Federal vs. state dispute likely means precedent set by Detroit bankruptcy

A trash-strewn "street" on Detroit's east side

In a story over the weekend on the Detroit bankruptcy, Ashley Woods of Huffington Post Detroit foresaw the tug of war that is playing out in the federal and state courts.

Ingham County Circuit Judge Rosemary Aquilina, in an initial ruling on lawsuits brought by Detroit’s two pension funds, ruled that the bankruptcy process must be handled in the state courts. U.S. Bankruptcy U.S. Judge Steven Rhodes reacted forcefully, declaring that the issues will be hammered out in his federal courtroom.

Rhodes issued an order Monday that said he will hold a hearing at 10 a.m. Wednesday to consider the city’s request to put all lawsuits filed before the city filed for bankruptcy on hold.

At issue is whether the Michigan Constitution, one of nine state constitutions that protect public pension funds, holds legal sway, even though it does not guarantee payouts if a public pension fund defaults. The U.S. Constitution puts bankruptcy proceedings in the hands of the federal courts.

Officials in states and cities across the nation will be watching closely to determine if the largest American municipal bankruptcy ever will set some legal precedents.

Here’s a portion of what Woods wrote:

“That interplay between state and federal law makes the Detroit case an important precedent as more and more cities and counties confront their underfunded retirement obligations, said Peter Henning, a constitutional law professor at Wayne State University law school in Detroit.

"’If the bankruptcy results in a significant reduction of pensions as a matter of federal law,’ he said, ‘other government units are going to look at this and say, 'maybe we do the same thing.'"

“…While experts think it unlikely, a court could rule that the constitutional protection of public pensions overrides the power of a bankruptcy judge.

"'I would not be surprised to see some of these issues ultimately reach the Supreme Court of the United States. You are setting a precedent here,’" said Jim McTevia, the principal of McTevia & Associates who has 40 years of experience in bankruptcy and restructuring.

The HuffPo Detroit piece is accompanied by a 53-photo slide show that takes a disheartening look at Detroit's deterioration.