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Judge Clears Way for Detroit to Pursue Bankruptcy, Handing Labor Unions Huge Defeat


"The city needs help."

In a photo from Monday, Dec. 2, 2013, an empty field in Brush Park, north of Detroit's downtown is shown with an abandoned home. Detroit, which on Thursday, July 18, 2013, filed the largest municipal bankruptcy case in American history, owes as much as $20 billion to banks, bondholders and pension funds. The city can get rid of its gargantuan debt, but a bankruptcy judge can’t bring back residents or raise its dwindling revenue. (AP Photo/Carlos Osorio, File)\n

Dealing a major blow to labor unions, a judge ruled Tuesday that Detroit can move ahead with its bankruptcy filing.

Getty Images.

"This once proud and prosperous city can't pay its debts. It's insolvent. It's eligible for bankruptcy," Judge Steven Rhodes said in announcing his decision. "At the same time, it also has an opportunity for a fresh start."

The bankruptcy, which aims to address the city’s $18 billion in long-term liabilities, means unions, pension funds and retirees stand to take a loss with the rest of the city's creditors.

Rhoades said he believes bankruptcy will allow Detroit to recover and move forward.

"The city of Detroit was once a hard-working, diverse, vital city, the home of the automobile industry, proud of its nickname the Motor City," he said adding Detroit’s many problems including double-digit unemployment, "catastrophic" debt deals, vacant homes, massive public safety issues and population loss.

The judge did not approve a specific bankruptcy plan for the city. Rather, he gave Detroit officials the green light to pursue that option, despite massive pushback from major labor unions.

"Unions and pension funds had argued that the city should not be eligible to use bankruptcy court protections," CNN Money reported. "They said that regardless of the Detroit's financial troubles, city and state officials did not negotiate with creditors in good faith in an effort to reach a deal on its liabilities."

The judge ruled that the city filed its petition properly, arguing that labor's claim that the city negotiated in bad faith didn't hold up because of the sheer number of creditors (more than 100,000). He said the negotiations were impractical.

Under the direction of Emergency Manager Kevyn Orr, who was appointed in March to oversee the city's finances by Michigan Gov. Rick Snyder, Detroit filed for bankruptcy court protection on July 18.

Orr, a bankruptcy expert, proposed that the city cut roughly $9 billion of its $11.5 billion in unsecured debt in order to address the city's major financial problems.

"But Orr's plan could mean deep cuts to the pension benefits and retiree health care coverage that has been promised to city employees. It could also mean investors holding debt issued by Detroit would receive only pennies on the dollar," CNN Money reported.

Nevertheless, city officials argue that bankruptcy is a necessary step in offering relief to the city's residents who have put up with dilapidated public services such as "slow to nonexistent police response, darkened streetlights and erratic garbage pickup," the Associated Press reported.

An attorney for the city's largest union bemoaned Rhodes' ruling, saying the judge got "absolutely everything."

"It's a huge loss for the city of Detroit," said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees.

For his part, Orr said the city's  conditions are "unacceptable" and praised the judge's ruling, pledging to "press ahead with the ongoing revitalization of Detroit."

The bankruptcy, should it now move forward, is also the largest public bankruptcy in U.S. history.


Follow Becket Adams (@BecketAdams) on Twitter

This post has been updated.


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