Braced to Remake Itself, Detroit First Awaits Challenges to Bankruptcy Eligibility By STEVEN YACCINO Published: August 18, 2013 Before Detroit can start remaking itself in bankruptcy court, there is a basic question that stands in its way: Does it even qualify? That might seem like an odd notion in a place wrestling with an estimated $18 billion debt. But unions, creditors and retirees are expected to file formal objections to Detroit’s eligibility for bankruptcy protection before a Monday deadline, the opening of a legal fight over whether the largest municipal bankruptcy in the nation’s history should proceed. “This is just getting your ticket punched to get in the door,” said Michael A. Sweet, a bankruptcy lawyer with Fox Rothschild in San Francisco. A trial to consider Detroit’s eligibility for bankruptcy is scheduled for Oct. 23. To meet the criteria for municipal bankruptcy, known as Chapter 9, Detroit must convince Judge Steven W. Rhodes of federal bankruptcy court that the city is insolvent. It must also show that it received state authorization to seek bankruptcy protection and that it made a good-faith effort to reach a deal with creditors before seeking bankruptcy. The deadline for filing eligibility challenges is 11:59 p.m. Eastern time Monday. By Sunday evening, only a handful of objections had been submitted. Since 1954, there have been only 63 Chapter 9 filings that dealt with cities, towns, villages or counties across the country, said James E. Spiotto, a bankruptcy specialist based in Chicago at the law firm of Chapman and Cutler. Of those, 29 cases were dismissed for reasons that included ineligibility, he said. Bruce Babiarz, a spokesman for Detroit’s fire and police retirement system, which supports 8,500 retirees, said lawyers for the group would argue that Gov. Rick Snyder, a Republican, did not have the authority to approve Detroit’s bankruptcy filing last month because the decision infringed on Michigan’s constitutional protections for pensions. Kevyn D. Orr, the emergency manager Mr. Snyder appointed to oversee the city’s finances in March, has said he intends to use the bankruptcy filing to seek reductions to pensions. With as much as $3.5 billion in unfunded pensions at stake, that constitutional dispute is expected to be critical in the eligibility trial. The issue has already set up a confrontation between Mr. Snyder and the attorney general of Michigan, Bill Schuette, who announced last month that he would defend retirees in the proceedings despite the governor’s support for bankruptcy. Joy Yearout, a spokeswoman for the attorney general, would not comment on whether Mr. Schuette intends to protest Detroit’s eligibility. But there are other widely voiced legal objections, including accusations that the city is not as insolvent as it claims and that officials did not adequately try to bargain with creditors before filing for bankruptcy. Mr. Orr set the groundwork for a filing in May, detailing the city’s finances in a report that painted a grim picture of a cash-hemorrhaging city. In June, he proposed a plan that offered 10 cents on the dollar on the city’s debt obligations like unsecured bonds and a portion of unfunded pension liabilities. Critics have described subsequent meetings with Mr. Orr’s team as more presentational than open to substantial negotiations, saying discussions had barely started when Detroit suddenly filed for Chapter 9 last month. In court documents, Mr. Orr said that unions declined to bargain on behalf of the 21,000 municipal retirees and that multiple lawsuits filed against him and the governor proved resistance from some creditors. “Negotiations go both ways,” said Bill Nowling, a spokesman for Mr. Orr. “When one party is suing another party, I think it’s safe to assume the negotiations have ended.” Detroit still is pursuing an aggressive timeline to present a restructuring plan in bankruptcy court by the end of the year, months before the court-set deadline of March 1. And last week, Judge Rhodes appointed a mediator, Judge Gerald E. Rosen of Federal District Court, to begin overseeing discussions about creditors’ claims and collective bargaining agreements with the city on Sept. 17. Bankruptcy experts, and even some creditors, said Detroit’s odds of winning the eligibility trial in October are strong, possibly benefiting from rulings in recent municipal bankruptcy hearings, like one in Stockton, Calif., where a judge ruled against objectors. They also said some parties might decide to focus on mediation talks rather than squabble about eligibility, saving the legal costs and arguments for later. “If you’re not an eligible debtor, the case is dismissed, and that leaves a very chaotic situation,” said Karol K. Denniston, a San Francisco-based bankruptcy lawyer with Schiff Hardin, which represents some Detroit creditors, although she declined to identify them. “I think that a lot of people are beginning to realize, and I mean all creditors, with the exception of this constitutional issue, that fighting over eligibility in Detroit is the effectual equivalent of fiddling while Rome burns,” she said.
Posted on: Mon, 19 Aug 2013 04:38:04 +0000
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