October 23, 2013

From The Wall Street Journal

by Matthew Dolan

Detroit to Make Case for Bankruptcy Before Judge; Unions, Pension Funds and Retirees Object to Filing; Experts Say City Is Likely to Qualify

Before this troubled city gets a chance to restructure its finances in federal bankruptcy court, it needs to prove it belongs there.

A trial over Detroit's eligibility for bankruptcy protection kicks off Wednesday, with U.S. Bankruptcy Judge Steven Rhodes set to hear a host of objections to Detroit's filing. Representatives of unions, pension funds and retired city workers plan to challenge the city's assertion that it is insolvent, despite an estimated $18 billion of long-term liabilities.

The parties are also expected to provide evidence and witnesses in an effort to show that the city violated a state constitutional protection for Michigan's public pensions. Finally, lawyers will attack the state's emergency-manager law, which paved the way for the city's bankruptcy filing.

Judge Rhodes is likely to decide on these issues by the end of the year. His ruling will determine whether the bankruptcy can proceed. A review of recent bankruptcy cases indicates that Detroit is more than likely to qualify despite the protests, experts say.

Randye Soref, an attorney with Polsinelli in Los Angeles who has worked on municipal-bankruptcy cases, said it would be difficult for employee groups to persuade a judge to uphold their state constitutional protection for pensions in federal court. "The federal statute will pre-empt the state statute," Ms. Soref said.

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