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Judge orders halt on Detroit bankruptcy filing

Published time: July 19, 2013 22:02
Edited time: July 20, 2013 12:59

Bill Pugliano / Getty Images / AFP

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One day after Detroit’s Emergency Manager announced that city administrators were filing a petition to declare bankruptcy, a Michigan court has ordered that it be withdrawn, citing a violation of the state's constitution.

The Chapter 9 filing on Thursday, which makes Detroit the largest city in American history to file for bankruptcy, led to a dump of city bonds by investors who remained skittish despite reassurances made by Michigan Governor Rick Snyder and Detroit's Emergency Manager Kevyn Orr, reports Reuters.

Lawsuits have already been filed in response to the bankruptcy bid, and Ingham County Circuit Court Judge Rosemarie Aquilina ruled on Friday that the process must be halted.

“I have some very serious concerns because there was this rush to bankruptcy court that didn’t have to occur and shouldn’t have occurred,” said Judge Rosemarie Aquilina.

Governor Snyder lacks the power to "diminish or impair pension benefits," according to the ruling by Judge Aquilina.

Orr, who was appointed by Snyder in March to try and resolve the city's financial crisis, had said in June that the chances of bankruptcy for Detroit were 50-50.

Seemingly unable to strike a deal with the city’s creditors to tackle Detroit’s $18.5 billion in long-term debt, Orr acknowledged that court battles over the need for a bankruptcy filing could be protracted and difficult, while also setting the seemingly ambitious goal of concluding the bankruptcy process no later than September 2014.

"I've got 15 months left on my tenure. I promised the governor that we were going to try and get this done within the time frame provided by the statute," said Orr.

Bankruptcy experts cited by Reuters, however, expect the bankruptcy court case could last years and cost tens of millions of dollars.

The first test in the city's Chapter 9 proceeding will be whether Detroit has explored other reasonable options before filing, and the city will "have an eligibility fight, I suspect" over that qualification, Orr said.

Orr met with over 180 bond insurers, pension trustees, union representatives and an assortment of creditors in June and asked them to accept about 10 cents on the dollar for the city’s debt, reports the AP.

The White House meanwhile appeared to be closely watching the bankruptcy proceedings.

On Friday, Judge Aquilina said she intended to keep the administration informed regarding matters affecting pensions by sending her rulings in the state cases directly to US President Barack Obama, according to her law clerk, as well as attorney William Wertheimer, who is representing retirees in a lawsuit.

Detroit had for years relied on borrowing and deferred payments to its pension funds to keep the city afloat, said Orr.