Creditors protest Detroit bankruptcy

DETROIT (AP) ― The city’s biggest employee union, retirees and even a few dozen residents filed objections Monday to Detroit’s request for bankruptcy protection, the largest municipal filing in U.S. history and a move aimed at wiping away billions of dollars in debt.

The filing by the American Federation of State, County & Municipal Employees Michigan Council 25 also came before expected objections from two city pension systems, bondholders, banks and others who hope to convince federal Judge Steven Rhodes not to allow the Chapter 9 petition by Detroit emergency manager Kevyn Orr.

Rhodes set Monday as the eligibility objection deadline. Attorneys for large creditors have until just before midnight to file objections electronically. Individual creditors who fear losing their pensions and paying more for health care began filing objections Monday in person at the court.

By Monday evening, more than 100 objections had been filed including those made by several smaller city unions.

“We think the creditors and banks will make objections during the litigation on a proposed plan of adjustment, which we are slating to be finished by year’s end,” said Bill Nowling, spokesman for Orr.

Since 1954, 29 of 62 municipal bankruptcies pursued in the U.S. have been dismissed. 

The AFSCME, the AFL-CIO and city retirees claim in their objection that Michigan’s emergency manager law ― which gives Orr his authority ― impairs vested pension rights violating the state constitution. They also claim Orr did not negotiate in good faith with city creditors and that he has not yet proved Detroit is insolvent.

“The city, led by its unelected, politically appointed emergency manager ... hastily commenced this unconstitutional, unlawfully authorized Chapter 9 proceeding seeking the haven of bankruptcy to illegally attempt to slash pension and other post-employment benefit obligations and cram such reductions down the throats of current and former city employees such as the AFSCME Detroit Employees,” read their objection.

Orr, hired in March by the state to fix Detroit’s finances, has said there are no other options for Detroit. The city’s budget deficit has hovered near or above $300 million during the past few years.

He filed for bankruptcy on July 18, claiming the city has at least $18 billion in liabilities, from underfunded pensions and health care costs to bonds that lack city revenue to be paid off.

Orr also stopped payment on $2.5 billion in debt in June.

Michigan Attorney General Bill Schuette, who earlier joined the battle on behalf of city pensioners, wrote in a 20-page statement filed Monday in federal court that constitutional protections cannot be stepped on.

“No reasonable person can disagree that the city of Detroit is bankrupt and that federal bankruptcy proceedings under the leadership of emergency manager Kevyn Orr is the only avenue to rebuild the Motor City,” Schuette, a Republican, said in a release. “However, throughout this bankruptcy process, protections enshrined in the Michigan Constitution ... must be honored, respected and followed.”

That contention also will be part of the objections that will be filed by the city’s two employee pension systems, said Bruce Babiarz, spokesman for Detroit’s Police and Fire Retirement System and General Retirement System.

The systems are the city’s two largest unsecured creditors.

Detroit has about 21,000 retired workers who are owed benefits, with underfunded obligations of about $3.5 billion for pensions and $5.7 billion for retiree health coverage.

Mary Dugans, one of those retirees, filed an individual objection Monday.

“I need my pension for basic human needs,” she wrote in her one-page filing. “Additionally, I’m 80 years old with age related medical conditions. Therefore, I have to pay for medical co-pays as well as for prescribed medications. Please consider my situation as you approach this important matter. Thanks.”

Monday’s deadline for objections drew protesters outside federal court in Detroit.

Some in a group of about 30 people amassed outside the building said in their filings that there are no provisions in Chapter 9 that gave Orr authority to file the bankruptcy petition and that it was done without the consent of the city’s elected representatives.

“Hopefully, we’ll have the opportunity to argue why Detroit should not be allowed to go into bankruptcy,” said the Rev. Charles Williams II, Michigan chapter president of the National Action Network, which opposes the state’s emergency law.

But only creditors holding accepted claims likely have standing to object to Orr’s petition, according to James McTevia, a turnaround expert and managing member of McTevia & Associates.

“While there is no doubt that ... residents are seriously affected by the city of Detroit’s problems and the ultimate resolutions, it is my opinion that they are not either individually or collectively creditors,” he wrote Monday in an email to the Associated Press.

Monday’s deadline is just one of several steps that could lead to Judge Rhodes allowing Detroit into bankruptcy protection while it restructures.

Some bankruptcy experts say it can be difficult for objections to stop a bankruptcy, but they have proved successful in a few cases. Boise County, Idaho, failed to go into bankruptcy after objections that the county was not insolvent. Harrisburg, Pa., failed the garner protection because its bankruptcy filing was not authorized by state law.

The city has until Sept. 6 to file its responses to any objections by creditors. A multi-day hearing on the eligibility question is scheduled to start Oct. 23.

“Objecting creditors are individual parties in interest in the Chapter 9 bankrupt estate,” McTevia wrote. “It is doubtful that the judge will render a blanket ruling either accepting or rejecting all objections.”