McGee, an attorney with Miller Canfield, appeared with Bing at the Monday emergency council session. McGee, who is special counsel to the city, argued that Crittendon’s lawsuit challenged state law — not the city charter, as she contends — and that she does not have the authority to challenge state law without the mayor’s direct order. “This is a state law question and can only be brought by the corporation counsel at the direction of the mayor,” McGee said.

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