Detroit Bankruptcy Litigation

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On July 18, 2013, the city of Detroit, Michigan filed a petition declaring Chapter 9 bankruptcy in the United States Bankruptcy Court for the Eastern District of Michigan, Southern Division. Detroit's attempt to declare bankruptcy briefly came to a halt on July 22, 2013, when Michigan Circuit Court Judge Rosemarie Aquilina ordered the filing in federal court to be withdrawn. Judge Aquilina's basis for the order was that the bankruptcy declaration threatened to interfere with public employees' pensions, and thus was unconstitutional pursuant to Article IX Section 24 of the Michigan Constitution. Federal bankruptcy Judge Steven Rhodes superseded the state court's ruling on July 25, 2013, by asserting the federal court's exclusive jurisdiction over the case and issued a stay on all litigation surrounding the city's bankruptcy.

Detroit's case made further progress in September 2013 when Judge Gerald Rosen, chief federal judge for the Eastern District of Michigan, allowed for mediation to take place between the city and its creditors. Barclays PLC, a London-based financial institution, approved a $350 million loan for Detroit, and on November 6, 2013 the city requested court approval of the plan. That same day, the court used the stay on related litigation to deny a lawsuit from the NAACP challenging the constitutionality of Public Act 436, which authorized the creation of the city's emergency manager position. Judge Rhode's reasoning behind the denial was that declaring the law unconstitutional would interfere with the bankruptcy proceedings by removing the emergency manager.

Judge Rhodes ruled on December 3, 2013 that Detroit was eligible to file for bankruptcy, finding the city insolvent and incapable of negotiations with its creditors. The city negotiated with corporate banks, UBS and Bank of America, for its bankruptcy-related financing, but Judge Rhodes ordered renegotiation of the plan on December 18, 2013, because the original plan too heavily favored the banks. Another agreement between those corporate banks and the city encountered trouble in January 17, 2014 after Judge Rhodes rejected a "financially imprudent" $165 million settlement agreement.

Most recently, Detroit filed a lawsuit in the US Bankruptcy Court for the Eastern District of Michigan on January 31, 2014. The city's lawsuit claims that the $1.44 billion of pension debt sold by the city is in violation of the state's imposed borrowing limits, and as a result any and all contracts or obligations associated with that debt are invalid. This lawsuit is currently pending before the court, as well is the city's bankruptcy case.

 

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