UPDATE 1-Detroit may file for bankruptcy as early as Friday -report
DETROIT, July 18 (Reuters) - The city of Detroit is in final preparations to file for federal bankruptcy as early as Friday morning, the Detroit Free Press reported on Thursday, citing several unnamed sources.
Bankruptcy lawyers and restructuring experts who are following Detroit's financial struggles say the city's hand may be forced by lawsuits filed in state court by municipal employees, retirees and pension funds that challenge its right to file for bankruptcy.
The filing would begin a 30-to-90-day period that will determine whether the city is eligible for Chapter 9 protection from its creditors and define how many claimants might compete for the limited settlement resources that Detroit has to offer, the newspaper reported on its website.
Bill Nowling, spokesman for the city's emergency manager, Kevyn Orr, could not be reached immediately for comment on the Free Press report. Before the Free Press report, Nowling told Reuters a bankruptcy filing could happen "at any time" but declined to give a time frame.
Before the report, a spokeswoman for Michigan Governor Rick Snyder - who by state law must approve any Detroit bankruptcy filing - also said no determination had been made on a filing. Snyder in March appointed Orr to the position of emergency manager, responsible for fixing the Motor City's troubled finances.
A judge in Ingham County, where the state capital Lansing is located, has scheduled a hearing Monday on a proposed injunction that would prevent Orr from a bankruptcy filing.
City retirees and workers made arguments in the two lawsuits that Orr's plan to slash vested pensions for city retirees would violate strong protections in the Michigan constitution for retirement benefits of public-sector workers.
The pension funds' lawsuit makes similar claims. It also was filed in Ingham County Circuit Court, by the city's two funds - the General Retirement System and the Police and Fire Retirement System.
"I think this is going to be a triggering event," said Doug Bernstein, a Bloomfield Hills, Michigan-based bankruptcy attorney at Plunkett Cooney. "He may decide it's best to file the damn thing before some judge says you can't."
Some attorneys said Orr would have a strong incentive to move ahead with a bankruptcy filing rather than risk having a state court rule that he could not make such a move. While federal bankruptcy law trumps state law, such a ruling would complicate Orr's actions.
"I think the uncertainty of allowing a state court to interfere with his ability to file for Chapter 9 is a risk that is too great for Orr to accept," said Michael Sweet, an attorney at Fox Rothschild who helped the city of Richmond, California, restructure its finances to avoid bankruptcy.
A federal bankruptcy case would allow Orr to have all matters pertaining to the case adjudicated in a consolidated manner in federal court, where he has deep experience as a former corporate bankruptcy lawyer.