Investors dumped Detroit's municipal bonds a day after the city's historic bankruptcy filing even as a ruling in state court raised questions about whether the bankruptcy will stand up to court review.
Attempts by Michigan Governor Rick Snyder and Detroit's Emergency Manager Kevyn Orr to put a positive spin on the largest municipal bankruptcy in U.S. history failed to reassure investors. Prices on some Detroit bonds plunged and there were wider declines in the $3.7 trillion U.S. municipal bond market.
The state court judge in Michigan's capital of Lansing ordered Orr to withdraw the bankruptcy petition because the state law that allowed Snyder to approve the bankruptcy violated the Michigan Constitution. The governor lacks the power to "diminish or impair pension benefits," according to the ruling by Ingham County Circuit Court Judge Rosemarie Aquilina.
Michigan Attorney General Bill Schuette, acting on behalf of Snyder, quickly filed an appeal with the state appeals court. His office said motions seeking emergency consideration were expected to be filed later on Friday.
Orr, meanwhile, filed a motion with Federal Bankruptcy Court Judge Steven Rhodes, who was appointed on Friday to oversee the Detroit case, requesting a hearing as soon as Tuesday on his request to place lawsuits aimed at derailing the city's Chapter 9 proceedings on hold. The emergency manager's motion also asked the judge to rule on deadlines, schedules, notification lists and other procedural matters.
Ken Klee, a bankruptcy lawyer at Klee, Tuchin, Bogdanoff & Stern LLP, said the Judge Aquilina's orders could be coming too late in the Detroit bankruptcy case.
"The state judge could not order Detroit to dismiss the case or Kevyn Orr to dismiss it, because once it's filed the automatic stay under the bankruptcy code kicks in, to protect the city and its employees from lawsuits," he said.
Neither Snyder nor Orr could necessarily be compelled to withdraw the city's petition at this juncture, he added.
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Orr, who was appointed by Snyder in March to try to resolve the city's financial crisis and tackle its $18.5 billion in long-term debt, acknowledged that court battles over the need for a bankruptcy filing could be protracted and difficult.
A first test in a Chapter 9 bankruptcy proceeding is whether the city has explored other reasonable options before filing, and the city will "have an eligibility fight, I suspect" over the decision, Orr said.