(VOD covered Friday press conference with Detroit EM Kevyn Orr and Gov. Rick Snyder and is researching matters; story coming this week-end. Meanwhile, Judge Rosemarie Aquilina’s order forbidding further action on bankruptcy is at Acquilina order on bankruptcy 7 19 13, motion and briefs by retirees’ attorneys in one case are at Retiree lawsuit complaint; Retiree lawsuit motion070313_1; and Retiree lawsuit brief. Judge Aquilina said she was prepared to rule in favor of retirees prior to temporary halt to hearing. She will continue hearing the case Monday, July 22 at 9 a.m. in the 30th Circuit Court in Mason, Michigan.)
Published: Saturday, 20 Jul 2013 | 5:13 AM ET Reuters
Investors dumped Detroit’s municipal bonds a day after the city’s historic bankruptcy filing even as a ruling in state court raised questions about whether the bankruptcy will stand up to court review.
Attempts by Michigan Governor Rick Snyder and Detroit’s Emergency Manager Kevyn Orr to put a positive spin on the largest municipal bankruptcy in U.S. history failed to reassure investors. Prices on some Detroit bonds plunged and there were wider declines in the $3.7 trillion U.S. municipal bond market.
The state court judge in Michigan’s capital of Lansing [actually Ingham County Circuit Court in Mason, Michigan] ordered Orr to withdraw the bankruptcy petition because the state law that allowed Snyder to approve the bankruptcy violated the Michigan Constitution. The governor lacks the power to “diminish or impair pension benefits,” according to the ruling by Ingham County Circuit Court Judge Rosemarie Aquilina.
Michigan Attorney General Bill Schuette, acting on behalf of Snyder, quickly filed an appeal with the state appeals court. His office said motions seeking emergency consideration were expected to be filed later on Friday.
Orr, meanwhile, filed a motion with Federal Bankruptcy Court Judge Steven Rhodes, who was appointed on Friday to oversee the Detroit case, requesting a hearing as soon as Tuesday on his request to place lawsuits aimed at derailing the city’s Chapter 9 proceedings on hold. The emergency manager’s motion also asked the judge to rule on deadlines, schedules, notification lists and other procedural matters.
Ken Klee, a bankruptcy lawyer at Klee, Tuchin, Bogdanoff & Stern LLP, said the Judge Aquilina’s orders could be coming too late in the Detroit bankruptcy case.
“The state judge could not order Detroit to dismiss the case or Kevyn Orr to dismiss it, because once it’s filed the automatic stay under the bankruptcy code kicks in, to protect the city and its employees from lawsuits,” he said.
Neither Snyder nor Orr could necessarily be compelled to withdraw the city’s petition at this juncture, he added.
(Read More: Detroit bankruptcy could hit millions of retirees)
Orr, who was appointed by Snyder in March to try to resolve the city’s financial crisis and tackle its $18.5 billion in long-term debt, acknowledged that court battles over the need for a bankruptcy filing could be protracted and difficult.
A first test in a Chapter 9 bankruptcy proceeding is whether the city has explored other reasonable options before filing, and the city will “have an eligibility fight, I suspect” over the decision, Orr said.
Detroit Mayor Dave Bing says it is unlikely President Obama will bail out the city. Charlie Langton, Langton Law partner, believes the city will get a bailout, while Carol Roth, author of “The Entrepreneur Equation, is against it.
In the bankruptcy filing, Orr stated he has set an objective to conclude the bankruptcy process no later than September 2014.
“I’ve got 15 months left on my tenure,” Orr said. “I promised the governor that we were going to try and get this done within the time frame provided by the statute.”
Judge Rhodes of the U.S. District Court for the Eastern District of Michigan was assigned to oversee the Detroit case, which involves thousands of creditors. Bankruptcy experts expect the case could last years and cost tens of millions of dollars.
(Read More: Tear down chunks of Detroit: Billionaire landowner)
Under the 2012 Michigan law that created the emergency manager position, Orr’s term is limited to 18 months, after which he can be removed by a two-thirds vote of Detroit’s city council.
Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime became rampant and its population shriveled by about 25 percent in the past decade to 700,000.
Under the state law that created the emergency manager position, Detroit could not file for bankruptcy without the governor’s approval. Lawsuits by pension funds and city workers, filed earlier this month, had sought to prevent a filing. But on Thursday, Orr filed the bankruptcy petition, with Snyder’s permission, just minutes before Judge Aquilina was set to rule on a petition to stop the process.
In an interview with Reuters on Friday, Snyder sidestepped the constitutional question.
“That’s a matter in litigation and we have very good attorneys who I’m sure are on top of that,” he said.
The governor has sought to paint the bankruptcy filing as a positive move for the city and the state.
“We’re the comeback state in Michigan, but to be a great state we need…Detroit on the path to being a great city again,” Snyder, a Republican, said at a press conference.
Snyder acknowledged that the bankruptcy would be seen as a new low point for the city, but said, “This is the day to stabilize Detroit.”
Orr addressed concerns that art works at the Detroit Institute of Arts or other city assets would be auctioned off to pay off creditors, who have been offered pennies on the dollar.
(Read More: Should Detroit sell its art collection?)
“Right now, there’s nothing for sale,” he said.
U.S. Vice President Joe Biden told reporters on Friday that White House officials had been briefed on Detroit’s situation, but that it was unclear what help the administration could provide.
In the state court proceeding on Friday, Judge Aquilina said she plans to keep the White House informed on matters affecting pensions by sending her rulings in the state cases to President Barack Obama, according to her law clerk, and attorney William Wertheimer, who is representing retirees in a lawsuit.
MUNICIPAL BOND SELLOFF ACCELERATED BY DETROIT BANKRUPTCY FILING
NEW YORK, July 19 (Reuters) – U.S. municipal bonds fell the most in nearly a month on Friday as news that Detroit had filed for the largest municipal bankruptcy in U.S. history added to a slew of concerns about the $3.7 trillion market.
Selling picked up in the afternoon. Yields on longer-dated triple-A maturities ranging from 2037 to 2043 rose by 9 to 11 basis points, according to a preliminary read on Municipal Market Data’s triple-A scale.
The rise was the steepest since June 24 after the U.S. Federal Reserve rattled markets with plans to scale back its bond buying program, pushing yields on both the 10- and the 30-year maturities up as much as 17 basis points in a single session. Prices move inversely to yields.
(Reporting by Edward Krudy; Editing by Tiziana Barghini and Chizu Nomiyama)