DETROIT — Public labor unions took aim at Detroit’s historic bankruptcy filing on Monday, asking a U.S. court to toss the City’s bid for protection from its creditors, because it is constitutionally flawed on both the state and federal levels.

A union that represents public-sector workers even took the unusual step of arguing that Chapter 9 of the federal bankruptcy code, under which municipalities seek protection from their creditors, violates the U.S. Constitution.

But as a midnight deadline for filing objections to the bankruptcy passed, Detroit’s bondholders were conspicuously absent from the long list of unions, pension funds and individual creditors lining up to argue against bankruptcy.

Unions, representing the City’s firefighters and police, alleged that state-appointed emergency manager Kevyn Orr had failed to negotiate in good faith, stating “there were no negotiations.”

Under U.S. bankruptcy code, Detroit must prove it is insolvent and has negotiated with creditors in good faith, or there were too many creditors to make negotiations feasible, in order to be certified by a federal judge for a bankruptcy proceeding.

For his part, Michigan Attorney General Bill Schuette said in a filing that, even if the bankruptcy case continues, the city cannot be allowed to ignore state constitutional protections for retirement benefits earned by its employees.

Schuette’s filing does not ask the judge to prevent Detroit’s bankruptcy from proceeding.

Unions and the City’s two public pension funds made similar arguments in their filings, claiming a bankruptcy filing will lead to an unconstitutional reduction in retirement benefits.

The American Federation of State, County and Municipal Employees Council 25, in its filing with the U.S. Bankruptcy Court in Detroit, argued that Chapter 9 encroaches on states’ rights.

The union made more conventional legal arguments as well.

It argued that Detroit, which last month filed for what would rank as the largest-ever U.S. municipal bankruptcy, has not proven it is insolvent and has not negotiated in good faith with its creditors.

AFSCME also said Michigan’s emergency manager law, which enabled Detroit to file for bankruptcy on July 18, violates the state constitution, because the law does not explicitly protect retirement benefits for public workers.

The United Auto Workers, whose members work for the City, also filed an objection early Monday evening, claiming that Gov. Rick Snyder violated Michigan’s constitution when he permitted Detroit’s emergency manager Kevyn Orr to file for bankruptcy.

A June 14 “Proposal to Creditors” made roughly a month before the bankruptcy filing “serves as the vehicle of Governor Snyder and EM Orr to use federal bankruptcy law to impair pensions protected from impairment” by the Michigan constitution, the UAW said in its objection.

AFSCME’s arguments were adopted by two other City unions -SEIU Local 517 and International Union of Operating Engineers Local 324 – in separate filings.

Municipal bankruptcy experts said the U.S. Supreme Court settled Chapter 9’s constitutionality in 1938.

Jim Spiotto, an attorney at Chapman and Cutler, said as long as a state allows a local government to file for bankruptcy, as in Detroit’s case, states’ rights are not at issue.

“I’m sure somebody at the bankruptcy court level brought it up before, but I don’t think (the argument) lasted very long,” he said.

Schuette, the Michigan attorney general, said in his filing that Detroit is bankrupt, and the governor was authorized to allow the City’s bankruptcy petition.

“However, throughout this bankruptcy process, protections enshrined in the Michigan Constitution by the citizens of our state must be honored, respected and followed,” Schuette said, pointing to a constitutional prohibition against diminishing or impairing accrued retirement benefits for public workers.

About 50 individuals filed objections at the federal court in Detroit on Monday morning. The group was organized by the Detroit chapter of the National Action Network, a national civil rights organization, founded by Rev. Al Sharpton.

The group’s objection cites potential constitutional problems with a Michigan law that allowed for the bankruptcy filing and claims that the judge did not allow enough time for objection filings.

Rev. Charles Williams II, the chapter’s president, said that many residents, himself included, received notice only last week that they were parties of interest, who could object to the filing.

“The process hasn’t been as clear and transparent as it should have,” Williams said. “Many Detroit residents received letters, giving them the opportunity to file for an objection and they didn’t even know they received it. They weren’t properly notified.”

October 23 has been scheduled for the start of a hearing, to determine if Detroit is eligible to file for bankruptcy under Chapter 9. If Detroit is deemed eligible for municipal bankruptcy, it would be the biggest such case in U.S. history.  

— Reuters