The city of Detroit today officially became the largest
municipality in U.S. history to enter Chapter 9 bankruptcy after U.S.
Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria
required to receive protection from its creditors.
The landmark ruling ends more than four months of
uncertainty over the fate of the case and sets the stage for a fierce clash
over how to slash an estimated $18 billion in debt and long-term liabilities
that have hampered Detroit from attacking pervasive blight and violent crime.
“It is indeed a momentous day,” Rhodes said at the end of a
90-minute summary of his ruling. “We have here a judicial finding that this
once proud city cannot pay its debts. At the same time, it has an opportunity
for a fresh start. I hope that everybody associated with the city will
recognize that opportunity.”
Rhodes — in a surprise decision this morning — also said
he’ll allow pension cuts in Detroit's bankruptcy. Rhodes emphasized that he
won’t necessarily agree to pension cuts in the city’s final reorganization plan
unless the entire plan is fair and equitable.
“Resolving this issue now will likely expedite the
resolution of this bankruptcy case,” he said.
Rhodes’ verbal ruling this morning — which will be followed
by a 140-page written opinion — gave Detroit the green light to enter Chapter 9
bankruptcy.
“The court finds that Detroit was and is insolvent,” he
said. “The court finds that the city was generally not paying its debts as they
became due.”
Rhodes said bankruptcy was a “foregone conclusion for a very
long time. Cities often wait longer to file for bankruptcy than they should
have, and the city of Detroit was no exception.”
Rhodes said he will not issue a stay on the bankruptcy,
meaning the case will proceed.
And even though an appeal has already been filed — and more
will come in the days ahead — the bankruptcy code provides for Chapter 9 to
continue while appeals are pending that challenge, said Clark Hill lawyer
Robert Gordon, who represents the city’s pension funds and will be filing an
appeal.
University of Michigan bankruptcy law professor John Pottow
said Rhodes was clearly urging the city to reach a consensual resolution with
its creditors.
“Bottom line: he’s pushing negotiation,” Pottow said in an
email.
Still, Rhodes also scolded the city for rushing through
negotiations with its creditors, noting they only had 30 days to offer a
counter-proposal. Saying that amount of time is “simply far too short,” Rhodes
ruled the city did not satisfy good-faith requirements to try to negotiate with
creditors outside of bankruptcy court.
Attorneys for unions and retirees who fought to convince the
judge to reject Detroit’s eligibility for bankruptcy found a silver lining in
Rhodes’ criticism of the city’s negotiation efforts.
“The city has to step up now and negotiate more reasonable
and more fairly,” said Lynn Brimer, an attorney for the Detroit Retired Police
Members Association.
Despite the criticism of Detroit’s negotiations, Rhodes said
moments later that negotiating in good faith was “impracticable” for the city
because its financial crisis was growing worse, and creditors filed several
lawsuits that could have derailed a bankruptcy filing.
The city will now proceed with its plan to introduce a
proposal to restructure its debt and reshape government operations.
Rhodes asked lawyers for Jones Day, the law firm that
represents the city, if the first draft of the “plan of adjustment” would be filed
by the end of the year. Attorney David Heiman responded that “we’re not quite
certain,” adding it would be far in advance of the judge’s March deadline.
Detroit Emergency Manager Kevyn Orr said his team plans to
submit the plan of adjustment “in the coming weeks,” file a disclosure
statement early next year and work to exit Chapter 9 protection by the end of
September.
“Time is of the essence, and we will continue to move
forward as quickly and efficiently as possible,” Orr said in a statement. “We
hope all parties will work together to help us develop a realistic
restructuring plan that improves the financial condition of Detroit and the
lives of its 700,000 citizens.”
The plan is expected to include controversial cuts to
unsecured creditors and asset sales, including a potential spinoff of the water
and sewer department and the possible sale of Detroit Institute of Arts
property.
Rhodes said one-time infusions of cash will not provide for
a sustainable financial future, but he did not rule out the possibility of
approving the sale of assets.
In a press conference after the ruling, Orr message’s to
pensioners was: “We're trying to be very thoughtful, measured and humane,” but
cuts are necessary.
Gordon, the lead attorney for the city’s two pension funds,
said he believes the judge cares about residents and the plight of pensioners.
“I hope it plays out when a plan is proposed,” he said of
expected pension cuts. While the judge cautioned the city he would scrutinize
proposed cuts in the restoration plan, Gordon lawyer did not interpret it as a
warning to the city to protect the funds.
Clark Hill is teaming with Arnold and Porter to file an
appeal within days. “Clarity is important,” Gordon said.
Other lawyers representing retirees expressed disappointment
that individuals were being lumped in with bondholders and financial
institutions.
Retiree associations are “taken aback that they are being
treated the same as bondholders,” said their lawyer Ryan Plecha, who also plans
to appeal. He said the ruling sends a troubling message to employees who were
made promises as part of their municipal employment.
AFSCME lawyer Sharon Levine said bankruptcy is a powerful
and flexible tool. “You can treat creditors differently.”
The ruling comes after an exhaustive nine-day bankruptcy
eligibility trial that concluded Nov. 8. During that trial, Rhodes gave unions
and retiree groups an opportunity make their argument that the city’s bankruptcy
case should be rejected.
Major creditors objecting to the bankruptcy included AFSCME,
the UAW, Detroit’s two pension funds, the city’s public safety unions, retiree
associations and a committee created to officially represent retirees during
the bankruptcy.
Unions and retirees argued that Orr conducted no substantive
negotiations with creditors and argued the city fell short of its duty to
conduct “good faith” negotiations before filing for bankruptcy. No financial
creditors objected to the filing.
By July 18, the day Detroit filed for bankruptcy, the city
was being bombarded by lawsuits, facing dwindling cash flow and failing to
deliver vital services — adding credence to Jones Day bankruptcy attorney Bruce
Bennett’s argument that reaching a deal with more than 100,000 creditors would
have taken too long.
“It was clear to Judge Rhodes that negotiations were not
going to go anywhere,” Laura Beth Bartell, a Wayne State University law
professor, said in a recent interview.
Rhodes ruled the city is legally insolvent and obtained the
necessary legal authorization from Gov. Rick Snyder to enter Chapter 9.
Michigan Council 25 of AFSCME filed a notice of appeal
immediately after Rhodes ruled.
“We are going to do everything we can,” to protect pension
benefits, Levine said.
Brimer said the fight isn’t over. “Perhaps it’s fair to say
the fight has just begun.”
Mayor Dave Bing sounded an optimistic note after the ruling,
saying it will be beneficial in the long run.
“There's going to be a lot of pain for a lot of different
people,” he said. “But in the long run, the future will be bright.”
Source: Detroit
Free Press
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