The decision by U.S. Bankruptcy Judge Steven Rhodes was a major victory for Detroit, especially after an Ingham County judge last week said Gov. Rick Snyder ignored the Michigan Constitution and acted illegally in approving the Chapter 9 filing. That ruling and others had threatened to derail the case.
Retirees had sued, claiming the bankruptcy threatened their pensions that are protected by the constitution.
"If these actions are not stopped, the city would be irreparably harmed. ... These litigants will have due process. They will have their day in court," Detroit attorney Heather Lennox said during two hours of arguments by the city, pension funds and unions.
Rhodes said there's nothing in federal law or the U.S. Constitution that gives a state court a shared role in a bankruptcy.
Questions about Detroit's eligibility to overhaul itself through bankruptcy "are within this court's exclusive jurisdiction," he said.
The courtroom was jammed with lawyers representing some of the thousands of creditors as well as rank-and-file city employees and retirees eager to know the outcome. Some wore T-shirts that said, "Detroit vs. Everybody."
Detroit emergency manager Kevyn Orr, who recommended bankruptcy, sat in the front row. Outside the courthouse, protesters held a banner with a message for Wall Street: "Cancel Detroit's debt. The banks owe us."
Detroit has about 21,000 retired workers who are owed benefits - including former officer workers at city hall, police, paramedics, sanitation crews, firefighters and bus drivers - with underfunded obligations of about $3.5 billion for pensions and $5.7 billion for retiree health coverage.
There are three lawsuits in state courts challenging the bankruptcy. They mostly focus on a provision in the Michigan Constitution that says public pensions "shall not be diminished or impaired." Pensions have not been frozen or reduced in the bankruptcy so far, but officials say there are shortfalls in the funds and that payouts could be at risk.
Sharon Levine, an attorney for a union that represents city workers, urged Rhodes to let those lawsuits run their course. She said there's no federal insurance for public pensions once they're broken, unlike pensions at private employers.
"Our members who participate at most are at or below $19,000 a year. There is no safety net," Levine said.
Snyder signed off on Detroit's bankruptcy, calling it the only "feasible path" for a city whose population has plummeted to 700,000 from 1.8 million decades ago. Detroit's $18 billion in long-term debt has become an urban millstone.
In March, the governor appointed Orr, a bankruptcy expert, as Detroit's emergency manager. Orr had sweeping powers to reshape city finances but recommended bankruptcy after failing to reach any significant deals with creditors, including Wall Street bankers and Detroit pension funds. Many of those creditors, however, accused him of being inflexible and believe bankruptcy always was the plan.
Detroit has more than double the population of Stockton, Calif., which had been the largest U.S. city to file for bankruptcy before Detroit trumped it last week.
Retirees and city employees are concerned. Lt. James Edwards, who has worked 18 years at the fire department, attended the court hearing Wednesday.
"It seems as though we're going to end up being the patsy for a lot of bad decisions that have been made over the years," he said. "You base your life decisions on promises made to you when you came on the job."