Detroit’s Bankruptcy Bid Could Still Fall Apart

Eric Pianin
The Fiscal Times

It seemed a slam dunk this summer that Detroit would receive Chapter 9 bankruptcy protection in the wake of the largest municipal financial crisis in history – and many experts continue to predict that will be the case.

Motown needs that protection to prevent 100,000 or more nervous creditors from coming after the city for payments before officials have time to work out a major restructuring of a jaw-dropping $18 billion of short-term and long term debt. But the federal bankruptcy judge who will soon make that decision has raised just enough tough questions about the city’s petition for relief to leave Kevyn Orr, the state-appointed emergency manager, a little queasy.

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“I frankly shudder to think” what would happen if the judge turns down the city’s petition and leaves it to fend for itself without immediate borrowing authority and a mounting operating deficit, Orr said on a Detroit Public Television program last weekend.

“That would mean some very severe outcomes for the city . . . and I don’t know if we could cut enough [from city services] to make up for the shortfall,” Orr said on the program “American Black Journal.”

Federal Bankruptcy Judge Steven Rhodes said he will announce his decision on Tuesday, December 3. That ruling will determine whether Orr can proceed with a “plan of adjustment” by the end of the year to dramatically restructure the city’s debt and long-term liabilities.

Orr filed the petition last July in the largest U.S. municipal bankruptcy case in U.S. history. His goal was to simultaneously seek federal court protection from creditors while freeing up enough money to begin addressing Detroit’s dysfunctional city services, mediocre schools, high crime rate and widespread blight and abandoned buildings.

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The petition was vigorously opposed by union lawyers representing city employees and retirees, who argued that Orr didn’t do nearly enough before filing for bankruptcy to persuade creditors to take a haircut.

In early July, Orr took about 25 bankers on a tour of Detroit’s hardest-hit areas, to try to drum up support for a restructuring of the debt. “If they can see what it’s like for Detroiters, what they endure every day in this city, I think they’ll begin to understand what’s at stake,” he said at the time. But his pitch fell on deaf ears.

Lawyers for the unions also argued that Orr’s thinly veiled intentions to slash the pensions of 23,500 retirees would violate a provision of the Michigan state constitution.  

Throughout a nine-day hearing that concluded Nov. 8, Judge Rhodes did his best to put both sides on the defensive. The 64-year-old jurist, a graduate of the University of Michigan Law School, has a strong pragmatic streak and an abiding concern for Detroit’s residents, city workers and retirees.

With the glare of a national spotlight on the case, Rhodes repeatedly admonished lawyers from both sides that every day they spent squabbling with each other in court was another day that Detroiters were forced to live with a dysfunctional city government, a high crime rate, and uncertainty over their financial future, according to the Detroit Free Press.

“He’s very organized, he’s impatient with people who want to waste his time, he makes his schedules and keeps his schedules – and you respect him for that,” Laura Beth Bartell a bankruptcy law professor at Wayne State University and long-time friend of Rhodes told The Fiscal Times on Monday. “His normal docket involves average people . . . and he’s very sensitive to the concerns of individuals and he doesn’t like people who view them as collateral damage.”

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In order to prove that Detroit is eligible for bankruptcy protection, Orr and his lawyers must show that the city was insolvent, that the state of Michigan approved of the bankruptcy application,  and that city officials had negotiated “in good faith” with creditors before concluding that compromise was “impractical.”

Orr had no problem proving the city’s insolvency or that Republican Gov. Rick Snyder – who handpicked Orr for the job – had authorized the filing. But proving that Orr had bargained in “good faith” with bond holders and creditors before filing his petition in July proved more difficult.

Rhodes sparred with Bruce Bennett, the city’s lead attorney, over Bennett’s argument that Orr had negotiated in “good faith” but concluded it was legally “impractical” because he didn’t receive adequate counterproposals and faced unions unwilling to negotiate on pensions, according to the Free Press.  Rhodes replied that Bennett’s argument “strikes me as factually impossible.”

The city’s “good faith” argument suffered further blows when creditors got on the witness stand and outlined in detail how Orr and other city officials had engaged in few substantive conversations with them between June 14 and their July 18 bankruptcy filing, according to press accounts.

“The governor took more time to interview  the consultants” to restructure Detroit “than they took to negotiate the restructuring itself,” said Sharon Levine, an attorney for the city’s largest employee union, Michigan Council 25 of the American Federation of State, County and Municipal Employees, during the trial. “That’s absurd.”

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Arguably the most contentious issue is the fate of the city’s pension program, but Rhodes  signaled that it might be premature to decide how pension benefits are affected until the city proposes a plan that addresses how all creditors will be impacted. However, Rhodes chided Orr at one point for telling a retiree at a June 10 meeting that pension rights are “sacrosanct” under the Michigan state constitution.

“What would you say to that retiree now?” Rhodes asked Orr during the hearing. Orr responded that “I would say that his rights are in bankruptcy now.”

Rhodes replied: “That’s a bit different than ‘sacrosanct,’ isn’t it?”

Bartell, the Wayne State professor, says she is confident Rhodes will rule in the city’s favor in seeking eligibility for bankruptcy protection. “It’s a slam dunk,” she insisted.

“Steve Rhodes is doing exactly what he should do, and that is go through every requirement of eligibility, allow everybody who wants to make an objection to make an objection, and deal with all of the objections one by one,” she added. “But that doesn’t mean he doesn’t think the city of Detroit is eligible.”

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