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Detroit manager scores first win over unions in bankruptcy bid

A vacant blighted home is seen next to a well-kept occupied home on West Grand Boulevard in Detroit, Michigan July 23, 2013. REUTERS/ Rebecc
A vacant blighted home is seen next to a well-kept occupied home on West Grand Boulevard in Detroit, Michigan July 23, 2013. REUTERS/ Rebecc

By Bernie Woodall and Joseph Lichterman

DETROIT (Reuters) - A U.S. bankruptcy court judge on Wednesday dealt a blow to Detroit's public employee unions and pension funds opposed to the city's historic bankruptcy filing by suspending legal challenges in Michigan state courts while he reviews the city's petition for protection from creditors.

Judge Steven Rhodes ordered three lawsuits filed by city workers, retirees and pension funds be halted and extended that stay to suits against Michigan's governor, treasurer and Detroit's emergency manager. Rhodes' action ensures that the only path to fight the city's Chapter 9 bankruptcy petition runs through his courtroom in downtown Detroit.

It also sets the stage for what is expected to be a protracted and bruising battle over the city's eligibility to restructure more than $18 billion in debt and pension and healthcare liabilities under the broad protections of federal bankruptcy law.

"It gives us one venue to settle our disputes. This brings it into one court where it should be," said Bill Nowling, a spokesman for Detroit Emergency Manager Kevyn Orr, who attended the oral arguments before Rhodes on Wednesday morning but did not return for the judge's ruling from the bench in the afternoon.

The city's unions and pension funds had hoped to keep the fight in state court, where they felt Michigan's constitutional protections of retiree benefits would prevail against efforts by Orr to scale them back. Now, barring an appeal of the Rhodes ruling, their fight likely turns to convincing the judge that Orr has not dealt with them in good faith in negotiations since he was appointed by state officials in March.

"Stay or no stay, we will never stop fighting for Detroit and its workers," Al Garrett, president of American Federation of State, County and Municipal Employees Council 25, Detroit's biggest union, said in a statement.

Union members in the packed courtroom held their heads in their hands or shook their heads as Rhodes ruled against them on all three of the motions at issue in the day's proceedings. Meanwhile, city firefighters, worried that the bankruptcy case will lead to stinging cuts in their retirement benefits, protested outside.

Ironically, Wednesday's launch of the bankruptcy case began exactly 312 years after the settlement that became Detroit was founded in 1701 by French soldier Antoine de la Mothe Cadillac, after whom the iconic Cadillac automobile brand was named when the city grew to be the cradle of the U.S. automotive industry.

Detroit, which also gave birth to the music industry's Motown sound in the 1960s, has struggled for decades as companies moved or closed, crime became rampant and its population shriveled by almost two-thirds since the 1950s to about 700,000 at present. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.

PROVE INSOLVENCY, GOOD FAITH

The immediate next step in the case now is a procedural hearing before Rhodes set for August 2. At some point after that, Rhodes will preside over formal hearings to determine whether Detroit is eligible to declare bankruptcy. The city's Chapter 9 municipal bankruptcy petition is the largest in U.S. history.

The next phase of the case involves the city proving that it is insolvent. The city will also have to prove it made a good-faith effort to negotiate with its creditors or that there are too many creditors to make negotiating possible.

In his initial court filing last week, Orr said the pool of potential creditors, including current city workers, retirees, and bondholders, is vast and it would have been essentially impossible to negotiate with each of them outside of the Chapter 9 process.

In a signal that the judge is going to press both sides into hard negotiations, Rhodes has proposed the appointment of a federal judge as mediator in the case.

Gerald Rosen, chief judge for the U.S. District Court for the Eastern District of Michigan, can direct parties in the case to mediate and designate other mediators, according to the proposed order, which also said information from the mediation sessions would not be disclosed or placed in evidence. Rosen's appointment will be at issue during the August 2 hearing.

Detroit has more than $18 billion of debt and unfunded liabilities it is seeking to restructure, some at rates as low as pennies on the dollar, according to Orr's preliminary offer to creditors last month. Roughly half its liabilities stem from retirement benefits, including $5.7 billion in liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability.

Orr wants to wrap up the city's bankruptcy case by September 2014, but the process for determining a municipality's eligibility for bankruptcy, which in Detroit's case may involve arguments concerning the state constitutionality of the filing, could drag on. In Stockton, California's case, it took almost a year.

(Additional reporting by Deepa Seetharaman in Detroit, Tom Hals in Wilmington, Del., and Nick Brown in New York; Writing by Karen Pierog; Editing by Dan Burns, Matthew Lewis and Tim Dobbyn)

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