UPDATE 2-Initial ruling on Detroit bankruptcy bid may come Wednesday
* Opening salvos of biggest U.S. muni bankruptcy case
* Judge may rule at 1800 GMT on motion to stay all related litigation
* Court officials open overflow rooms to accommodate crowds
* City must still prove that it is insolvent
DETROIT, July 24 (Reuters) - A U.S. bankruptcy court judge said he may rule later on Wednesday on whether lawsuits challenging Detroit's bankruptcy filing on state constitutional grounds should be suspended while he reviews the city's petition for protection from creditors.
Judge Steven Rhodes recessed Wednesday's first hearing in Detroit's historic municipal bankruptcy filing to consider arguments he heard earlier from attorneys representing the city, its unions and pension funds and others.
The judge ordered the parties back to his jam-packed courtroom at 2 p.m. EDT (1800 GMT) for his possible ruling on a motion to stay all related litigation. He will also rule at that time on a motion to extend that stay to lawsuits filed against Michigan's governor and state treasurer and Kevyn Orr, Detroit's state-appointed emergency manager who filed the biggest Chapter 9 municipal bankruptcy petition in U.S. history for the city on July 18.
Over the course of a nearly two-hour hearing on Wednesday, lawyers for the city of Detroit asked Rhodes to set aside all other lawsuits seeking to block the city's petition for bankruptcy protection, arguing that federal bankruptcy court is the only venue to debate the matter.
Attorney Heather Lennox said the court should force city employees, retirees and pension plans that object to the Chapter 9 filing as violating the state constitution to make their case only in his court.
"We believe those decisions must be made and can only be made by this court in actions brought before this court," said Lennox, an attorney for the law firm Jones Day, which has been hired by the city. Kevyn Orr, a corporate bankruptcy lawyer tapped by Michigan officials in March as Detroit's emergency manager, also worked for Jones Day before joining the city.
'NO SAFETY NET'
Sharon Levine, an attorney at Lowenstein Sandler, who is representing Detroit's largest public labor union - the American Federation of State, County and Municipal Employees Council 25 - said the fundamental right of the city's workers to retain their pensions was at stake.
"Clearly there is no safety net," said Levine, noting retired city workers receive an average pension of less than $19,000 per year.
Levine urged Rhodes to leave the issue of constitutionality to state court where, she said, there would be a more thorough airing of the issues between the city's pension funds and unions and Orr's team.
"They are arguing the merits of eligibility. As your honor has pointed out, that is not at issue today," Lennox said in her rebuttal.
The case has attracted massive U.S. media interest, with people lining up to gain entrance to the federal courthouse in downtown Detroit on Wednesday morning, forcing court officials to open overflow rooms to accommodate the crowd. Meanwhile, city firefighters, worried that the bankruptcy case, filed July 18, will lead to stinging cuts in their retirement benefits, protested outside.
Rhodes agreed on Monday to an expedited hearing requested by Orr that seeks to extend Chapter 9's automatic stay of litigation to lawsuits filed against Governor Rick Snyder, Michigan Treasurer Andy Dillon, and Orr by Detroit workers, retirees and pension funds. Those lawsuits are pending in state court in Michigan's capital city of Lansing.
Those lawsuits were halted by a Michigan Appeals Court panel on Tuesday in response to State Attorney General Bill Schuette's request to stop proceedings while he seeks to overturn orders issued by a lower court judge hearing the cases. One of those orders directs Orr to withdraw the bankruptcy petition on state constitutional grounds.
Ironically, Wednesday's launch of the historic bankruptcy case began exactly 312 years after Detroit was founded in 1701 by French soldier Antoine de la Mothe Cadillac.
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 almost two-thirds since the 1950s to about 700,000 at present. The city's revenue failed to keep pace with spending, leading to years of budget deficits and a dependence on borrowing to stay afloat.
CITY STILL MUST PROVE INSOLVENCY
In a declaratory judgment on Friday, state Judge Rosemarie Aquilina ordered Orr to withdraw the bankruptcy petition, saying the state law that allowed 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.
Aquilina's order came in a lawsuit filed this month by a Detroit worker and retiree. Two other lawsuits are also pending, one backed by the United Auto Workers union and another filed by the city's general retirement system and police and fire retirement system.
In a June 14 proposal to creditors, Orr called for "significant cuts in accrued, vested pension amounts for both active and currently retired persons."
If Rhodes allows Detroit's bankruptcy petition to proceed without interference from the state courts, the city still must prove that it is insolvent and that it made a good-faith effort to negotiate with creditors, including its employee pension funds. Detroit has more than $18 billion of debt and unfunded liabilities. That includes $5.7 billion in liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability.
Rhodes on Tuesday proposed appointing Chief District Judge Gerald Rosen in the U.S. District Court for the Eastern District of Michigan as mediator in the case. Rosen can direct parties in the case to mediate and designate other mediators, according to the proposed order, which also said information from the mediation sessions would not be disclosed or placed in evidence.