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Detroit hurtles toward first bankruptcy hearing Wednesday

The largest municipal bankruptcy in U.S. history will have its first day in court Wednesday, even as other lawsuits seek to block a plan to restructure Detroit's more than $18 billion in debt.

On Monday, U.S. Bankruptcy Court Judge Steven Rhodes agreed to the expedited hearing requested by Detroit's emergency manager Kevyn Orr in the wake of a Michigan court judge's order for Orr to withdraw Thursday's Chapter 9 filing on state constitutional grounds.

Orr is seeking to put lawsuits challenging the bankruptcy filings on hold. Concerned that retirement benefits will be slashed, Detroit retirees, workers and pension funds have been running to state court in Michigan's capital of Lansing in an effort to derail the Chapter 9 municipal bankruptcy.

(Read more: Some strength in Detroit real estate)

Ingham County Circuit Court Judge Rosemarie Aquilina on Friday said the state law that allowed Gov. Rick Snyder to approve the bankruptcy filing violated the Michigan constitution. The governor cannot take actions that would violate constitutional protections for retirement benefits for public workers, she said.

Michigan Attorney General Bill Schuette, acting on behalf of Snyder, filed an appeal with the state appeals court asking for immediate consideration. But the appeals court has not yet taken any action on the matter.

Kevyn Orr
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Kevyn Orr

Aquilina on Monday morning adjourned a hearing in another case brought by city pension plans with no action taken. The pension plans asked for the proceedings to be postponed one week to July 29. The pension funds had filed an objection to an expedited hearing in federal bankruptcy court, according to a court document.

Legal experts have said they expect the federal judge to put state court litigation on hold, allowing those plaintiffs to use the federal court to argue why Detroit should not be allowed to file for bankruptcy.

Orr on Friday said he suspected the city will face an eligibility fight, which would also include whether or not the city made a good faith effort to negotiate with creditors over its debt.

Wednesday's hearing will also consider whether Michigan state officials, Orr and others would be protected from litigation regarding the bankruptcy petition.

(Related video: Detroit's next steps)

Rhodes also set an Aug. 2 hearing in federal court on Orr's motion on procedural matters, including deadlines, schedules, the assumption of leases and contracts and the appointment of a retired employees' committee.

Detroit, a former manufacturing powerhouse and cradle of the U.S. automotive industry and Motown music, has struggled for decades as companies moved or closed, crime became rampant and its population shriveled by about 25 percent in the past decade to 700,000. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.

—By Reuters, with CNBC.com.

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