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Michigan court stays challenges to Detroit bankruptcy filing

Downtown Detroit is seen looking south along Woodward Avenue in Detroit, Michigan July 21, 2013. REUTERS/ Rebecca Cook
Downtown Detroit is seen looking south along Woodward Avenue in Detroit, Michigan July 21, 2013. REUTERS/ Rebecca Cook

DETROIT (Reuters) - The Michigan Court of Appeals on Tuesday ordered a temporary halt to three lawsuits that seek to derail Detroit's municipal bankruptcy after the state's attorney general sought to overturn lower court rulings, including one that found the bankruptcy filing unconstitutional.

The lawsuits were filed by city workers, retirees and pension funds earlier this month in anticipation that the bankruptcy petition by Detroit would lead to cuts in retirement benefits.

A three-judge panel of the appeals court said it stayed the lower court orders and any other proceedings in the lawsuits challenging the bankruptcy until the appeal by Attorney General Bill Schuette is resolved or the appeals court issues a further ruling.

On Wednesday, the U.S. Bankruptcy Court judge overseeing Detroit's case will hold a hearing on a request by the city's emergency manager to extend Chapter 9's automatic freeze on legal action to the lawsuits filed by the unions and others.

Detroit's July 18 filing is the biggest ever U.S. municipal bankruptcy.

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

The state appeals court stay came as a surprise to lawyers suing the city, who were told to file their response in court by Wednesday, said Bill Wertheimer, who is representing retirees in a lawsuit. "Up to now, we've had no voice at the appellate level," he said.

Judge Rosemarie Aquilina, of Ingham County Circuit Court in Lansing, on Friday ruled that the state law that allowed Governor Rick Snyder to approve the bankruptcy filing violated the Michigan Constitution. She ordered Detroit's emergency manager, Kevyn Orr, to withdraw the bankruptcy petition.

Aquilina said the governor cannot take actions that would violate constitutional protections for retirement benefits for public workers. That so-called declaratory judgment was issued in a lawsuit filed this month by a Detroit worker and retiree.

The other lawsuits pending are one backed by the United Auto Workers union and another by the city's general retirement system, and police and fire retirement system.

Schuette on Friday appealed Aquilina's rulings, including temporary restraining orders to stop Orr and state officials from taking further actions in federal bankruptcy court.

John Canzano, an attorney handling one of the lawsuits, said if the litigation is also halted by the federal judge overseeing Detroit's bankruptcy case then the appeals court would be unable to decide Schuette's appeal.

(Reporting By Karen Pierog and Deepa Seetharaman; Editing by Greg McCune, Leslie Adler and Tim Dobbyn)

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