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Federal judge clears path for Detroit bankruptcy

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On Dec. 3, U.S. Judge Steven Rhodes ruled that Detroit can declare bankruptcy under Chapter 9, Title 11, United States Code, which contains the laws that apply to municipalities in need of debt restructuring.

“It is indeed a momentous day,” Rhodes said in court. “We have here a judicial finding that this once-proud and prosperous city cannot pay its debts. It's insolvent. It's eligible for bankruptcy. At the same time it has an opportunity for a fresh start.”

The decision is a landmark for stating that public employee pensions are not protected in a federal Chapter 9 bankruptcy, even though a state constitution, like Michigan's, expressly protects them. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” said Rhodes. However, this decision was expected by many legal experts, as under the United States Constitution, federal law trumps state law when the two conflict.

The decision was opposed by civil rights advocates and labor unions on the grounds that the city will be breaching contracts made with people who worked for the city government and are now receiving pensions. “It was a devastating opinion,” said Sharon Levine, a partner at Lowenstein Sandler LLP who represents the American Federation of State, County and Municipal Employees in the case.

Detroit currently has a debt of $18.5 billion, and has dwindled in population from 1.8 million in 1950 to 700,000 today. Falling real estate values exacerbated the problems. Under such a burdensome debt, the city government is struggling to provide even basic services, such as emergency services and streetlights. The most recent unemployment figure for Detroit is at 17.7 percent (August 2013) and the crime rate is in the top 2 percent of cities in the nation.

Judge Rhodes has declared that motions to appeal the decision must first be filed in bankruptcy court, and cannot go directly to the 6th Circuit U.S. Court of Appeals. He also declined to stay bankruptcy proceedings during the appeals process. The American Federation of State, County and Municipal Employees Council 25 has filed a notice of appeal of Rhodes' ruling in the bankruptcy court. The appeal alleges that the ruling that federal bankruptcy law trumps a state constitution is in error.



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