Detroit Ruled Eligible for Chapter 9 Bankruptcy

Story by AP

Detroit is eligible to shed billions in debt in the largest public bankruptcy in U.S. history, a judge said Tuesday in a long-awaited decision that now shifts the case toward how the city will accomplish that task.

Judge Steven Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

But that plan isn’t on the judge’s desk yet. The issue for Rhodes, who presided over a nine-day trial, was whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss and collapse of the middle class.

Earlier:

When U.S. Bankruptcy Judge Steven Rhodes rules on Detroit’s eligibility for bankruptcy relief Tuesday morning, experts believe two things could happen: an orderly resolution of the city’s debts will be set in motion or a “financial free-for-all” from creditors will ensue, making the city’s problems far worse, the Detroit News reports.

Douglas Bernstein, a Bloomfield Hills attorney and expert on municipal bankruptcy, told The News that keeping the city in bankruptcy court will bring a “sense of order” for which creditors get paid and exactly how much they would receive.

If Rhodes kicks the case out of court, the ruling would allow some 500 creditors with lawsuits against the city to continue with collection efforts. Detroit would be left open to judgments that could push the city into an even tighter financial bind, experts told The News. The city has more than 100,000 creditors who are owned some $18 billion, according the Detroit Free Press. Here are more details behind the city’s bankruptcy and what could happen, depending on how the judge rules:

Getting kicked out of bankruptcy court could lead to lengthy court battles, payless paydays for city workers, cuts to already shoddy city services and a state court ruling that blocks Detroit from filing for bankruptcy again, experts said. “Think about what Detroit was like before they filed: a bunch of lawsuits, the city fending off creditors, the fear it couldn’t manage its cash,” Bernstein said. Although many experts consider Detroit a likely recipient of Chapter 9 bankruptcy protection, there remains a chance it could be ruled ineligible. Outside of bankruptcy protection, a creditor could get a judgment to collect on debts and conceivably garnishee the city’s bank accounts and seize assets such as masterpieces from the Detroit Institute of Arts’ collection. “It’s a race to the courthouse among creditors to see who gets the Warhol first,” said Michael Sweet, a San Francisco bankruptcy attorney who has been following Chapter 9 cases in Detroit and California. Asked earlier if the city had a Plan B, Emergency Manager Kevyn Orr spokesman Bill Nowling said: “No, we will have to reassess after that.” A nine-day trial last month about whether Detroit was eligible for Chapter 9 relief focused on the city’s grim finances outside of bankruptcy court. Attorneys for labor unions and retiree groups spent most of their time arguing the city did not negotiate in good faith and that Orr was trying to improperly use the federal bankruptcy court to wipe out public pensions protected by Michigan’s Constitution. Ryan Plecha, a lawyer who represents the Detroit Retired City Employees Association and Retired Detroit Police and Fire Fighters Association, said a ruling against the city Tuesday could spark good-faith negotiations. “It is somewhat opening Pandora’s box, but I don’t think it would be the doom and gloom that the city is portraying,” Plecha said. “The city could negotiate with retirees in good faith, which is what they should have done prior to filing the bankruptcy petition. Or there is a chance the city could refile for bankruptcy and exclude the pensions. That would not be something we would object to.”

The dispute over pensions has been another touchy issue that has Detroit and unions fighting for their respective interests. During the trial, Rhodes questioned Detroit Emergency Manager Kevyn Orr on city pensions, specifically his proposals for deep cuts in “the estimated $3.5 billion portion of the pension obligations that is unfunded,” according to the Wall Street Journal. Rhodes, however, also challenged pension holders for arguing that they should be treated more favorably than other unsecured creditors of Detroit. Michigan Council 25 of the American Federation of State, County and Municipal Employees, the city’s largest employee union, argued during the trial that the city did not negotiate in good faith, according to the Free Press:

“Trial testimony demonstrated not only that the city never engaged AFSCME in ‘negotiations’ over retiree benefits at all, but also that it conducted its negotiations … all the while intending to avoid reaching an agreement,” AFSCME said in its filing. “Courts recognize that a ‘non-negotiable, take-it-or-leave-it’ proposal by a debtor fails to comply with the duty to negotiate in good faith.” Attorneys for the Retired Detroit Police and Fire Fighters Association and the Detroit Retired City Employees Association said the city cannot justify its rush into bankruptcy. “The requirement that the city first negotiate with its creditors is too important to be sacrificed to expediency. The requirement of good-faith negotiation was not met in this case no matter what definition of ‘good faith’ is applied,” the associations argued.

The uncertainly of what will happen tomorrow morning has Michigan Republican Gov. Rick Snyder eager for a ruling, no matter what the outcome may be. “When you have uncertainty it makes it more difficult for people to get excited about investment and growing in the city,” Gov. Snyder told the Wall Street Journal. “As soon as we get certainty, then we’ll know what we’re dealing with and we can move forward.”